Bets that the Federal Reserve will start cutting interest rates as early as March are starting to look optimistic after stronger-than-expected US jobs numbers over the past week, pushing up bond yields and leaving equity investors pondering what to do next.
In a shortened working week, thanks to the Martin Luther King Day holiday (15 Jan), major US equity markets ended pretty much where they started, although the economically sensitive Russell 2000 of smaller companies fell close on 2%.
Semiconductor stocks bolstered a firm tech showing with the SOX index of microchip firms gaining almost 4% after the world’s largest contract chip maker Taiwan Semiconductor Manufacturing (TMC:NYSE) said it saw strong demand for chips used in AI (artificial intelligence), a song likely to be sung again next week as tech reporting kicks off with Microsoft (MSFT:NASDAQ), Netflix (NFLX:NASDAQ) and Texas Instruments (TXN:NASDAQ) all announcing earnings on 23 January.
US BANKS
The US earnings season has got off to a mixed start as large US banks balance ongoing challenges and uncertainty around funding pressures, revenue trajectory, operating leverage, and capital constraints.
Updates from JPMorgan Chase (JPM:NYSE) and Goldman Sachs (GS:NYSE) were largely positive, but rival Morgan Stanley (MS:NYSE). missed earnings expectations despite a strong showing from its investment banking business to leave the stock soggy.
In contrast, JPMorgan reported its best-ever annual profit, although it experienced a quarterly dip in earnings, sending its shares retreating from all-time highs. Goldman Sachs also beat earnings forecasts but saw its revenue fall in the final quarter as fixed income trading lagged forecasts.
Year-to-date, JPMorgan and Goldman shares are down around 3%, while Morgan Stanley shares 10% lower.
‘Bank stocks have struggled to start 2024, with large banks down around 4% and smaller banks down more than 5% midway through January’, observed Kevin Kielbasa, equity analyst at specialist financial investment firm Algebris.
SPIRIT AIRLINES
North American budget airline Spirit Airlines (SAVE:NYSE) is facing a bleak future after a US federal judge blocked its proposed $3.8 billion takeover by rival JetBlue Airways (JBLU:NASDAQ).
‘We believe Spirit is likely to look for another buyer… but a more likely scenario is a Chapter 11 filing, followed by a liquidation,’ said TD Cowen aviation analyst and managing director Helane Becker.
Spirit’s shares have plunged more than 60% to $5.70, valuing the business at just $622 million.
Becker’s argument is that too much airline capacity flooded the US domestic market in the second half of 2023, putting downward pressure on air fares to the detriment of low-cost carriers such as Spirit. If TD Cowen’s analysis sounds alarmist and harsh, Spirit lost $158 million in the third quarter of 2023 and failed to even host a conference call with investors.
Spirit recently raised $419 million by selling and leasing back some of its aircraft in a desperate attempt to provide enough capital for Spirit to self-finance a debt restructuring and pay creditors back over time, but a rescue takeover looked the most effective way to secure its future.
HUMANA
Looking decidedly sickly this week were shares in Humana (HUM:NYSE), which sank 11.5% to $396.2 after the Louisville-headquartered health insurer lowered its 2023 earnings outlook amid the rising demand for medical care among older adults that is driving up costs and could crimp earnings in 2024.
Humana’s much larger rival UnitedHealth (UNH:NYSE), which has also warned of higher-than-expected medical services costs, was marked down 3% to $509.3 in sympathy.
Humana, whose shares have fallen some 20% over one year, now expects to deliver adjusted earnings per share of $26.09 for the 2023 calendar year, below the $28.29 called for by consensus, and warned the impact of emerging medical utilisation trends on its 2024 outlook will be ‘material if current trends continue’.
