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Will they or won’t they? That’s the prevailing question when discussing the whether the Federal Reserve, which is scheduled for two-day meeting on Dec. 13 and 14, will pivot from its hawkish stance regarding interest rates. Although inflation has somewhat moderated, based on recent CPI data, those aren’t the only metrics weighing on the Fed’s decision. As such, Friday’s release of better-than-expected jobs report for November will likely be a key factor in what’s to come.
Despite the negative reaction to the jobs report, the market ended the session mixed, overcoming early jitters to close mostly flat. The Dow Jones Industrial Average was under pressure initially, falling more than 400 points as the job report showed continuing strength even in the face of rising interest rates. According the the Labor Department, the economy added 263,000 jobs for November, surpassing expectations for only an increase of 200,000. The rate kept the unemployment rate steady at 3.7%.
The concern stems from the fact that the Federal Reserve may not back off from its hawkish policy position if the labor market remains strong. But as the trading session continued, the concerns gave way for optimisms about a potential strong fourth quarter holiday shopping season. The Dow rose 34.87 points, or 0.10% to close at 34,429.88. The S&P 500 index gave up 4.87 points, or 0.12%, to end at 4,071.70, while the tech-heavy Nasdaq Composite Index declined by 20.95 points, losing 0.18%, to close at 11,461.50.
For November, average hourly earnings increased 0.6%, which is about double what economists expected. Wages rose 5.1% on a year-over-year basis, well above the 4.6% expected. In many respects, these collective metrics suggests the overall inflation environment is not as adversely impactful as other periods.
The question is, is that enough to compel the Fed to slow down the rate hikes in future meetings? Friday’s market reaction would suggest that investors expect the Fed to slow down. Traders are now betting an 80% probability that the Fed will now hike by 50 basis points, slowing the down its 75 basis-point increases it has imposed in the previous four policy decision. Will that come to pass? We will know in a few weeks.
Until then, here are the earnings I’ll be watching for the coming this week.
Broadcom (AVGO) – Reports after the close, Thursday, Dec. 8
Wall Street expects the company to earn $10.28 per share on revenue of $8.90 billion. This compares to the year-ago quarter when earnings came to $7.81 per share on revenue of $7.41 billion.
What to watch: Growing concerns about shrinking lead-times and declining revenue trends have pressured the semiconductor sector for most the year. And Broadcom, despite consistently beaten earnings expectations over the past two years, hasn’t escaped the downturn, particularly given the company’s reliance on the consumer-facing segments like smartphones and broadband. But after taking a massive hit over the past several months, chip stocks have come roaring back over the past several weeks, rising along with the rest of the tech sector on optimism that a recession can be averted. One of the biggest movers has been Broadcom, which has seen its shares rise almost 20% in thirty days. However, the shares, which have fallen 17% year to date, compared to 14% decline for the S&P 500 index, still have some climbing to do. Having consistently beaten earnings expectations over the past two years, you would be hard-pressed to find a stronger management team within the chip space. On a mission to become the world leader in infrastructure technology, the company has gone on an acquisition spree and diversifying its business away from its core semiconductor segments. The company’s $61 billion acquisition of VMware is the latest example. The VMware deal exposes Broadcom to various applications such as cloud management, arming it with strong portfolio of high-growth services to drive revenue for years to come. For the stock to continue its uptrend, it will take upbeat revenue guidance and datacenter results to continue the cement the growth thesis.
Costco (COST) – Reports after the close, Thursday, Dec. 8
Wall Street expects Costco to earn $3.17 per share on revenue of $54.71 billion. This compares to the year-ago quarter when earnings came to $2.97 per share on revenue of $50.36 billion.
What to watch: The retail sector has been under pressure over the past several months as investors digest the impact of rising inflation at a time when the Federal Reserve is also raising interest rates. Despite this scenario, Costco is still expected to deliver a year-over-year increases in earnings on higher revenues when it reports results. However, the company recently reported its comparable sales growth for November, revealing only a 4.3% rise, which notably below the 7.7% analysts were expecting. What’s more, e-commerce revenue declined 10.1%, though the company cited the online offerings had become more discretionary. The mixed results sent the stock more than 6% lower. The shares have, nonetheless, been a strong out-performer during the market correction, falling 11% year to date, besting the 15% decline in the S&P 500 index, including 10% rise over the past six months, while S&P 500 has fallen 1%. But if Walmart’s (WMT) strong earnings were any indication, buying Costco stock ahead of the earnings results might be a smart move. In a period where investors continue to weigh the potential impact on consumer spending that rate increases will have, and perhaps worse, a recession, Costco will continue to be a good defensive stock that also has growth qualities. What’s more, with membership renewal rates consistently above/around 90%, Costco’s stock is poised to outperform other retailers. The management on Thursday will need to talk positively about its growth prospects and the macro impact on its customers. The company’s profit margin guidance must also reflect that level of confidence.
DocuSign (DOCU) – Reports after the close, Thursday, Dec. 8
Wall Street expects DocuSign to earn 42 cents per share on revenue of $626.88 million. This compares to the year-ago quarter when earnings were 58 cents per share on revenue of $545.46 million.
What to watch: Shares of e-signature specialist have gotten punished over the past twelve months. While the company remains the leader in the e-signature space, including the recent move to the contract agreement cloud, the market is seemingly less confident that DocuSign can regain the growth rates achieved at the height of the pandemic. But, with the pandemic being less of an issue, the company’s revenue continues to decelerate. Investors want to know if now is a good time to bet on DocuSign’s recovery. Dan Ives, analyst at Wedbush Securities believe it is. Ives recently upgraded DOCU, saying that the headwinds that have adversely affected the company have “played out” and downside from here is limited. Although not a glowing endorsement given that the upgrade is from from Underperform to Neutral, the analyst sees signs of stabilization in the company. “We believe execution on the [contract lifecycle management] deal front have generally stabilized with numbers now attainable for [fiscal 2023 and fiscal 2024],” Ives wrote in a note to clients. That said, the stock is now at a very appealing valuation. But to reverse the negative downward trend, DocuSign must issue strong revenue growth forecast for next quarter and fiscal year.
Lululemon (LULU) – Reports after the close, Thursday, Dec. 8
Wall Street expects Lululemon to earn $1.96 per share on revenue of $1.81 billion. This compares to the year-ago quarter when earnings came to $1.62 per share on revenue of $1.45 billion.
What to watch: After a brutal start to the year, driving by fears of rising inflation, rising interest rates and the prospect of a recession, Lululemon stock has come roaring back. The share have risen some 16% over the past thirty days, besting the 6% rise in the S&P 500 index. And when expanding that period by six months, LULU stock has delivered 32% gains compared to a 1% decline for the S&P 500 index. As inflationary metrics showed signs of easing, the pressure on retailers like LULU have waned. For Lululemon, however, the company has shown its resilience during the decline to maintain its strong profit margins. Thanks to its omni-channel operating model, including its direct-to-consumer sales strategy, the company posted strong revenue growth in the most-recent quarter. The Global Activewear Market is expected to grow to $455 billion in the next five years, according to Statista, rising from $380 billion. The company’s international expansion strategy, combined with its powerful brand will continue to drive shareholder value. For the stock to continue to rise, investors on Thursday will want to hear more about ways the company is navigating inflation headwinds in the near-term, in addition to delivering a top and bottom line beat.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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