This year's rebound in US asset prices suggests that investor sentiment is shifting to risk-on after a year of playing defence. Trying to divine the future for pricing is always precarious, especially in the near term, but stocks were lifted early in the week as investors digested comments from Federal Reserve Chair Jerome Powell about how long the central bank may need to tame inflation.
Powell said 2023 should be a year of ‘significant declines in inflation.’
His comments renewed investor hopes for less aggressive monetary policy that wavered after a strong US jobs report last Friday. ‘We didn't expect it to be this strong,’ Powell said at the Economic Club of Washington, referring to the nonfarm payrolls report for January, but it ‘shows why we think this will be a process that takes quite a bit of time.’
US markets over the past week
Worries about a recession have been belied by a strong jobs market, though layoffs continue to flow through, with Disney (DIS:NYSE), Yahoo, Zoom (ZM:NASDAQ), Dell Technologies (DELL:NYDSE), and PayPal (PYPL:NASDAQ) swinging the jobs axe during the past few days.
‘The bigger picture here, though, is that the surge in layoff announcements will pass through into claims by late winter/early spring, allowing for the usual lags,’ Pantheon Macroeconomics said.
Financials also weighed on the market, pressured by a dip in bank stocks as an inverted yield curve, in which short rates are higher than longer rates, tends to keep a lid on bank lending margins' profitability.
WALT DISNEY
The market reacted positively to the first earnings update under returning chief executive Bob Iger at Walt Disney (DIS:NYSE). Under pressure from activist investor Nelson Peltz and other shareholders after a miserable run for the share price under his one-time successor and predecessor Bob Chapek, Iger has wasted no time in acting.
He is simplifying the group's structure with three divisions: Disney Entertainment (streaming and most other media operations), ESPN (the sports TV network) and Parks, Experiences and Products. He also announced 7,000 job cuts in a bid to save £5.5 billion in costs.
The company saw the first quarterly drop in subscriber numbers since the launch of its Disney+ platform in 2019 but the loss of 2.4 million was less than the three million which had been forecast. Earnings per share came in at $0.99 versus the $0.78 pencilled in by analysts, supported by a strong showing from its theme parks.
CHIPOTLE
The acid test for the severity of a recession is how much someone is prepared to pay for food on the go. So far, McDonald's burgers have proved to be an inexpensive treat that is seemingly immune from an economic downturn. A $12 burrito is another matter. While still cheaper than a sit-down meal, one of the big sellers of this type of food has encountered some indigestion.
Shares in Chipotle Mexican Grill (CMG:NYSE) fell 5% on 8 February after it missed quarterly sales and profit expectations. Fewer people placed orders for burritos, bowls and quesadillas to be sent to their home, with Chipotle revealing a 15% decline in delivery transactions in the fourth quarter.
The problem appears to be down to two issues, judging by comments from Chipotle's management. First, delivery items are premium-priced, and many people are watching every penny. Second, more people are now out and about post-pandemic. That implies digital growth expectations might have to be pared back versus what Chipotle was thinking a year or so ago.
PEPSICO
Shares in PepsiCo (PEP:NASDAQ) rose 1.1% to $173 after the soft drinks and snacks powerhouse's fourth quarter sales and earnings (9 Feb) beat Wall Street estimates thanks to price rises. However, this did result in a 2% volume decline across its food business worldwide as price hikes impacted consumer demand.
PepsiCo's fourth quarter net sales rose 10.9% to $28 billion, ahead of the $26.84 billion analysts were looking for and including organic revenue growth of 14.6%. Adjusted earnings per share came in at $1.67, beating the $1.65 forecast by analysts.
PepsiCo also declared its 51st consecutive annual dividend increase, upping the shareholder reward by 10% to $5.06 per share.
CEO Ramon Laguarta said PepsiCo, whose super-resilient brands span everything from eponymous soft drink Pepsi to Gatorade, Frito-Lay, Quaker Oats and Tropicana, will continue to ‘focus on driving growth and winning in the marketplace while developing advantaged capabilities to fortify our businesses for the long term’. For 2023, PepsiCo expects to deliver 6% organic sales growth and 8% earnings per share growth and plans to buy back another $1 billion worth of shares.
