The stock market rally approached or topped key resistance levels, then sold off Thursday as a hot inflation reading and Fed rate hike fears sent Treasury yields surging. The Dow Jones, S&P 500 index and Nasdaq composite were up slightly for the week as of Friday morning, while the Russell 2000 rose solidly. Datadog led some fallen software leaders higher, while Affirm crashed on results.
Stock Market Rally Still Rangebound
The Dow Jones, S&P 500 and Nasdaq composite rose slightly so far this week, but that included a sharp retreat Thursday on the strong CPI inflation reading. The 10-year Treasury yield spiked above 2% for the first time in 30 months, while short-term yields surged far more. Commodity-related sectors continued to do well, along with oceangoing shipping firms.
Inflation Signals Aggressive Fed
Thursday's upside surprise in the consumer price index was fairly modest — both the overall CPI and core rate rose 0.6% in January vs. the 0.5% consensus — but it sent Treasury yields surging and jolted the Fed rate-hike outlook. Odds of a 50-basis-point rate hike at the March 15-16 meeting went from slim to overwhelming. Deutsche Bank said it now expects the Fed to raise its key rate by 1.75 percentage points this year — a half-point more than its economists expected prior to the CPI data. Deutsche Bank highlighted the acceleration of rent and medical services inflation, a sign that inflation pressures will persist. Consumer inflation hit 7.5% and the core rate 6%, both 39-year highs — and the labor market is basically at maximum employment, with wages soaring.
Yet the Fed's benchmark rate is still pegged 0%-0.25%. Every time inflation surprises on the upside, the risk grows that high inflation will become entrenched, and the Fed's risk-management requires an even faster pace of tightening.
Disney Magic Returns
Disney EPS more than tripled year over year to $1.06 on a 34% sales bump to $21.82 billion as visitors returned to its domestic theme parks and its streaming business keeps chugging along. Disney+ subscribers reached 129.8 million. FactSet had expected 125.41 million. Disney's parks, experiences and consumer products division revenue notched $7.2 billion during the quarter, double a year earlier. Disney stock popped after reporting earnings.
Chip Stocks Pop On Earnings
Chipmakers getting a boost from beat-and-raise earnings reports included Alpha & Omega Semiconductor, GlobalFoundries and Onsemi. Meanwhile, some fabless chipmakers and chip gear vendors disappointed with their fourth-quarter reports and outlook because of supply constraints. They included tracking-chip maker Impinj and semiconductor equipment suppliers Advanced Energy Industries and Ichor.
Nvidia-Arm Deal Canceled
Graphics-chip maker Nvidia abandoned its planned purchase of chip designer Arm from Japan's SoftBank. The deal, announced in September 2020, faced regulatory opposition in the U.S., Europe, and China. SoftBank is now planning an initial public offering for Arm, which the Nvidia deal originally valued at $40 billion. Nvidia plans to pursue its goals in data center processing units as a licensee of Arm technology. The collapse of the Arm deal removed an uncertainty weighing on Nvidia stock, analysts said.
Advanced Micro Devices said it received final clearances to buy Xilinx. AMD expects to complete the purchase on Monday.
Frontier Buying Spirit Air
Frontier Group, parent of Frontier Airlines, will buy discount rival Spirit Airlines. The merger should close in the second half of the year, though regulatory approval could be tricky. A name for the airline and new branding will be determined before the deal's close.
Uber Nears Pre-Pandemic Levels
Uber revenue shot up 83% in Q4, with the ride-hailing giant saying bookings are almost back to pre-pandemic levels. The company also marked its second profitable quarter, thanks to its 11% stake in Chinese ride-hailing company Didi. Uber rival Lyft also beat earnings and revenue estimates but said it had fewer active riders than in the prior quarter.
Chipotle Tops Views
Fast-casual Mexican chain Chipotle Mexican Grill reported fourth-quarter results that beat expectations. Chipotle said digital sales and "healthy demand" for smoked brisket helped lift same-store sales. So did menu-price increases, amid rising wages and costs for beef and shipping. The company boosted its longer-term outlook for the number of Chipotle stores it believes North America can hold but noted omicron and bad weather made for a messy January. Earnings for Yum Brands, parent of KFC, Taco Bell and Pizza Hut, missed EPS expectations. But sales beat.
Drug Earnings Mixed
Pfizer tumbled after Q4 sales surged 105% to $23.84 billion but still missed views. Adjusted EPS leapt 152%, beating. AstraZeneca reported EPS grew 56% as sales ran up 64% to just over $12 billion, topping forecasts. GlaxoSmithKline also beat estimates with 8% gains for EPS and sales.
Hospitals, Insurers Strong
Three big health care names near buy points came to bat for Q4 earnings, yielding one breakout: Tenet Healthcare; one flirtation: Centene; and one modest setback: Molina Healthcare. Tenet EBITDA topped estimates on higher margins, despite soft revenue. Analysts highlighted the growth outlook for its ambulatory service center business after its SurgCenter Development acquisition. Managed-care players Centene and Molina offered a more muted growth outlook, with Molina saying health-insurance-exchange members will fall by two-thirds, though helping margins. Medicaid enrollment for both firms could take a hit as states reset eligibility for the first time since the pandemic. But Centene has been picking up market share in Medicare Advantage via aggressive pricing.
Software Stocks Jump
A number of highly valued former software leaders jumped amid generally solid earnings and guidance.
Datadog reported Q4 EPS up 233% while revenue jumped 84% to $326.2 million, amid an expanding partnership with Amazon Web Services. Both were well above views. Revenue guidance for Q1 and full-year 2022 was strong. Shares jumped.
Paycom Software reported Q4 per-share profit climbed 32% with revenue rising 29% to $285 million. The workforce-management software maker forecast Q1 revenue just above consensus.
Digital Turbine reported Q4 EPS swelled 133% with revenue up 324% to $375.5 million, both topping. Social media platform TikTok is now a top 5 customer of Digital Turbine, which connects wireless service providers, smartphone makers, and publishers with app developers and advertisers.
CyberArk reported a 6-cent loss in fiscal Q3 while revenue rose 14% to $121.6 million, both edging by estimates. Billings rose 18% to $187.7 million, above forecasts. For fiscal Q4, the cybersecurity firm forecast revenue slightly past views.
HubSpot earnings shot up 45% with revenue up 47%. The digital marketing software maker guided up for Q1.
Cloudflare broke even in Q4 vs. a 2-cent loss a year earlier, meeting expectations. Revenue jumped 54% to $193.6 million, beating views. For full-year 2022, the cloud-based networking and cybersecurity services firm forecast revenue of $929 million at the midpoint of its guidance range vs. estimates of $891 million. Cloudflare also announced the acquisition of cybersecurity firm Vectrix. Terms were not given.
CVS Beats, But Covid Boost To Fade
CVS Health edged past Q4 estimates, growing EPS 52% and revenue 9%, thanks to a boost from Covid vaccines and tests. CVS expects that tailwind to fade this year, so guidance points to a slight year-over-year earnings decline. Still, the windfall from Covid sped up its deleveraging, allowing for stepped-up capital returns and M&A. CVS stock fell 5.5% on Thursday on the tepid guidance, but it's still technically fit after a big run since early December.
News In Brief
Expedia hit a record high as the online travel company reported fourth-quarter results that soundly beat Wall Street estimates on earnings and met revenue projections
MGM Resorts crushed Q4 earnings with Q4 adjusted EPS of 12 cents on sales of $3.1 billion. Forecasts were for EPS of one cent on sales of $2.8 billion. Net revenue at Las Vegas Strip casinos and resorts soared 277% year over year to $1.8 billion. But BetMGM posted a loss of $57 million in Q4.
S&P Global: reported a 16% jump in Q4 EPS to $3.15, beating analyst estimates by two cents. Revenue rose 12% to $2.09 billion, also above estimates.
O'Reilly Automotive posted a 42% EPS increase to $7.64 on a 16% sales gain to $3.292 billion, an overall beat.
Toyota Motor and Honda Motor gave an upbeat profit outlook for the full year after cutting production and warning chip woes continue. Their Q4 profit came in higher than forecast as consumers pay more for cars.
Tyson Foods, the meat-production giant, reported fiscal first-quarter results that beat estimates. Shares jumped.
Danaos, an owner of container ships, topped fourth-quarter expectations with a 166% EPS gain and 80% revenue rise.
Affirm crashed Thursday as the "buy now, pay later" leader reported a wider-than-expected fiscal Q2 loss. Revenue climbed 77% to $361 million, easily beating, but expenses grew nearly twice as fast. Affirm guided low on fiscal Q3 revenue.
New Relic topped fiscal Q3 revenue estimates, but the data analytics firm fell short on earnings and guided low. Shares plunged.
Agricultural giant Bunge wrapped up a record year with a solid beat as Q4 EPS rose 14% to $3.59. This year, Bunge sees EPS of at least $9.50. While below this year's, that floor was nearly $1 ahead of views.
Cleveland-Cliffs Q4 results came in far below estimates, despite being up massively from the prior year. The company, a huge supplier to the auto industry, said it accelerated maintenance amid chip-constrained demand, which should help 2022 results. It also forecast higher-average steel prices vs. 2021 based on its contract prices. CLF stock gapped down moderately on Friday, stalled below its 200-day line.
