Boeing scores a win and Bank of America is fined by the feds

Stocks skipped higher Friday, prodded by promising economic numbers. Consumers remain cautiously confident…not too much…not too little – the Fed likes that.

A sentimental journey. I write often of how many economic numbers can be deceiving. Most of the releases that we receive during a given month reflect activity from the past. In some cases, as far back as almost 4 months. Now, in the big picture, 4 months is a short period of time, but in these rapidly changing times the situation – and the markets can make severe pivots overnight. Of course, it is good to know how much the economy grew in the 1^st quarter of this year. I don’t know about you, but I am looking out my window into my garden, and it looks nothing like it did in…March. Similarly, the 1^st quarter’s economy was reeling from not only freshly high inflation, but also a new war in Ukraine which brought uncertainty and only served to accentuate inflation. The Fed only began on its rate-hiking journey in the 1^st quarter with only 1 single 25 basis-point bump in March. Therefore, I think that you would agree that where we are today, smack in the middle of the third quarter, is at a significantly different place! Next week, we will get the first estimate on GDP growth for the second quarter, which ended on June 30^th. That is a bit timelier than the presently available number, but it still represents activity that occurred way back in May.

When considering stock investments, investors consider past performance, but their real concern should be future performance. Heuristically speaking, we buy stocks that we feel have good prospects for the future. Some companies we consider may not have sales that match up to those of larger, more well-established concerns, but if the company has great growth prospects, it may receive a higher valuation…and may not even be profitable. Consider, EV maker Tesla, which has trailing 12 months of sales totaling $62.2 billion and has a market cap of $746.4 billion. General Motors, a longer-established competitor sold a far greater $130.5 billion product in that same period, and it has a lower market cap of just $47.9 billion. How can that be? Because investors expect that Tesla will have greater growth prospects than GM…in the future…NOT LAST QUARTER. Don’t worry, there are mathematics to support the discrepancy. I won’t get into the details here,  but at a high level, a company’s theoretical stock price is the present value of all its future earnings, ALL, as in, perpetuity. When modeling out all those future earnings, growth becomes a driving factor in the difference. Large, consistent growth translates into higher valuations. Ok, ok, so we understand that it is the future that is important for investors and that stocks today should be factoring in those future expectations.

Knowing that, wouldn’t it be nice to know how well the economy might be doing in the future instead of 4 months ago? How about inflation? Wouldn’t you like to know what inflation might be like in the future? Well, there is no way to accurately forecast GDP or inflation beyond a year from now, let alone, 5 to 10 years from now, but we can get some clues. Remember that roughly 2/3 of US GDP is made up of consumer spending. If consumers…well, consume a lot, the economy will grow by “a lot” * 0.66, mathematically speaking. We don’t exactly know what “a lot” is, but we do know that consumers spend more when they are confident. We get 2 consumer confidence reports every month, Conference Board Consumer Confidence and University of Michigan Sentiment. Both are based on surveys of consumers and hope to capture confidence on not only current conditions, but also future expectations. In the case of the Michigan survey, consumers are polled on their sentiments on what conditions might be like a year from today and beyond, among other things. They are also queried on their opinions on where inflation will be in a year…and in 5 – 10 years. On Friday, we got the July preliminary release, which means the survey was conducted this very month. The results show that consumers have become more confident since last month on both current conditions and future expectations. Both numbers were higher than economists’ estimates. Regarding inflation, respondents lowered their expectation for inflation 1 year out to 5.2% from 5.3% and lowered their 5-10 inflation expectations from 3.1% to 2.8%. The actual numbers are less important than the fact that consumers are gaining confidence and simultaneously lowering expectations for inflation in the future. These represent small moves, but their direction is significant. In a time where our largest concerns are inflation, the Fed, and a looming recession, these small moves show that a soft landing may still be possible. That is a good scenario for on-edge stocks, and why markets rallied as they did on Friday. The future looks marginally brighter, and the past…well that was the past.

WHAT’S SHAKIN’

Bank of America Corp (BAC) shares are down slightly by -0.31% in the premarket after initially pulsing lower in the wake of AM earnings releases. The company announced that it missed EPS and Sales estimates by -2.17% and -0.28% respectively. BAC announced a $200 million impairment from an SEC fine, similar to that announced by JPMorgan Chase last week. In the case of BAC however, the company is not suspending its share buyback program as many feared leading up to today’s release. Dividend yield: 2.61%. Potential average analyst projection upside: +31.8%.

The Boeing Company (BA) shares are higher by +4.25% in the premarket after it announced that Delta Airlines made a firm order of 100 737 Max 10 aircrafts. That comes as good news for Boeing, which has been struggling with quality issues and its long grounding in the wake of several quality-related disasters. The company is set to announce its earnings next week on the 27^th. Potential average analyst projection upside: +45.2%.

The Goldman Sachs Group Inc (GS) shares are trading higher by +3.15% after it announced that it beat EPS and Revenues by +16.29% and +12.94% respectively. The company had a strong showing in its trading operations while lowering costs associated with compensation and loan loss provisions. Dividend yield: 2.72%. Potential average analyst projection upside: +33.5%.

FRIDAY’S MARKETS

Stocks rallied on Friday after a strong showing from Citigroup along with some optimistic numbers in Retail Sales, which remain strong along with improving consumer sentiment. The S&P500 rose by +1.92%, the Dow Jones Industrial Average climbed by +2.15%, the Nasdaq Composite Index advanced by +1.79%, and the Russel 2000 Index jumped by +2.16%. Bonds rose and 10-year Treasury Note Yields gave up -4 basis points to 2.91%. Cryptos climbed by +3.79% and Bitcoin was higher by +1.25%.

NXT UP

• NAHB Housing Market Index (July) may have slipped to 65 from 67.
• The week ahead: Earnings ramp up this week and we will get more housing numbers, regional Fed reports, Leading Economic Index, and flash PMIs. Please refer to the attached economic and earnings calendars for times and details.