- Fed rate hike, PCE inflation, Q2 GDP, and mega-cap tech earnings in focus this week.
- McDonald’s stock is a buy with earnings due on Thursday.
- Snap shares set to underperform amid bleak profitability outlook.
Stocks on Wall Street ended mixed on Friday, as investors weighed the latest round of corporate earnings results while continuing to focus on the outlook for the economy and monetary policy.
The Dow Jones Industrial Average rose marginally to notch its tenth straight day of gains, its longest rally since August 2017.
For the week, the blue-chip Dow advanced 2.1%, the S&P 500 added 0.7%, while the tech-heavy Nasdaq fell 0.6%.
The blockbuster week ahead is expected to be an eventful one filled with several market-moving events, including a key Fed rate decision, as well as a flurry of heavyweight earnings reports and economic data.
After a June pause, the U.S. central bank is widely expected to raise the target range for the Federal funds rate by a quarter point to 5.25% to 5.50% at the conclusion of its two-day policy meeting on Wednesday.
Fed Chair Jerome Powell’s comments on the future direction of monetary policy will be in focus as investors ramp up bets that the upcoming rate hike will be the last one in the Fed’s current tightening cycle.
Besides the Fed, most important on the economic calendar will be the core personal consumption expenditures (PCE) price index, due on Friday.
In addition, there is also important second-quarter GDP data due on Thursday, which will provide more clues as to whether the economy is heading for a recession.
Meanwhile, the earnings season hits full swing, with mega-cap tech companies Microsoft (NASDAQ:MSFT), Google-parent Alphabet (NASDAQ:GOOGL), and Meta Platforms due to report.
These mega-caps will be joined by big names like Boeing (NYSE:BA), Intel (NASDAQ:INTC), Coca-Cola (NYSE:KO), Ford (NYSE:F), General Motors (NYSE:GM), Visa (NYSE:V), Mastercard (NYSE:MA), ExxonMobil (NYSE:XOM), Chevron (NYSE:CVX), General Electric (NYSE:GE), 3M (NYSE:MMM), AT&T (NYSE:T), Verizon (NYSE:VZ), and Southwest Airlines (NYSE:LUV).
Regardless of which direction the market goes next week, below I highlight one stock likely to be in demand and another which could see fresh downside.
Remember though, my timeframe is just for the week ahead, July 24-28.
Stock To Buy: McDonald’s
I expect McDonald’s (NYSE:MCD) stock to outperform in the week ahead, with a potential breakout to a new record high on the horizon, as the fast-food giant’s latest earnings report will surprise to the upside in my opinion thanks to favorable consumer demand trends.
McDonald’s is scheduled to deliver its second-quarter update before the U.S. market open on Thursday, July 27 at 7:00AM ET, and results are likely to benefit from higher menu prices as U.S. consumers flock to its restaurants amid the current economic climate.
Options trading implies a roughly 3% swing for MCD shares after the numbers drop.
Many Americans have cut back spending at traditional full-service restaurants in response to a slowing economy and persistently high inflation, boosting demand for McDonald’s iconic lineup of ‘Big Mac’ burgers and chicken ‘McNuggets’.
Not surprisingly, an InvestingPro survey of analyst earnings revisions points to surging optimism ahead of the print, with analysts growing increasingly bullish on the fast-food chain. Of the 25 analysts surveyed, 24 upwardly revised their MCD earnings forecast in the past 90 days, while only one made a downward revision.
Consensus expectations call for McDonald’s to post Q2 earnings per share of $2.79, increasing 9.4% from EPS of $2.55 in the year-ago period. If that is in fact reality, it would mark McDonald’s most profitable quarter in its 83-year history, surpassing the previous record of $2.76 notched in Q3 2021.
Meanwhile, revenue is seen jumping 10% year-over-year to $6.29 billion, which would be the highest quarterly sales total in seven years, as it benefits from higher menu prices, unique marketing promotions, and a successful digital loyalty program.
McDonald’s has missed Wall Street’s top line expectations only once in the past two years, while trailing revenue estimates twice in that span, a testament to the resilience of its underlying business and strong execution across the company.
MCD stock rose to a new all-time peak of $299.35 on Friday, above the prior record high of $299.10 reached on June 30, before ending the session at $295.61.
The Chicago, Illinois-based fast-food company has a market cap of $215.8 billion at its current valuation, making it the world’s biggest quick-service restaurant chain.
Year-to-date, shares, which are one of the thirty components of the Dow Jones Industrial Average, are up 12.1% to vastly outperform the blue-chip index over the same period.
Stock To Sell: Snap
I believe shares of Snap (NYSE:SNAP) will suffer a challenging week ahead, as the struggling social media company’s latest earnings report will reveal a steep decline in both profit and revenue growth in my view, due to the challenging economic environment.
Market participants expect a sizable swing in SNAP shares following the update, with a possible implied move of approximately 11% in either direction, according to the options market.
Underscoring several headwinds Snap faces amid the current backdrop, an InvestingPro survey of analyst earnings revisions points to mounting pessimism ahead of the report, with all twenty analysts surveyed slashing their EPS estimates in the last three months.
Wall Street sees the parent company of social media messaging app Snapchat losing $0.04 per share, worsening from a profit of $0.01 per share in the preceding quarter and compared to a loss of $0.24 per share in the year-ago period.
Revenue is expected to decline 4.5% annually to $1.06 billion, due to a weak performance in its core ads business, resulting from privacy changes in Apple’s iOS and growing competition from Chinese video-sharing app TikTok.
That does not bode well for Snap’s monetization efforts, which will likely prolong its path to profitability and heighten its execution risk.
The ad-reliant social media company badly missed profit and sales growth expectations when it released Q1 results in late April, sending shares down by almost 12%, as corporations and small businesses cut back on digital advertising spending amid the current operating environment.
Snap has missed bottom-line expectations six times in the past seven quarters, while coming up short of profit estimates twice in that span.
SNAP stock rallied to a 2023 high of $13.89 on July 13; it ended Friday’s session at $12.74, earning the Santa Monica, California-based social media firm a valuation of $20.5 billion.
Shares have been doing well this year, jumping 42% so far in 2023, amid a broad-based rebound in the tech space. Notwithstanding the recent turnaround, SNAP remains 85% below its September 2021 record peak of $83.84.
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Disclosure: At the time of writing, I am long on the Dow Jones Industrial Average, S&P 500, and the Nasdaq 100 via the SPDR Dow ETF (DIA), SPDR S&P 500 ETF (SPY), and the Invesco QQQ Trust ETF (QQQ). I am also long on the Technology Select Sector SPDR ETF (NYSE:XLK). I regularly rebalance my portfolio of individual stocks and ETFs based on ongoing risk assessment of both the macroeconomic environment and companies' financials. The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.