US Stock Market: Investors Dumping Overpriced Tech Stocks, Rotating into Undervalued Cyclical Stocks

The major U.S. stock indexes plunged on Thursday as investors continued to shed high-flying tech shares due to mixed earnings reports and growing signs of a worsening coronavirus pandemic, which could drive the economy into a deep recession. The price action also suggests that investors continued to dump overpriced tech stocks, while rotating into undervalued cyclical stocks.

In the cash market on Thursday, the benchmark S&P 500 Index settled at 3235.66, down 40.36 or -1.34%. The blue chip Dow Jones Industrial Average finished at 26652.33, down 353.51 or -1.41% and the technology-based NASDAQ Composite closed at 10461.42, down 244.71 or -2.58%.

Stock Index Recap

The bellwether S&P 500 snapped a four-day winning streak with its biggest daily percentage drop in nearly four weeks. All three major U.S. stock averages lost ground. The S&P 500 Index, the Dow and the NASDAQ Composite were mostly dragged down by shared components Apple and Microsoft Corp. Heavyweight Amazon.com was also a major drag on the tech-driven NASDAQ.

The Russell 2000 and the S&P Smallcap 600, both small cap indexes, outperformed the broader market.

Earnings Update

Second-quarter reporting season is in full-stride, with 113 S&P 500 constituents having reported. Refinitiv data shows that 77% of those have beaten expectations that were extraordinarily low. Analysts now see aggregate second-quarter S&P earnings plummeting by 40.8%, year-on-year, per Refinitiv, Reuters reported.

Microsoft Corp shares fell after reporting its cloud computing business Azure reported its first-ever quarterly growth under 50%.

Tesla Inc reported a profit for the fourth straight quarter, setting the company up for inclusion in the S&P 500. But the stock slid as analysts questioned whether the electric automaker’s stock price matched its performance.

Twitter Inc advanced after reporting its highest-ever annual growth of daily users.

American Airlines Group Inc jumped after announcing it would rethink the number of flights to add in August and September. Also, it reported an adjusted loss per share of $7.82.

Southwest Airlines said Thursday it lost $915 million in the second quarter compared with $741 million in net income a year earlier and warned that travel demand will likely remain depressed until there’s a vaccine or treatment for the coronavirus.

Economic Data and Fiscal Stimulus Bill Update

The number of Americans who filed for unemployment benefits rose more than expected last week as the coronavirus pandemic inflicted more damage to the U.S. economy.

The Labor Department said Thursday initial jobless claims came in at 1.416 million for the week-ending July 18. Economists polled by Dow Jones expected 1.3 million.

It was the 18th straight week in which initial claims totaled more than 1 million, and it snapped a 15-week streak of declining initial claims.

The number excludes recipients of Pandemic Unemployment Assistance, set to expire on July 31.

Meanwhile, Congress kept working to pass new stimulus before that deadline continued, with Senate Republicans announcing they could present their version of the bill to Democrats as early as this week.

For a look at all of today’s economic events, check out our economic calendar.

European Markets slip Ahead of the ECB

China Q2 GDP showed a 11.5% rebound, more than reversing the -10% fall in output seen in Q1, suggesting a nice v-shaped recovery in economic activity. The annualised number recovered to 3.2% from -6.8%.

If you had any doubts about the accuracy of China’s GDP numbers before this morning’s announcement, these figures only serve to reinforce that scepticism, as they appear to completely diverge from most of the data that has come out of China since April. In terms of the trade data, both imports and exports have been weak, while retail sales have also struggled.

Retail sales have declined in every month, by -7.5%, -2.8% and -1.8% in June, and with the Chinese consumer now making up around half of China’s economic output, I would suggest these numbers in no way reflect the real picture regarding China’s economy at this moment.

After yesterday’s strong session, markets here in Europe have taken their cues from the weakness in Asia markets and opened lower, as some of the vaccine optimism of yesterday starts to taper off.

On the results front Ladbrokes and Coral owner GVC Holdings have fallen back after reporting a decline in group net gaming revenue of 11%, in the first half of the year, largely down to the suspension of sporting events. The biggest falls in like for like revenues were in the UK and Europe with sharp drops of 86% and 90% in Q2, largely down to the wholesale closure of stores, though with the re-opening of shops in June these numbers are now starting to pick up again.

On the plus side, helping offset that weakness online gaming revenue rose, rose 19% in H1, with a 22% rise in Q2, with a strong performance in Australia. Management said they expect first half earnings to be within the range of £340m-£350m, while CEO Keith Alexander is set to retire and will be replaced by Shay Segev.

Energy provider SSE has said that coronavirus impacts on operating profits are in line with expectations, with profit expected to be in the range of £150m and £250m, though this could well change. The company has said it still expects to pay an interim dividend of 24.4p in November, in line with its 5-year plan to 2022/23.

In terms of renewable output, this came in below plan, but was still higher than the same period a year ago.

Purplebricks shares are higher after announcing the sale of its Canadian business for C$60.5m to Desjardins Group

Aviva announced that it has completed the sale of a 76% stake in Friends Provident to RL360 for £259m.

Royal Bank of Scotland also announced that from 22nd July 2020 it would henceforth be known as NatWest Group, subject to approval as it strives to draw a line under the toxicity of the RBS brand. This toxicity has dogged the bank since the 2008 bailout, along with the various scandals, around rate fixing, PPI and the GRG business, that have swirled around the bank since then. Investors will certainly be hoping so given the current share price performance, and hope that the change in name isn’t akin to putting lipstick on a pig.

Consumer credit ratings company Experian latest Q1 numbers have shown a large fall in revenue growth across all of its regions with the exception of North America, and which helped mitigate a lot of the weakness elsewhere.

The euro is slightly softer ahead of this afternoon’s ECB rate decision, which is expected to see no change in policy. At its last meeting the European Central Bank hiked its pandemic emergency purchase program by another €600bn to €1.35trn, with the time horizon pushed into the middle of June 2021. The ECB still needs to formally respond to the challenge of the German court irrespective of its insistence it is covered under the jurisdiction of the European Court.

Even where Germany is concerned optics are important, particularly if the ECB wants to be seen as a responsible arbiter of the economy across all of Europe, and the PEPP still remains vulnerable to a legal challenge, due to its difference with the previous program. The bank could also indicate if it has any plans to start buying the bonds of so called “fallen angels”. These are the bonds of companies that were investment grade, but have fallen into “junk” status as a result of the pandemic.

This morning’s UK unemployment numbers don’t tell us anything we don’t already know. The ILO measure came in at 3.9% for the three months to May, however the numbers don’t include those workers currently on furlough, and while a good proportion of these could well come back, there is still a good percentage that won’t.

On the plus side the reduction in jobless claims from 7.8% to 7.3% suggests that some workers did return to the work force in June, as shops started to reopen, however the number was tiny when compared to the claim increases seen in April and May, which saw the May numbers revised up to 566.4k.

To get a better idea of where we are in the jobs market the ONS numbers do tell us that there are now around 650k fewer people on the payroll than before the March lockdown, and that number is likely to continue to rise as we head into the end of the year and the furlough runs off.

The pound is little moved on the back of the numbers, while gilt yields have edged slightly higher.

US markets look set to take their cues from the weakness seen here in European markets, with the main attention set to be on the latest June retail sales and weekly jobless claims numbers.

Retail sales are expected to rise 5% in June, some way below the 17.7% rebound seen in the May numbers which reversed a -14.7% fall in April. The strength expected in the June number seems optimistic when set aside the employment numbers, and the 13m people still not working since March. This suggests that this number could well be highly fluid and while a lot of US workers have managed to get their furlough payments, it doesn’t necessarily follow that they will spend it.

Weekly jobless claims are still expected to be above the 1m mark, with a slight reduction expected to 1.25m from 1.31m. Continuing claims are expected to fall further to 17.5m, however these could start to edge higher in the coming weeks as US states issue orders to reclose businesses in the wake of the recent surge in coronavirus cases.

Twitter shares lost ground lost night after the bell as it became apparent that the accounts of high profit individuals like Elon Musk, Warren Buffet and former US President Barack Obama were hacked by a bitcoin scammer. All verified accounts were shut down as a result as Twitter scrambled to get on top of the problem. It’s difficult not to overstate how embarrassing this is for Twitter given that the blue tick offers certainty that the user of the account is the person they claim to be. To have them hacked is hugely embarrassing, and undermines the integrity of the whole blue tick process.

American Airlines shares are also likely to be in focus after the company announced that 25,000 jobs could be at risk, when the furlough scheme runs its course. United Airlines has already said it could cut up to 36,000 people, up to 45% of its workforce.

Netflix Q2 earnings are also due after the bell with high expectations that the company can build on its blow out Q1 subscriber numbers of 15.8m. Q2 is expected to see 7m new subscribers added.

Bank of America is also expected to post its latest Q2 numbers with the main attention on how much extra provision for bad loans the bank will add to its Q1 numbers.

Dow Jones is expected to open 160 points lower at 26,710

S&P500 is expected to open 18 points lower at 3,208

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

American Airlines Takes Leap Of Faith With Increased Capacity

American Airlines Group Inc. (AAL) reported a Q1 2020 loss of $2.65 per share in April, compounded by a 19.5% decline in year-over-year revenue, triggered by a worldwide air travel collapse due to the COVID-19 pandemic. The bearish results weren’t a surprise, given well-documented woes of the airline industry, but Wall Street analysts still understated the severity of the losses. The news set off an aggressive sell-the-news reaction, dumping the stock to an 8-year low on May 14.

American Airlines Ticket Sales Picking Up

The outlook improved in the second half of May, with demand exceeding supply through the end of the second quarter. The load factor also improved at a steady pace, lifting from 15% in April to 63% in June. That uptick gave American Airlines a boost and the incentive to sell flights up to capacity, starting on July 1. However, it’s a risky move, requiring the carrier to add substantial payroll at the same time an out-of-control epidemic is sweeping through Southern and Southwestern states, forcing the EU to ban flights from the United States.

 

Executives outlined the latest initiative on Thursday, advising that “face coverings are now mandatory for all customers and team members while at work. As team members report to work every day, we have temperature checkpoints in place, and we’re also asking customers to certify they are symptom-free before traveling. We have also started a new collaboration with Vanderbilt University Medical Center to create a Travel Health Advisory Panel, which will advise on health and cleaning matters.”

Wall Street And Technical Outlook

Wall Street has taken a cautious approach on the stock, which was underperforming its rivals for many quarters prior to the pandemic. 3 ‘Buy’, 3 ‘Hold’, and a stomach-churning 7 “Sell’ recommendations highlight this skepticism, even though American Airlines has now dropped nearly 60% below the 2020 high. Targets range from a low of $7.00 to a street high $27.00, with price currently sitting at the dead center on the median $12.88 target.

Dilution could mark the biggest negative for American Airlines investors in coming quarters, with secondary offerings and heavy borrowing undermining bounces and uptrends. More importantly, the stock is now trading less than 5 points above the deep March low, raising odds for a retest that could trigger a dreaded death spiral, driving the once-profitable carrier into bankruptcy or a hostile takeover.

American Airlines Plans to Secure $3.5 Billion in New Financing

American Airlines Group Inc, a publicly-traded airline holding company headquartered in Fort Worth, Texas, announced that it is planning to secure $3.5 billion in new financing to enhance the company’s liquidity position as the coronavirus and related travel restrictions have led to a collapse in air travel demand.

American Airlines Group, the largest in the U.S., proposed a private offering of $1.5 billion aggregate principal amount of secured senior notes due 2025. The notes will be guaranteed on a senior unsecured basis by American Airlines Group Inc.

The company also stated that it intends to enter into a new $500 million Term Loan B Facility due 2024 concurrently with the closing of the offering of the Notes, American Airlines Inc reported.

Debt Terms

According to Bloomberg’s June 19 report, the junk bonds were expected to carry a yield of 11%. However, the company said that the final terms and amounts of the notes and the Term Loan are subject to market and other conditions and may be different from expectations.

The Company intends to grant the underwriters of the offerings a 30-day option to purchase, in whole or in part, up to $112.5 million of additional shares of Common Stock in the Common Stock Offering and a 30-day option to purchase, in whole or in part, up to $112.5 million aggregate principal amount of additional Convertible Notes in the Convertible Notes Offering, in each case solely to cover over-allotments, if any, the company said.

The Company expects to use the net proceeds from the Common Stock Offering and the Convertible Notes Offering for general corporate purposes and to enhance the Company’s liquidity position. The closing of neither the Common Stock Offering nor the Convertible Notes Offering is conditioned upon the closing of the other offering, the airline added.

Goldman Sachs & Company LLC, Citigroup, BofA Securities and J.P. Morgan will act as the joint active book-runners and as representatives of the underwriters for the Common Stock Offering and the Convertible Notes Offering.

Stock Outlook

American Airlines Group closed nearly 3% lower at $16 on Friday. It has plunged about 45% so far this year, still outperforming every peer. Fourteen analysts forecast the average price in 12 months at $13.78 with a high of $27.00 and a low of $7.00.

The average price target represents a -13.88% decrease from the last price of $16.00, according to Tipranks.

It is good to sell at the current level as 150-day Moving Average and 100-200-day MACD Oscillator signals a selling opportunity.