Hopes that the Federal Reserve might ease up on interest rate rises were dashed this past week as US inflation reached new highs above 9% and this put stocks on the back foot, notwithstanding a mini-recovery at the end of the week.
The inflation reading was the highest in 40 years at 9.1% and there were big price increases across the board including in items like groceries, new cars and air fares.
Investors are now contemplating the risk of the Fed introducing a 100 basis point hike in rates at its next meeting on 27 July and a poor start to the second quarter earnings season as banks disappointed didn't help matters either.
The market looks to increasingly be pricing in the risk of a fully blown recession in the world's largest economy.
The best performer in the S&P 500 was semiconductor firm QUALCOMM (QCOM:NASDAQ) as it teased plans for the launch of a new microchip for smartwatches and other wearable products.
PEPSICO
Investors showed a thirst for shares in soft drinks to snacks giant PepsiCo (PEP:NASDAQ) after it served up (12 July) a forecast-beating 5.2% rise in second quarter sales to $20.2 billion and adjusted earnings per share of $1.86, ahead of the $1.74 Wall Street analysts were looking for.
Ramon Laguarta-guided PepsiCo, whose portfolio of tasty products spans everything from iconic soft drink Pepsi to Quaker Oats, Doritos and Gatorade, also raised its full year revenue forecast and said it could hike prices further in the months ahead, having hitherto seen little impact on demand for its sodas and snacks despite surging inflation.
The New York-based $236.4 billion cap now expects 2022 organic revenue to rise 10%, revised up from earlier guidance for an 8% increase, though it erred on the side of caution by maintaining its full year earnings forecast steady at $6.63 a share, implying 6% year-on-year growth.
Having to contend with supply chain issues and raw material price inflation, PepsiCo said it was looking at cutting costs with cheaper packaging. PepsiCo recorded a $1.4 billion charge in the second quarter, mainly related to the write-down of assets due to the Russia-Ukraine conflict.
BANKS
It was a poor start to the second quarter earnings season in the US, which traditionally kicks off with reports from the big Wall Street and Main Street banks.
Shares in JPMorgan Chase (JPM:NYSE) fell 3.5% on Thursday after earnings fell short of estimates and chief executive Jamie Dimon halted the bank's share buyback programme, warning a ‘hurricane’ was headed for the US economy.
Investment banking rival Morgan Stanley (MS:NYSE) also disappointed investors, with revenues and earnings falling on lower M&A (merger and acquisition) activity and fee income as companies pulled in their horns due to economic uncertainty.
Chief executive James Gorman said the market environment was ‘more volatile than we have seen for some time’.
US lender Wells Fargo (WFC:NYSE) was the third major bank to let investors down, missing earnings forecasts by around 10% after it set aside more money to cover potential non-performing loans.
RIVIAN
Electric vehicles maker Rivian (RIVN:NASDAQ) said it was planning a major cost cutting drive this week (12 July) to allow the company to ‘stay ahead of the changing economic landscape’.
The company said it was looking to optimize costs and operating expenses across the business. In a memo to employees founder and chief executive Robert Scaringe said the planned moves would enable it to achieve ‘sustainable’ growth.
Rivian came to the market in August 2021 amid great excitement at an offer price of $78 a share valuing the company at around $117 billion. The shares have since lost around 60% and trade at $30.8.
Growth shares and loss-making businesses have been penalised as interest rates have risen over the last nine months. Adding to pressure on the shares, Rivian missed first quarter sales growth expectations, although they still grew at a healthy clip.
Amazon (AMZN:NASDAQ) is the company's second largest shareholder with a stake of around 17.7%.
DISCLAIMER: AJ Bell is the owner and publisher of Shares. Tom Sieber owns shares in AJ Bell.
