The stock market rally lost significant ground, with the Nasdaq reversing a key resistance area once again. But the major indexes bounced back somewhat to end the week. Inflation surged to a 40-year high of 9.1%, with the underlying details signaling persistent cost pressures even with gasoline prices retreating sharply this month. JPMorgan Chase missed on earnings, but Citigroup soared from lows on strong results. ServiceNow warned of weak European demand. Delta Air Lines missed EPS views, but American Airlines reported strong preliminary results. Taiwan Semiconductor earnings and guidance lifted chip stocks.
Stock Market Rally Doesn't Break
The stock market rally retreated for most of the week as the Nasdaq reversed from the 10-week line, with hot inflation data raising Fed rate hike odds and recession risks. But the major indexes bounced back from Thursday lows and rallied Friday. Bank stocks were mixed on earnings. ServiceNow weighed on software. But chip names bounced on Taiwan Semiconductor earnings and guidance. The 10-year Treasury yield fell solidly, with the inverted yield curve highlighting recession concerns.
Hot Inflation Raises Fed Rate Odds
A trio of hot economic reports, highlighted by a new 40-year-high 9.1% CPI inflation rate, cemented expectations for a 75-basis-point Federal Reserve rate hike on July 27 and raised the possibility of a full-percentage-point move. The CPI report showed unexpectedly broad-based price pressures, with nonenergy services inflation hitting 5.5%, highest in 31 years. Producer price inflation also came in hot, with wholesale inflation for finished products unexpectedly picking up to 11.3%. A 1% rise in June retail sales, both overall and excluding autos, also topped expectations. Sales rose 0.7% excluding autos and gas vs. expectations of a slight decline. But inflation already appears to be coming down from its peak, with gas prices down nearly 10% from mid-June levels. Inflation expectations also fell slightly in July according to the University of Michigan sentiment survey.
Meanwhile, new claims for jobless benefits rose 9,000 to 244,000 in the week of July 9. That was the highest since November and up 78,000 from a half-century low in mid-March.
UnitedHealth Earnings Top
UnitedHealth posted an 18.5% EPS rise to $5.57 in Q2, sailing past estimates by 36 cents as revenue grew 12.6% to $80.33 billion. Coverage expansions, a lower cost of care and a huge 30% rise in revenue per customer for its Optum health services division powered Q2 results. The Dow Jones managed-care giant bumped up full-year earnings by 20 cents at the midpoint to a range of $21.40 to $21.90. UNH stock rose Friday, moving back toward a buy point.
Bank Earnings Mixed
Lower investment banking revenue was a common theme for big banks this earning season. JPMorgan and Morgan Stanley came in with bigger-than-expected EPS declines. JPMorgan temporarily suspended its share buyback. Morgan Stanley, which reported a 55% drop in investment banking revenue, did raise its dividend. Wells Fargo was roughly in line on earnings while revenue fell short. Citigroup earnings fell, but easily beat views. Citi revenue jumped 11% to $19.6 million, driven by its institutional client segment. JPM stock fell for the week, but closed off lows. Morgan Stanley, Wells Fargo and Citi rose, though all are in long downtrends.
Travel Demand Resists Hiccups
Delta Air Lines said it had "yet to see any meaningful pullback in demand" and that service disruptions were easing. But it plans to hold available flights at June levels to restore stability to service, as airlines struggle to stay staffed following Covid-related job cuts in 2020. Second-quarter per-share profit fell short of estimates. Adjusted revenue beat. The carrier remained upbeat on a rebound in international and corporate travel later this year. But it forecast a jump in costs, relative to 2019, as it limits flight capacity. American Airlines during the week offered a more optimistic forecast on Q2 unit revenue.
TSMC Posts Beat-And-Raise Report
Taiwan Semiconductor Manufacturing, known as TSMC, beat analyst estimates for the second quarter and gave a better-than-expected forecast for the current period. The chip foundry's EPS jumped 67% while sales grew 36% to $18.16 billion. However, TSMC gave some cautious commentary for late 2022 and early 2023, citing weakening sales of PCs, smartphones and consumer electronics. Shares rose, leading chip stocks higher.
ServiceNow Warns On European Sales, Strong Dollar
ServiceNow tumbled after CEO Bill McDermott told CNBC that the company's sales cycle in Europe could be getting longer. McDermott also said exchange rates pose a problem for software companies. Microsoft warned on currency swings several weeks ago, with the U.S. dollar soaring vs. rivals. Many software makers, from Microsoft to highly valued growth plays, fell solidly on the ServiceNow warning.
BYD Dives On Buffett Rumor, Slashes Losses
A filing suggested Warren Buffett's Berkshire Hathaway was selling some or all of its hefty long-term stake in the Chinese electric-car maker. But there's been no confirmation. BYD later gave preliminary first-half earnings results that were well above consensus. Shares, which plunged on the Buffett rumor, rebounded on the booming profit report, but still fell sharply for the week. BYD will begin selling its Seal sedan, a Model 3 rival, on July 18. Deliveries should start within a few days.
Market Chop Hits BlackRock
Investment-management giant BlackRock and custody banks Bank of New York Mellon and State Street offered up a mixed bag of second-quarter earnings. Shares of all three rose Friday, though BLK stock fell for the week. The results arrived as the industry attempts to steer their investor clients through bumpy markets, high inflation and rising interest rates. BlackRock CEO Larry Fink said investors were navigating "the worst start to the year for both stocks and bonds in half a century."
News In Brief
Tesla AI chief Andrej Karpathy, who oversaw the company's Autopilot development, has left the EV giant. Karpathy had been on a monthslong sabbatical, raising speculation that he was on his way out. Elon Musk said Tesla may cut prices if commodity prices decline. Tesla stock fell for the week.
Twitter filed a lawsuit against Elon Musk after the eccentric billionaire said he was terminating his $44 billion deal to buy Twitter. Musk may have to pay Twitter far more than a $1 billion breakup fee, with courts conceivably ordering him to carry out the deal. Twitter stock dived to start the week but slashed losses.
Unity Software will buy app monetization and distribution company IronSource in an all-stock deal valued at around $4.4 billion. Video game platform maker Unity, which also guided low on revenue, plunged.
Conagra Brands reported Q4 EPS grew 20%, just beating, while revenue was up 6% to $2.91 billion, roughly in line. The agribusiness giant guided low for fiscal 2023. Shares tumbled.
Cintas matched fourth-quarter revenue expectations with a 13% gain to $2.07 billion. EPS climbed 14%. The business uniforms giant guided up 2023 sales and in line for sales.
PepsiCo reported Q2 EPS grew 8% while sales climbed 5% to $20.23 billion, both beating views. The beverage and snack maker also boosted its full-year revenue outlook. Pepsi has hiked prices and shrunk products to manage rising expenses.
Fastenal grew earnings 19%, meeting views. Revenue fell just short, with the industrial supplies distributor warning on demand, citing high inflation.
