Lyft And Uber Battle Over Earnings Ahead Of The Fed Announcement

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(Wednesday Market Open) Equity index futures were pointing to a higher open as the S&P 500 (SPX) tries to put together a three-day win streak. Yet today’s success may depend largely on the Federal Open Market Committee’s rate move at midday, and on what Chair Jerome Powell says afterward about how aggressively the Fed will be unloading its balance sheet in the future.

Potential Market Movers

Until the Fed’s announcement this afternoon, investors will have plenty of earnings reports to sort through.

In the health care sector, CVS Health CVS reported better-than-expected earnings and revenue and raised its fiscal-year earnings guidance. The stock rallied 1.56% in premarket trading.  Vaccine maker Moderna MRNA also beat on top- and bottom-line numbers, prompting a 7.65% premarket rally. The company continues to see growth in its COVID-19 vaccine and raised its outlook for the next quarter.

After Tuesday’s close, Advanced Micro Devices AMD reported that it crushed earnings thanks in part to its ability to capture market share from its competitor, Intel INTC, which helped AMD grow revenue 71%. AMD rallied 4.28% in extended-hours trading. The semiconductor sector has been a mixed bag this earnings season, but AMD is certainly chipping in.

Travel and leisure may get a boost from Airbnb ABNB, which reported a much smaller loss than anticipated thanks to higher-than-expected revenues. The company reported that it has surpassed 100 million nights booked in a quarter for the first time. ABNB rose in after-hours trading by 3.97% but has some room to go after dropping more than 5% on Tuesday alongside Expedia EXPE, which fell 14% despite beating on earnings and revenue.  

Both may get a boost from Marriott MAR, which reported a beat on earnings and revenue this morning. Marriott subsidiary The Ritz-Carlton reported a 96.5% increase in revenue per available room during the quarter. MAR also raised its dividend. The news triggered a 1.84% rise in premarket trading.

Another interesting earnings development happened in the ride-sharing space. Lyft LYFT missed so badly on estimates that its main competitor, Uber UBER, released its positive earnings news earlier than scheduled. Lyft fell 24.48% in premarket trading. Despite the better earnings, Uber was trading 5% lower ahead of the opening bell as investors seemed concerned about how ride sharing will fare post-pandemic.

On the economic report front, ADP nonfarm employment report came in much lower than expected at 247,000 instead of 395,000 forecasted. The biggest losses were in small businesses with 50 or fewer employees. A tight labor market could be hindering smaller businesses less likely to compete with big-company wage offers. That said, leisure and hospitality saw the biggest hiring gains with restaurants getting a big boost in hiring as COVID-19 restriction are lifted. With fewer jobs added, Friday’s Employment Situation report could be weaker than expected.

Oil futures were moving higher ahead of the opening bell on the news that the European Union (EU) is proposing a ban on Russian oil imports by the end of the year. Additionally, the EU wants to remove Russia’s biggest bank, Sberbank, from the SWIFT international payments network.

Russia may have found an oil buyer in India, but India wants a discounted price below $70 a barrel due to the risks involved in buying from Russia. Indian officials are concerned they may see a ban on India’s wheat exports to Europe and the United States if they buy oil from Russia. Wheat futures were up 3.75% before the opening bell.

Reviewing the Market Minutes

Yesterday, the JOLTs job openings report revealed that there are still of plenty of jobs going unfilled. Openings increased from 11.344 million in February to 11.549 million in March. Forecasters were expecting a drop to 11 million. Additionally, factory orders also came in higher than expected, up 2.2% month over month in March, which was also better than the forecasted 1%. Both reports signal economic strength in the United States, but that’s the bright spot. The continued hot job market and increase in factory orders are likely to embolden the Fed in its aggressive approach to raising interest rates.

Stocks were positive Tuesday, but investors appeared to be in a “wait and see” mode ahead of today’s Fed announcement. The S&P 500 (SPX), Nasdaq Composite ($COMP), and the Dow Jones Industrial Average ($DJI) closed higher by 0.52%, 0.23%, and 0.28% respectively. Investors appeared to favor value stocks to growth stocks because the Russell 3000 Value Index (RAV) rose 0.9% compared to the Russell 3000 Growth Index (RAG) that was just 0.02% higher.

Energy was the top-performing sector with the Energy Select Sector Index rallying 2.91% despite oil prices closing 2.3% lower on the day. The financials and real estate sectors were second and third on the day ahead of today’s  Fed announcement. Consumer staples and discretionary were the only two sectors in the red.

CHART OF THE DAY: POTENTIAL GUSHER. The Energy Select Sector Index ($IXE—candlesticks) is now trading between support and resistance levels not seen for seven or eight years. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Cue the Theme Music: Thematic investing has been a popular approach among many investors who align with a disruptive industry or social movement. These are investments that focus on a specific theme like robotics, efficient energy, cybersecurity, generational needs, space exploration, and so on. It’s a top-down approach to investing that tries to identify potentially revolutionary products and companies.

The concept has been around for decades but has really gained popularity in recent years. In a March 2021 survey by FactSet, investors allocated on average 28% of their portfolio to a thematic investing concept or strategy. Additionally, investors told FactSet that they expected their allocation to grow to 35% in the next 18 months.  

Themes Can be Risky: About four years ago, MSCI created several indexes around themes under broad categories including transformative technologies, environment and resources, health and healthcare, society and lifestyles, and multi-themed. However, recent studies by Factor Research reveal some interesting findings that investors should weigh before implementing a thematic investment strategy.

First, many of the indexes are made up of small-cap stocks that tend to be more volatile than large companies. Second, many indexes are weighted heavily towards the technology sector, which also tends to be more volatile than most. Third, focusing on the theme strategy alone is likely to result in a portfolio that lacks proper diversification. Finally, while the MSCI indexes have outperformed their specific benchmarks, they’ve underperformed the S&P 500 (SPX).

Themes and Variation: A thematic investment or strategy can still be a part of a diversified portfolio as long as investors don’t put all their eggs in one basket. Having 100 stocks within the same theme isn’t very well diversified because each stock is liable to rise and fall on the same news and trends. Be careful that a theme strategy doesn’t overweight your portfolio in small-cap and/or tech stocks.

Also, watch overlapping investments. Often, investors don’t pay attention to how much one strategy might overlap another. For example, an efficient energy theme is probably going to have similar investments to an electric vehicle theme. This could lead to overweighting in a few key companies.

Finally, loving a theme doesn’t mean you have to marry it. If something fundamentally changes about a theme, consider whether it still belongs in your portfolio. For example, millennials is a theme. However, even millennials run the risk of turning into their baby boomer parents which could make the theme less distinctive over time and therefore less worthy as an investment strategy.

Notable Calendar Items

May 5: Earnings from Shell SHEL, ConocoPhillips COP, and Anheuser Busch BUD

May 6: Employment situation report and earnings from Alibaba BABA, and Cigna CI

May 9: Earnings from Duke Energy DUK, Simon Property SPG, BioNTech BNTX, and Tyson Foods TSN

May 10: Earnings from Occidental OXY, Suncor Energy SU, and Sysco SYY

May 11: Consumer Price Index (CPI) and earnings from Toyota TM, Walt Disney DIS, and JD.com JD

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image sourced from Unsplash

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.