This week, Bradley Johnston, CFP®, ChFC®, MSBA, discusses the recent Fed rate hike, shares the latest on GDP and jobless claims, and reports earnings from Coca-Cola, Ford, Apple, Amazon, and more.
Welcome to the weekly market update. And what a week it was – from over a dozen of our portfolio holdings reporting earnings to new economic data and of-course the fed’s rate hike announcement. There was simply too much happening to cover in a single video this week, so let’s dive into the main headlines.
Although it was unanimously expected, perhaps the week’s biggest headline was Fed policy makers announcing on Wednesday to raise their benchmark interest rate by another 75 basis points as they try to lessen the year’s run-up of inflation.
This takes the cumulative June and July increase to 150 basis points, for a total of 2% thus far in 2022. This has lifted the target for the federal funds rate to a range of TWO AND A QUARTER percent to 2 AND A HALF percent.
On the heels of this announcement, new economic data showed a second-quarter GDP decrease of 0.9%. This is the second quarter of shrinking GDP, with the first quarter seeing a 1.7% decline.
Two quarters of contracting GDP is often used as the definition of a technical recession. But the National Bureau of Economic Research, who are the official recession scorekeepers, and Fed Chair Powell disagree largely by pointing to a labor market that is holding strong. Unemployment forecast is expected to hold near a 50 year low in July after strong hiring numbers and a near-record number of job openings. Jobless claims also dropped last week and continuing claims, which measure Americans applying for ongoing benefits, are also holding near historic lows.
Despite worry that the economy may be on the verge of a recession, it seems the Fed has a more glass is half full outlook, believing a strong labor market will allow the economy to weather the monetary adjustments.
Coca Cola continued it’s strong start to the year seeing both earnings per share and revenue increase from the year prior. While Coke’s ability to navigate supply chain concerns and inflationary pressures has been impressive, perhaps most surprising is this strong start has almost influenced Frank Reilly to switch sides in this long-standing rivalry. (Frank Reilly Pepsi photo) Almost. The company has adjusted their revenue growth expectations to 12-13%, up from previous guidance of 7-8%. However, they kept their earnings per share growth estimates at 5-6% given that commodity price inflation is expected to be steeper than previously forecasted. Despite increased costs, analysts do not expect to see a significant slump in sales, given that their product is considered a lower-priced staple.
You may recall we discussed the rise of semiconductors last week and the prices of new and used cars alike. This week, Ford shares jumped as second-quarter earnings and revenues beat analyst estimates. While Ford may be the name we associate with the first cars in America, it is quickly entering the electric vehicle market (insert graphic below) with electric mustangs and trucks ready for purchase. In fact, it is a market leader when it comes to their percentage of research and development going into the vehicles of the future. Adjusted earnings per share came in at 68 cents blowing estimates of 45 cents out of the water. Another great sign for the company was revenue coming in at $37.9 billion, continuing to increase year over year, and well above estimates of $34.5 billion.
Amphenol, a holding in the Core portfolio, is up over 5% as it too beat on earnings and sales. Amphenol has also announced the acquisition of NPI Solutions, a Morgan Hill, California-based company with annual sales of approximately $65 million. The company manufactures cable and value-add assemblies for industrial applications with a particular focus on semiconductor manufacturing equipment. Amphenol had revenue growth of 18% for the second quarter, with net sales of $3.14 billion. Earnings per share beat estimates of 68 cents with a delivery of 75 cents to investors. They do expect things to be a bit slower in quarter 3 with forecasts of net sales at $3.04 billion and adjusted earnings per share at 71 cents.
Apple and Amazon
Investors waited for Apple and Amazon’s earnings to cap-off an already eventful week. And neither of the tech giants disappointed. Amazon’s revenue topped estimates while they gave a strong sales forecast for the current quarter. They continue to see significant growth in their cloud computing business, which increased 33% and generated almost $20 billion in revenue. Apple’s revenue also topped analysts’ estimates, with Iphone and Ipad sales holding up better than expected. The businesses’ upbeat earnings showed they are more than capable of handling consumers possibly tightening their belt with inflation concerns, resulting in both companies rising significantly in after-hours trading yesterday.
So what does it all mean? Despite the US economy shrinking for a second straight quarter, the market has experienced a bit of a rally in July, climbing over 10% since bottoming out in late June. It is likely that the market had already priced in the Fed’s announcement and declining GDP before they became official, and is now pricing in optimism for better numbers in the second half of 2022. At the end of the day, this came as a welcome sight for investors who saw a second strong week in a row, relying on the many companies who reported positive earnings. With headlines changing from covid to invasions to inflation to GDP it shows there is always something to worry about, which is perfectly normal. So instead, we will share investors optimism, also relying on high quality companies to navigate such headlines as they always have. We will continue to monitor such developments on your behalf. So please, sit back, relax, and join us again next week for our weekly market update.