Inflation Concerns Ruin First Week of Earnings Season

There was no Friday rally this time around as stocks took a step back today and finished the week lower amid ongoing concerns of rising inflation. Even better-than-expected retail sales couldn’t improve the market’s mood.

Stocks began in the green, but another Friday jump like last week wasn’t in the cards. The Dow ended lower by 0.86% (or practically 300 points) to 34,687.85, while the NASDAQ slipped 0.80% (or 115 points) to 14,427.24. The S&P was off 0.75% to 4327.16.

All of the indices were lower for the week with some heavy divergence. The NASDAQ plunged as much as 1.9% over the five days, while the Dow slipped only 0.5%. The S&P was in the middle with a 1% drop. These results snapped three-week win streaks for the indices.

We got a really good number for retail sales today, which climbed 0.6% in June to beat expectations for a slight loss. It also marked a substantial improvement from a 1.7% drop in May. Yesterday’s jobless claims report was also solid with the 360K print marking a pandemic low, improving upon last week and remaining below 400K.

But most of the data this week centered on the rising inflation, including CPI soaring 5.4% year over year on Tuesday and PPI rising 7.3% on Wednesday. And then today consumer sentiment declined to 80.8 in July from 85.5 in June. The result fell short of expectations for a slight gain, while consumer inflation expectations appear to be on the rise.

Fed Chair Jerome Powell testified twice this week, reiterating to both the House and Senate that rising inflation is transitory and the central bank plans to stick with its support until the economy reaches its benchmarks. Nevertheless, investors are nervous.

All this inflation stuff stole some thunder from a mostly positive start to earnings season. Several of the country’s biggest banks went to the plate this week and posted better-than-expected headline numbers. But investors noticed some sluggishness in the business segments, which impacted the market’s reaction. It looks like the market is going to be just as difficult to please as it was last earnings season.

But the reports are just beginning! We get our first FAANG on Tuesday when Netflix (NASDAQ:NFLX) takes centerstage after the close. There’ll be hundreds of other companies announcing next week as well, including names like IBM (NYSE:IBM, Monday), Johnson & Johnson (JNJ, Wednesday) and Texas Instruments (NASDAQ:TXN, Wednesday).

“We are off to a great start in the Q2 earnings season, with the big banks coming out with a much stronger profitability picture relative to what they were able to show in the preceding periods,” said Sheraz Mian in his hot-off-the-presses Earnings Preview article. “This reconfirms our bullish earnings outlook that envisions estimates going up significantly over the coming months as the full extent of the economic rebound becomes clearer.”

Today's Portfolio Highlights:

Counterstrike: The market may still be close to all-time highs, but Jeremy has been talking about problems “under the hood” for a while now. This morning’s reversal just further confirmed it. So for the first time in months, he made a couple short bets on Friday. The editor added a 5% allocation in ProShares Ultra VIX ShortTerm Futures ETF (UVXY), which will move 1.5X the VIX, and also picked up a 4% allocation in Direxion Daily S&P 500 Bear 3X Shares (SPXS), which will go up or down 3X the daily movement of the SPX. These positions will make good money for the portfolio on any further declines and can be easily exited on any moves higher. Read the full write-up for specifics on these plays.

Healthcare Innovators: The human adaptive immune system is providing some of the most important scientific and medical research right now, and Kevin added a name on Friday that specializes in this innovative field. Adaptive Biotechnologies (NASDAQ:ADPT) is an emerging player in genetic diagnostics focused on immune-driven clinical products and bioinformatics to transform the treatment of disease. Shares surged during the ARK bubble, but have now pulled back to the point that the editor sees a good risk/reward. Rising earnings estimates have made ADPT a Zacks Rank #2 (Buy) with sales growth expected at more than 50% to breach $150 million. Next year should get past $200 million. In addition to buying ADPT, Kevin also sold Phio Pharma (PHIO) after taking out its stop. Read the full write-up for more on today’s action.

Marijuana Innovators: Are the markets discounting the probability of federal legalization way too much? Dave thinks they are, which means there’s plenty of opportunity out there for marijuana investors. On Friday, he picked up GrowGeneration (NASDAQ:GRWG), which owns and operates specialty retail hydroponic and organic gardening stores. The portfolio pulled a nearly 100% return out of this name back in March and now it has dropped 25% in the past two weeks. He bought GRWG again today on weakness with hopes of more success in the future. Read the full write-up for more on this addition and details on Dave’s thoughts on legalization.

Surprise Trader: "A frustrating day to say the least with the bears taking control. It was a gnarly end to a nasty week with stocks coming under pressure, the bid drying up, and folks jumping out of the way of the selling.

"The fact that we are teetering at a market top is also partly to blame for this. The market is seeking a catalyst. The problem is, right now the only catalysts are negative. An increasingly hawkish Fed, despite their rhetoric, combined with fearmongering surrounding the Delta variant is a one-two punch the market is struggling with.

"However, nothing turns around a market quite like earnings season. If earnings come in strong and guidance continues to rise, then we are going to do just fine. Actually, having the market selloff ahead of a busy earnings season is fantastic. That way, I can come in and buy on sale what was ticking up at all-time highs a few short days ago. With money on the sidelines ready to rock, this could be a great setup for success." -- Dave Bartosiak

Have a Great Weekend!
Jim Giaquinto

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