- U.S. ISM services PMI, Fed speakers in focus during holiday-shortened week.
- Airbnb is a buy on news it will be joining the S&P 500.
- Kroger will struggle amid expected earnings miss.
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Stocks on Wall Street ended mostly higher on Friday to notch their best week since June, after the latest U.S. jobs report solidified expectations of a pause in interest rate hikes this month.
The Labor Department's report showed the August unemployment rate jumped to a more than one-year high of 3.8%, while wage growth slowed.
The soft data added to growing evidence of a cooling labor market, and it cemented expectations that the Federal Reserve will keep rates unchanged at its September meeting.
For the week, the blue-chip Dow Jones Industrial Average rose 1.4%, while the benchmark S&P 500 and the tech-heavy Nasdaq Composite added 2.5% and 3.3% respectively.
The holiday-shortened week ahead - which will see U.S. stock markets closed on Monday for the Labor Day holiday - is expected to be a rather quiet one.
On the economic calendar, the key events for the week include the Institute for Supply Management's (ISM) services-sector survey index, as well as the latest jobless claims numbers.
Those releases will be accompanied by a heavy slate of Fed FOMC speakers, which will surely add to the debate on the U.S. central bank’s outlook for interest rates. Currently, financial markets see a 94% chance of no action, and only a 6% likelihood of a rate hike, according to Investing.com’s Fed Rate Monitor Tool.
Meanwhile, there are just a handful of companies reporting corporate results as the Q2 earnings season winds to a close, including GameStop (NYSE:GME), DocuSign (NASDAQ:DOCU), C3.AI (NYSE:AI), and Zscaler (NASDAQ:ZS).
Regardless of which direction the market goes next week, below I highlight one stock likely to be in demand and another that could see fresh downside.
Remember though, my timeframe is just for the week ahead, Monday, September 4 - Friday, September 8.
Stock To Buy: Airbnb
I believe Airbnb's (NASDAQ:ABNB) stock will outperform in the week ahead, after it was announced that shares of the online travel giant will be added to the benchmark S&P 500 index as part of its quarterly rebalance.
S&P Dow Jones Indices said late Friday that the San Francisco, California-based company will join the widely followed index - which tracks the stock performance of 500 of the largest companies listed on the U.S. stock market - before the start of trading on Monday, September 18.
Airbnb is replacing Newell Brands (NASDAQ:NWL), which will drop down to the S&P SmallCap 600 index as part of the reconstitution.
History has shown that stocks often enjoy a boost after the announcement of their addition to the S&P 500. In general, stocks making the jump usually benefit from increased liquidity and greater interest from individual and institutional investors, two factors that can potentially propel a company’s share price higher.
Indeed, past studies have found that companies added to the S&P 500 experience increases in their stock price as passive investment funds that are benchmarked to the index are forced to buy shares in order to realign with the S&P 500’s new composition.
ABNB closed Friday’s session at $132.69, earning the online vacation-rental booking company a valuation of around $85 billion.
Shares have been on a tear in 2023, scoring a year-to-date gain of 55.2% to easily outperform the broader market over the same timeframe.
Investors have turned more bullish on Airbnb in recent months as it benefits from a post-pandemic recovery in international travel demand, despite fears of a global economic slowdown that have sparked concerns about consumer spending.
The company reported earnings and revenue which easily beat estimates last month and gave an upbeat forecast for the current period as it continues to capitalize on the ongoing recovery in the travel industry.
Stock To Sell: Kroger
I believe Kroger (NYSE:KR) will suffer a difficult week ahead, with shares potentially breaking down to new lows, as the supermarket chain’s latest earnings will likely reveal a sharp slowdown in sales growth due to the uncertain macro environment.
Kroger’s second quarter financial results are due ahead of the opening bell on Friday, September 8 at 7:15AM ET, and are likely to take a hit from a decline in customer traffic at its grocery stores.
Market participants expect a sizable swing in KR stock following the update, with a possible implied move of approximately 6%, according to the options market.
Kroger, which is set to buy smaller rival Albertsons (NYSE:ACI) in a $25 billion deal, declined 2.2% after its last earnings report in mid-June.
According to an InvestingPro survey, analysts have slashed their Kroger earnings forecast eight times in the last 90 days, compared to four upward revisions.
Wall Street sees the Cincinnati, Ohio-based grocery store chain - which operates more than 2,700 locations in 35 states across the U.S. - earning $0.91 a share, nearly unchanged from EPS of $0.90 in the year-ago period.
Meanwhile, revenue is forecast to fall 1.5% annually to $34.12 billion amid high promotional activity and the ongoing slowdown in demand for higher-margin non-essential items.
Looking ahead, it is my belief that Kroger’s management will fail to lift its forward guidance for the second consecutive quarter and strike a cautious tone amid fears over a looming economic slowdown and as inflation remains persistently high.
KR stock ended at $45.98 on Friday, its lowest closing price since June 21. At current valuations, Kroger has a market cap of $33 billion, making it one of the biggest supermarket chains in the country.
Shares have lagged the year-to-date performance of the broader market by a wide margin in 2023, rising just 3.1% in contrast to the S&P 500’s near 18% gain.
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Disclosure: At the time of writing, I am long on the Dow Jones Industrial Average, S&P 500, and the Nasdaq 100 via the SPDR Dow ETF (DIA), SPDR S&P 500 ETF (SPY (NYSE:SPY)), and the Invesco QQQ Trust ETF (NASDAQ:QQQ). I am also long on the Technology Select Sector SPDR ETF (NYSE:XLK). I regularly rebalance my portfolio of individual stocks and ETFs based on ongoing risk assessment of both the macroeconomic environment and companies' financials. The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.