What to Expect in the Week Ahead (HD, NU, WMT and CSCO Earnings; July Inflation Data)

This week is expected to be calmer, with a lighter economic calendar and fewer significant data points. As earnings season wraps up, with 75% of reports already in, attention now turns to market conditions.

The Federal Reserve is currently in a rate-cutting cycle, even as unemployment remains near historical lows. The Sahm Rule, which signals a recession when the three-month average unemployment rate rises half a percentage point above its 12-month low, has been triggered, with unemployment increasing from 3.4% to 4.3%. This has heightened recession concerns, although some experts, including Claudia Sahm, believe the situation might be different this time and emphasize the importance of timely Fed actions to avoid urgent rate cuts.

Earnings reports from S&P 500 companies continue to show positive surprises, although the magnitude of these surprises is below average, according to John Butters of FactSet. This data underscores the current earnings trends amid broader market movements.

Nu Holdings, one of the fastest-growing fintech companies in Latin America, is disrupting the banking sector and is now the second-largest firm in Brazil by market cap. Supported by investors like Saudi Arabia, Softbank, and Warren Buffett, its revenue surged from $337 million in 2019 to $6.45 billion in 2023. It has nearly 100 million customers, up from 1.9 million in 2017, and sees a vast market potential in Latin and Central America and Mexico. Most of its growth is driven by word-of-mouth marketing, keeping costs low and contributing to a net profit of over $1 billion in 2023.

The upcoming financial results on Tuesday will be a crucial indicator of whether Nu Holdings can maintain its growth trajectory. The company reported a 64% revenue increase to $2.736 billion in Q1 2023. Analysts predict Q2 revenue of $2.92 billion, a 56% year-on-year growth, and expect annual revenue to reach $11.4 billion this year, growing to $14.5 billion by 2026. Profits are also expected to rise, with estimates of $0.09 per share in Q2 and $0.41 for the year. Historically, Nu Holdings has exceeded financial expectations, and this trend may continue.

- Expected to issue conservative guidance, reflecting a cautious but stable short-term outlook.

- Stock performance has been roughly flat for the year, indicating stagnation.

- Despite the conservative guidance, Lasser remains optimistic about Home Depot’s long-term prospects due to its strong market position and resilience in the consumer sector.

- UBS has set a $400 price target for Home Depot’s stock, suggesting a 14% potential upside.

- Anticipated earnings are $4.59 per share, a 1.3% decline year-over-year, with revenue projected at $42.6 billion, down 0.8% from the previous year.

- Expected to perform strongly, with a projected Q2 earnings of 65 cents per share on $168.5 billion in revenue, marking a 5.0% increase in earnings and a 4.0% rise in revenue year-over-year.

- In the previous quarter, Walmart earned 60 cents per share on $161.5 billion in revenue.

- Analysts forecast a positive outlook, with management expecting to meet or exceed previous guidance.

- Lasser highlights Walmart’s growth potential, particularly in advertising, which contributed $3.4 billion to the bottom line last year.

- UBS has set a target price of $74 for Walmart’s stock, indicating significant upside potential.

All eyes will be on the upcoming July inflation report and retail sales update, which are key releases scheduled just over a week before the Federal Reserve's Jackson Hole symposium on August 22-24. Market focus on U.S. recession risk has intensified since the Sahm Rule was triggered, indicating a potential recession when the three-month moving average of the unemployment rate rose by 0.5% relative to its low point in the previous 12 months. Despite the Sahm Rule's historically perfect track record, Seeking Alpha Investing Group Leader Lawrence Fuller believes it may be giving a false positive this time due to post-pandemic anomalies in the economic data.

Despite recent stock rallies, traders predict that market stability will take time to return. The Cboe Volatility Index (VIX), known as Wall Street's fear gauge, experienced its largest one-day jump ever on Monday. Historically, when the VIX closes above 35—a level it surpassed on Monday—it takes an average of 170 sessions to return to its long-term median of 17.6, indicating lower investor anxiety.

A key event to watch is the U.S. consumer price data report on Wednesday. If inflation drops too steeply, it could increase fears that the Federal Reserve's prolonged high interest rates have negatively impacted the economy, causing market turbulence. Currently, futures markets are pricing in a 55% chance that the Federal Reserve will lower benchmark interest rates by 50 basis points in September, up from a 5% chance a month ago. Oscar Munoz, chief U.S. macro strategist at TD Securities, notes that slower payroll growth indicates U.S. economic risks are becoming more balanced as inflation cools and economic activity slows. Corporate earnings have been mixed, neither strong nor weak enough to provide clear market direction, according to Charles Lemonides of ValueWorks LLC. S&P 500 companies have reported second-quarter results 4.1% above expectations, aligning with the long-term average.

The U.S. presidential race is expected to heighten market uncertainty. According to an Ipsos poll, Democrat Kamala Harris currently leads Republican Donald Trump 42% to 37% in the race for the November 5 election. Harris entered the race on July 21 after President Joe Biden withdrew following a poor debate performance against Trump on June 27.

With nearly three months until the election, investors are preparing for additional twists in an already dramatic election year. JPMorgan analysts noted that recent events have made the election outcome uncertain again, despite earlier indications of clearer results for the presidential and congressional races. Chris Marangi, co-chief investment officer of value at Gabelli Funds, anticipates that the election will contribute to market volatility. However, he also expects that potential rate cuts in September could lead to a shift into market areas that have lagged behind Big Tech. He predicts that while volatility will increase as the election approaches, the underlying market rotation will persist as lower rates counterbalance economic weaknesses.