Stocks Like Rising Yields, Wait What?

Stakes couldn’t be higher for NVIDIA. Earnings expected to hit $2.07 (up +305% from $0.51 last year). It’s been the best performing stock in the S&P 500 this year, up +212%.

If they miss the entire stock market could go down.

Markets

Prices as of 4 pm EST, 8/22/23

Macro

@philipjagd

Nobody wants to buy (or sell) existing homes. Sales of existing US homes fell 2.2% in July (more than expected) to the lowest level since January. The drop extends to ~17% on an annual basis. Median sales prices, meanwhile, rose 1.9% from a year earlier to $407,000. It was the first YoY increase in prices in 6 months. As we noted yesterday, high mortgage rates are keeping sellers put and homebuyers sidelined. The chart above illustrates the current phenomenon nicely: the effective rate for current homeowners is ~3.6% while the rate for new homebuyers is more than double (and rising).

Earlier this week, Standard and Poor's got a little moody. This is to say the agency cut ratings for 5 US banks: Associated Banc Corp, Comerica, KeyCorp, Valley National, and UMB Financial. Outlooks for River City Bank and S&T Bank were also lowered to negative. Fellow rating agency Moody's similarly downgraded 10 midsized lenders earlier this month. S&P cited the squeeze on liquidity for many banks as customer deposits shift (to high-yielding alternatives) due to higher interest rates as the driving factor behind the downgrades.

Stocks

Goldman Sachs

According to Goldman Sachs, there are just 11 (publicly-traded) near-term beneficiaries of the AI revolution. The bank's analysts break those companies down into 3 buckets: “enablers” (makers of semis and related equipment), “hyperscalers” (mega-caps commercializing AI at scale), and “empowered users” (companies leveraging AI in their businesses). Taken together, this group of stocks has outperformed the equal-weight S&P 500 by 62pp. And they're also seeing outlooks improve as all 11 have experienced positive EPS revisions since the first quarter. Over the same period, EPS estimates for the broader S&P 500 have fallen 1%.

Societe Generale

Stocks like it when bond yields fall. At least that's the traditional relationship between equities and yields. In fact, according to SocGen, 45% of the world's market cap prefers bond yields to be going down (first chart). So far this year, however, the stocks that have performed best in the US have been those most negatively correlated to rising bond yields (second chart). While some of that outperformance can be traced to the previous year's sharp losses, fading recessionary fears mean discounts to valuations (especially for cyclical stocks) need not be so deep.

Energy

Much to OPEC's ire, Iran will continue to raise its oil production. Having already increased production by ~50% since 2021, the country will now aim to pump out 3.4 million barrels a day. Meanwhile, Goldman is predicting lower global stocks will boost oil prices through the end of the year. It currently expects Brent to finish the year at $86 per barrel with a $2 potential boost if inventories decline further.

Earnings

Friday’s highlights:

DKS Dick's Sporting Goods: $2.82 EPS (vs. $3.81 expected), $3.22 billion in revenue (vs. $3.24B expected).

• The retailer missed top and bottom line estimates for the first time in 3 years.

• In-store theft continues to have a material impact on its stores.

• Dick's expects more shrinkage (aka inventory lost) from here and lowered its forecast for full-year profits.

What we’re watching today:

• Nvidia NVDA

• Analog Devices ADI

• Snowflake SNOW

• Autodesk ADSK

• NetApp NTAP

• Splunk SPLK

• Grab Holdings GRAB

• Williams-Sonoma WSM

• Bath & Body Works BBWI

• Full Truck Alliance YMM

• Lancaster Colony LANC

• Advanced Auto Parts AAP

• Dycom Industries DY

• Kohl's KSS

• Peloton PTON

• Foot Locker FL

• Abercrombie & Fitch ANF

Top Headlines

• BOE warning: The Bank of England has warned about an increased risk of corporate defaults.

• EU PMI: European business activity in July reached its lowest level since November 2020.

• De-dollarization: BRICS' attempt to overthrow the dollar faces several challenges.

• Fed talk: Richmond Fed President Barkin warned about messing with the Fed's 2% inflation target.

• Union deal: UPS workers have approved a new 5-year contract which includes heft pay bumps.

• Threads: Meta's Twitter clone has started rolling out on the web.

• Retail earnings: Shares of Macy's tumbled 14% despite a double beat.

• New SBF Diet: Sam Bankman-Fried's lawyers say he is on only "bread and water" and "no Adderall".

Deals

• Weather biz: IBM will sell The Weather Company assets to Francisco Partners.

• Crypto stake: Coinbase has taken a stake in stablecoin issuer Circle.

• Software M&A: Thoma Bravo is set to finalize its $3.2bn acquisition of ForgeRock after clearance from the Justice Department.

• O&G M&A: Permian Resources will buy Earthstone Energy for $4.5 bn including debt.

• FinTech unicorn: Finance software startup Ramp has raised $300 million at a $5.8bn valuation.