Stocks Rebound as Cheaper Valuations Attract Bargain Hunters

Morning Markets

September S&P 500 futures (ESU22) this morning are up +0.58% as markets reopen from Monday’s holiday.  Stocks are higher after three weeks of declines are attracting bargain hunters and dip buyers.  The recent selloff has reduced the S&P 500’s valuations to 16.5 times forward earnings, below the average of 17.2 over the past ten years.

Morgan Stanley today said they expect S&P 500 company earnings to fall 3% in 2023, even in the absence of a recession.  Also, Morgan Stanley said, “the next several quarters will end up containing some of the most significant downward revisions to forward EPS forecasts we have seen in the past several cycles.”  In addition, Morgan Stanley predicts “the lows for this bear market will likely arrive in Q4,” and the S&P 500 will fall to at least 3,400, about 13% below current levels, and could fall to 3,000 in the event of a recession.

The Euro Stoxx 50 today is up +0.50%.  A decline of more than -9% in European nat-gas prices today is temporarily easing energy crisis concerns and is supportive for stocks.   Switzerland and Finland today joined Germany in offering credit facilities to energy companies.  EU energy ministers will meet in Brussels on Friday to focus on liquidity in European energy markets.  Gains in retailers, autos, and travel stocks lifted the overall market, while energy stocks declined with today’s slump in gas prices. Weaker than expected German economic reports today also negatively affected stocks. 

Dovish comments today from several ECB members were supportive of stocks.  ECB Governing Council member Kazaks said the ECB might slow the pace of interest rate increases if a deep recession dampens inflation.  Also, ECB Governing Council member Centeno said the ECB's inflation goal might be achieved with a slow normalization of monetary policy.  In addition, ECB Governing Council member Stournaras said Eurozone inflation is close to its peak and will start a steady deceleration.

German July factory orders fell -1.1% m/m, weaker than expectations of -0.7% m/m, and the sixth consecutive month that orders have declined.

The German Aug S&P Global construction PMI fell -1.1 to 42.6, the steepest pace of contraction in 1-1/2 years.

Asian markets today settled mostly higher.  China’s Shanghai Composite Index closed up +1.36%, and Japan’s Nikkei Stock Index closed up +0.02%.

China’s Shanghai Composite today rallied to a 1-week high and settled moderately higher.  A rally in real estate stocks led the overall market higher after several builders, including Guangzhou R&F Properties and CIFI Holdings announced asset disposals, which eased liquidity concerns about property developers.  Also, Chinese solar manufacturers rallied today after Daiwa Securities said recent price hikes by Tongwei signal continued strong demand for solar cells.

However, a bearish factor for Chinese stocks was additional pandemic lockdowns after Chinese authorities ordered a pandemic lockdown in Guiyang, a city of 6.1 million people, and extended a lockdown in Chengdu, a city of 21 million, through Wednesday.  The lockdown threatens to disrupt economic activity and exacerbate supply-chain issues. 

Japan’s Nikkei Stock Index today closed slightly higher. Strength in exporters led the overall market higher today after the yen today sank to a new 24-year low against the dollar. Japanese drugstore operators fell today after Amazon said it is considering starting online sales of prescription medicine in Japan.  Weaker-than-expected Japanese economic reports today on household spending and cash earnings also weighed on the stocks.

 Japan July household spending rose +3.4% y/y, weaker than expectations of +4.6% y/y.

Japan July real cash earnings fell -1.3% y/y, weaker than expectations of -1.2% y/y. 

Pre-Market U.S. Stock Movers

CVS Health Corp (CVS) is up nearly +1% in pre-market trading after agreeing to buy Signify Health for about $8 billion.

Tanker stocks are climbing in pre-market trading after Jeffries said it remains positive on the sector.  Nordic American  (NAT) and Tsakos Energy (TNP) are up more than +3%, and Frontline Ltd (FRO) is up more than +1%. 

Transocean (RIG) is up more than +1% in pre-market trading after BTIG upgraded the stock to buy from neutral.

Rollins (ROL) climbed more than +2% in pre-market trading after RBC Capital Markets raised its recommendation on the stock to outperform from sector perform. 

Perrigo (PRGO) rose more than +2% in pre-market trading after Wells Fargo raised its recommendation on the stock to overweight from equal weight. 

CoStar Group (CSGP) surged +10, and Invitation Homes (INVH) jumped +6% % in pre-market trading after it was announced that both stocks would join the S&P 500 before the open of trading on Monday, September 19. 

FedEx (FDX) slipped nearly -2% in pre-market trading after Citigroup downgraded the stock to neutral from buy and said it’s concerned about the pace of freight activity heading into year-end.   

Ciena (CIEN) fell more than -1% in pre-market trading after JPMorgan Chase downgraded the stock to neutral from overweight.

U.S.-listed Chinese stocks are falling in pre-market trading as China imposes lockdowns in more cities amid an increase of Covid cases.  Alibaba Group Holding (BABA) is down more than -2%, and JD.com (JD), Pinduoduo (PDD), and Baidu (BIDU) are down more than -1%. 

Today’s U.S. Earnings Reports (9/6/2022)

Avid Bioservices Inc (CDMO), Coupa Software Inc (COUP), Guidewire Software Inc (GWRE), HealthEquity Inc (HQY), UiPath Inc (PATH).

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