Stocks Rose Tuesday: What Wall Street’s Saying

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Stocks rose Tuesday, but only on the strength of Big Tech. A positive development on a coronavirus vaccine was met with a weak consumer confidence reading, which dented sentiment.

The S&P 500 rose 0.36%, buoyed by the tech-heavy Nasdaq’s gain of 0.76%. Tech stocks have a heavy market cap weighting in the S&P 500, so the gains were keeping the S&P from falling, as many economically-sensitive sectors fell. 

Bullishly, the 10-Year Treasury rose to 0.69% and has risen significantly in the past few days, as investors have reason to believe the economic recovery is on track, leading into a strong 2021. The yield is currently below where inflation has been running of late, so some selling of the bond isn’t necessarily ill-advised. 

One positive news item enabling investors' confidence: coronavirus vaccines may soon to hit the market. AstraZeneca  (AZN) - Get Report said in a press release it is now testing its vaccine. The stock rose 0.44%. Other large biotech players are also working to produce vaccines. 

But cyclical sectors faltered Tuesday, with banking the only sector to rise, as the yield curve has expanded this week. 

The main negative denting risk sentiment in equities was that the consumer confidence reading for August came in at 84, against economists' estimates of 93 and lower than July’s reading of 91. Economic data -- and earnings for that matter -- have largely shown an aggressive trend in the direction of pre-virus levels, but the trend has been choppy, especially of late. A surge in virus cases in June has hurt some backward-looking data points, while a new fiscal stimulus bill won’t be passed until at least September. This puts consumer spend and the economic recovery on hold, as unemployment still sits at 10%. 

Large cap consumer discretionary stocks fell about a tenth of a percentage point. 

As for tech, Apple  (AAPL) - Get Report was down 0.82% to $499 a share. The stock is now trading at almost 30 times earnings, against earnings growth estimates, according to FactSet, for the next few years of roughly 8%. Still, analysts have said the stock isn’t overvalued, with some noting that Apple’s recurring revenue model in its growing services business can uphold the valuation. 

Positively, U.S. and Chinese officials said they are sticking by their sometimes questionable commitment to uphold to their phase one trade agreement. Still, Bank of America Global Research analysts say the majority of companies intend on restoring manufacturing operations to the U.S. and other counties to reduce country risk. This pressures cost structures, as labor in China is incredibly cheap. Bank of America says this will pressure free cash flow and return on equity, or earnings as a percentage of net assets, but that companies are willing to accept that negative if it means more supply chain stability. 

Here’s What Wall Street’s saying:

Ken Berman, Strategist, Gorrilla Trades: 

"This morning's economic releases were mixed and even the highly-anticipated CB consumer confidence number was well below the consensus estimate. The key cyclical sectors edged lower.” 

Market Haefele, Chief Investment Officer, Global Wealth Management, UBS:

"Progress on US-China trade talks supports upside for stocks. Progress on trade talks reinforces our preference for global equities: With both the US and China committed to the trade deal that they signed in January, we think tensions between the two sides remain more "bark" than "bite". As long as tariffs don't rise, we see little reason to expect a significantly negative economic impact in the near term. While volatility may persist in the run-up to the November US presidential election, we don't see this derailing our positive view on global equities, for which the Federal Reserve liquidity story is the key driver. Read more on positioning for the upside in equities here."

Krish Sankar, Apple Analyst, Cowen:

"We do a sum-of-the-parts analysis to arrive at our price target of $530 (was $470) applying a 25x (was 23x) earnings multiple to the core businesses (iPhone, hardware, etc.) and a 41x (was 35x) multiple to the recurring revenue Services segment. This leads to a blended 31x P/E multiple on our CY21 EPS of $16.83 (sell-side ~$16.11, buy-side around $17). The higher core hardware P/E is driven by potential for share gains in the premium segment entering the 5G upgrade cycle, and the higher Services P/E is consistent with EDA companies (recurring revenue model). On a blended basis the 31x multiple is consistent with. Other mega-cap tech companies with AAPL showing strong revenue growth and FCF yield, and also compares favorably to consumer staples such as Clorox.” 

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