US stocks notched a new high water mark for the year during the past week, the market’s pep suggesting investors think progress is being made on negotiations to raise the debt ceiling. Driving gains was the S&P 500, which has now chalked-up a near-10% advance so far in 2023, returns that few would have thought possible at the beginning of the year.
A stronger dollar and higher Treasury yields should be a negative, especially for highly valued growth stocks, but that hasn't hit tech stocks recently, which continue to dominate, led by 5% to 6% weekly rallies for Google-owner Alphabet (GOOG:NASDAQ) and Amazon (AMZN:NASDAQ).
That powered the Nasdaq 100 to a 52-week high, and while gains were top heavy, analysts seems encouraged by improving breadth thanks to robust earnings.
Streaming giant Netflix (NFLX:NASDAQ) and automation play Synopsys (SNPS:NASDAQ) were also big winners, as was the secretive data intelligence software business Palantir Technologies (PLTR:NYSE).
But recession and rate fears haven’t disappeared, with the 10-year Treasury yield popping seven basis points to a two-month high 3.65%. The dollar also continued its big run over the past couple of weeks, hitting a two-month high.
Stronger economic data, along with easing banking and US debt-ceiling fears, is reviving the possibility of further Fed rate hikes. Fed policymakers continued to signal they're not ready to declare a halt. The odds of another increase on 14 June climbing to 36% from 28%.
WALMART, HOME DEPOT, TARGET
First quarter earnings from a trio of the US’s big box retail beasts enabled investors to check on the health of a US consumer hitherto showing surprising resilience in the face of inflationary pressures, having built up savings during the pandemic.
The world’s largest retailer Walmart (WMT:NYSE) put up forecast-beating quarterly results on 18 May and raised full year guidance. Q1 revenue rose by a better-than-expected 7.6% to $152.3 billion with earnings per share coming in at $1.47, ahead of the $148.8 billion and $1.32 ‘the street’ was looking for respectively, as Walmart’s grocery business helped offset weaker clothing and electronics sales.
CEO Doug McMillon told investors higher prices on everyday items like food continue to squeeze shoppers’ budgets, leaving less money to spend in other ways, while stubborn inflation is ‘one of the key factors creating uncertainty for us in the back half of the year’.
This echoed cautious comments earlier in the week from home improvement giant Home Depot (HD:NYSE) and discounter Target (TGT:NYSE), with consumers reining in spending on big ticket and discretionary items and prioritising everyday essentials.
Target’s shares cheapened 0.3% to $157.4 over the week despite better-than-feared earnings (17 May) and maintained annual guidance, which offset another drop in quarterly profits amid softening sales trends. Q1 net income declined by 5.8% to $950 million or $2.05 per share, ahead of the $1.76 expected, in an ‘increasingly challenging environment’. However, revenue of $25.32 billion was ahead of the $25.29 billion analysts were looking for, while Target’s bloated inventory was 16% lower year-on-year at the end of the quarter.
And after dipping on the delivery (16 May) of its worst revenue miss in more than 20 years, with homeowners putting off large projects and purchasing fewer big-ticket items, Home Depot’s shares finished the week modestly in the green. After seeing comparable sales fall by 4.5% in Q1, the DIY products powerhouse now expects full year sales to decline between 2% and 5%, having previously predicted roughly flat revenues.
NEWMONT
US gold miner Newmont (NEM:NYSE) has sealed a $19 billion deal for Australian rival Newcrest (NCM:ASX). A previous all-share offer in February had been rebuffed, while a further approach in April had prompted Newcrest’s management to open their books.
An agreement has been struck amid strong gold prices linked to a recent banking crisis, the turmoil around the US debt ceiling and a pause in interest rate hikes from the Federal Reserve.
Newmont, the world’s largest gold miner by market valuation, will see a significant increase in its Aussie footprint thanks to the transaction. The takeover will also substantially increase its copper production – a metal seen as critical to the energy transition.
Newmont has identified synergies of $500 million which can be achieved within two years of the completion of the deal as well as the opportunity to boost cash flow by as much as $2 billion in that same period. The combined business will retain a secondary listing on Australia’s stock exchange.
CAPITAL ONE FINANCIAL
The Warren Buffett-effect lifted Capital One Financial (COF:NYSE) over the past week, the stock jumping 10% to $96 after the Sage of Omaha’s Berkshire Hathaway (BRK-B:NYSE) took a near-$1 billion stake in the credit cards company.
Buffett and Berkshire have been steadily selling bank stocks since 2020 and exited its remaining holdings in Bank of New York Mellon (BK:NYSE) and US Bancorp (USB:NYSE) during the first quarter, latest filings show. The firm also sold its remaining US-listed shares in Taiwanese chip firm TSMC (2330:TPE) with Buffett seeming to suggest the decision was prompted by ongoing geopolitical tensions with China.
However, along with UK drinks company Diageo (DGE), Capital One Financial was one of two new stakes the duo added during the quarter and appears to be a sign of confidence in both the credit card business and the ability of US consumers to service their debts, even as several regional banks have had to be rescued.
Berkshire already owns a sizeable stake in American Express (AXP:NYSE), with 7.7% of the shares (worth around $25 billion at the current price), together with smaller holdings in Mastercard (MA:NYSE) and Visa (V:NYSE) each valued at just under $2 billion at current market prices.
