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Stocks on Wall Street ended mostly lower on Friday, as investors continued to assess the outlook for the economy, inflation, interest rates and corporate earnings.
Despite Friday’s downbeat performance, all three major U.S. stock indexes notched impressive weekly gains as cooling inflation data eased fears about higher interest rates.
For the week, the blue-chip Dow Jones Industrial Average rose 2.3% to mark its biggest weekly increase since March. The S&P 500 and the Nasdaq, meanwhile, tacked on 2.4% and 3.3% respectively.
The week ahead is expected to be another busy one as Q2 earnings season shifts into high gear, with reports expected from several high-profile companies, including Tesla (NASDAQ:TSLA), IBM (NYSE:IBM), Bank of America (NYSE:BAC), Morgan Stanley (NYSE:MS), American Express (NYSE:AXP), Johnson & Johnson (NYSE:JNJ), American Airlines (NASDAQ:AAL), United Airlines (NASDAQ:UAL), and Taiwan Semiconductor (NYSE:TSM).
In addition to earnings, most important on the economic calendar will be Tuesday’s U.S. retail sales report for June, with economists estimating a headline increase of +0.5% after sales rose +0.3% during the prior month.
Meanwhile, Federal Reserve officials will be in a blackout period ahead of the U.S. central bank’s policy meeting scheduled for July 25-26.
As of Sunday morning, financial markets are pricing in a 97% chance of a 25 basis point rate hike at this month’s meeting, according to the Investing.com Fed Rate Monitor Tool.
Regardless of which direction the market goes, below I highlight one stock likely to be in demand and another which could see further downside.
Remember though, my timeframe is just for the week ahead, July 17-21.
I believe Netflix's (NASDAQ:NFLX) stock will outperform in the week ahead as the streaming giant’s second-quarter earnings report will surprise to the upside in my view, thanks to improving consumer demand trends and a favorable fundamental outlook.
Netflix plans to report its Q2 results after the closing bell on Wednesday, July 19 at 4:00PM ET. Options trading on Netflix implies a share price swing of roughly 9% following the report.
In my opinion, Netflix’s Q2 sales and subscriber growth figures will top estimates as it benefits from the launch of a lower-cost, ad-supported basic service tier and amid intensifying efforts to crack down on illegal password-sharing.
Wall Street sees the Los Gatos, California-based company earning $2.86 a share, dipping 10.6% from EPS of $3.20 in the year-ago period, amid increased content spending.
However, revenue is forecast to rise 3.9% annually to $8.28 billion, as the streaming giant benefits from its restructured business model, including the addition of an ad-backed subscription tier and an ongoing crackdown on password sharing.
Perhaps of greater importance, all eyes will be on Netflix’s Q2 subscriber tally, with Wall Street analysts expecting the internet television network to add 1.8 million new subscribers during the June quarter.
Looking ahead, I reckon the streaming video pioneer will provide upbeat guidance to reflect improving operating margins thanks to its ad-supported streaming video service as well as ongoing initiatives to curtail account-sharing and reduce costs.
NFLX stock closed at a fresh 2023 high of $441.91 on Friday, earning the company a valuation of around $196 billion.
Shares of the streaming leader are up 49.8% year-to-date, nearly tripling the S&P 500’s 17.3% increase over the same timeframe.
Despite strong year-to-date gains, it should be noted that Netflix’s stock still appears to be extremely undervalued according to several valuation models on InvestingPro.
The average ‘Fair Value’ price target for NFLX stands at $533.99, a potential upside of 20.8% from the current market value.
I believe shares of Goldman Sachs (NYSE:GS) will suffer a difficult week ahead, as the Wall Street powerhouse’s latest earnings report will likely reveal a steep decline in both profit and revenue growth due to the challenging economic environment.
Goldman’s financial results for the second quarter are due ahead of the opening bell on Wednesday, July 19 at 7:15AM ET and are once again likely to take a hit from a significant slowdown in both its key investment banking unit and wealth management services business, as well as a sharp drop in deal-making.
Options trading implies a roughly 4% swing for GS shares after the update drops.
Underscoring several headwinds Goldman Sachs faces amid the current backdrop, an InvestingPro survey of analyst earnings revisions points to mounting pessimism ahead of the report, with 13 out of 14 analysts slashing their EPS estimates in the last 90 days.
Consensus calls for Goldman Sachs to report earnings per share of $4.04, plunging 47.7% from EPS of $7.73 in the year-ago period.
Revenue expectations are equally concerning, with sales growth predicted to slump 9.5% year-over-year to $10.73 billion amid lingering macroeconomic challenges.
The financial services firm is expected to show an investment banking revenue decline of 32% from a year ago and a trading decline of 17%, according to analyst estimates.
As such, I believe Goldman Sachs CEO David Solomon will show caution about forecasting income growth for the months ahead as the bank struggles with the negative impact of a slump in global deal-making, merger activity, and IPO underwriting amid higher interest rates and lingering economic uncertainty.
Worldwide revenue from mergers and acquisitions for the first half of 2023 tumbled 38% compared to the same period last year, according to data from Refinitiv, amounting to the weakest first half for deal-making since 2020, when the Covid crisis wreaked havoc on the global economy.
GS stock ended Friday’s session at $326.19, earning the New York-based investment banking giant a valuation of $86.2 billion.
Shares have struggled this year, falling 5% so far in 2023 to significantly underperform the broader market. In comparison, the financial sector’s main ETF - the Financial Select Sector SPDR® Fund (NYSE:XLF) - has gained 0.2% year-to-date.
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Disclosure: At the time of writing, I am long on the S&P 500, and the Nasdaq 100 via the 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.
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