This week brought positive macro news. Wednesday’s Consumer Price Index (CPI) report from the Bureau of Labor Statistics showed 2.9% annualized inflation for July, the lowest since March 2021.
On a monthly basis, consumer prices declined by 0.1% from June, but still at 0.2% rate. In other words, prices continue to go up but at a slower pace. The stock market welcomed inflation news with both Nasdaq Composite (up 6.24%) and S&P 500 (up 4.65%) rallying over the week.
The market is now affirmed in the expectation that the Federal Reserve will start cutting the fund rate, presently in the 5.25% – 5.50% range. The central bank started rapidly elevating interest rates in March 2022, bursting both crypto and equity markets, to tame rising inflation.
With inflation subsiding, the market has priced in ~125 bps in rate cuts, ending at 4% – 4.25% range by the end of the year per fed fund futures aggregated data. In turn, the pressure on both consumers and businesses should be alleviated in a debt based economy.
The federal government itself broke all records in interest payments, exceeding $1 trillion in Q1 2024 vs $0.54 trillion in Q1 2020. Effectively, this means that debt service siphons the bulk of the nation’s energy, overshadowing even the enormous military spending.
Although the beginning of the interest rate cutting cycle is typically followed by a recession, which stocks could surge following the first expected rate cut in September?
Prologis
This logistics realtor is steadily closing the gap with negative 9% year-to-date returns, having gained nearly 14% in the last three months. With 115 million square meters of space on offer, Prologis Inc (NYSE:PLD) is critical for retail’s reliance on warehouses, distribution centers, as well as online fulfillment centers and business-to-business (B2B) models.
Conversely, such an industrial real estate investment trust (REIT) benefits from lowered borrowing costs. In the latest Q2 earnings report, Prologis had to pay $208.2 million in interest expense compared to $149.8 million in the year-ago quarter.
The bulk of the company’s revenue comes from rental, at $1.8 billion, and strategic capital, at $154.7 million. Prologis net income was $859.8 million, significantly lower from $1.2 billion in Q2 2023. Considering that warehouse space for large retail chains is always in demand, in addition to long-term leases, this makes Prologis recession resistant.
Although Prologis is not a dividend aristocrat, the company has maintained a solid yield history, currently at 3.13% at $3.84 annual payout per PLD share priced at $123. Against the 52-week average of $118.78, average PLD price target is $133.64 per share, according to Nasdaq forecasting data.
Wayfair
Harnessing the drop-shipping model, Wayfair Inc (NYSE:W) generates revenue from sales of goods without holding the products themselves. Without such overhead, Wayfair gathers items from over 11,000 suppliers for its e-commerce business.
Focused on home decor and furniture, Wayfair also charges installation fees via partnership with Angi. In an elevated interest rate regime coupled with rising inflation, the company experienced reduced demand. But with both on the downward trajectory, Wayfair is looking at renewed growth.
In Q2 earnings released on August 1st, Wayfair reported a 1.7% year-over-year revenue decline to $3.1 billion, with a net income loss of $42 million. With an accumulated deficit of $4.3 billion, Wayfair should see a reprieve following looser financial conditions. In the last four consecutive quarters, the company beat earnings per share estimates, with the latest one at a 47% positive surprise.
Now priced at $42.11, W stock lost 30% value year-to-date. Against the 52-week average of $56.63, W shares are positioned for a major upside move. Wayfair’s bottom forecast is above the current price level, at $45, while the average W price target is significantly above at $64.54 per share.
Block
Formerly Square, Jack Dorsey’s fintech company is set to onboard more merchants with looser financial conditions. In addition to Cash App for peer-to-peer (P2P) payments, Block Inc (NYSE:SQ) has a full-stack solution for businesses, ranging from payment processing to e-commerce management.
Following the acquisition of Afterpay in 2022 for its buy now, pay later (BNPL) service, Block could benefit indirectly as more retailers opt for Afterpay to drive sales. In Q2 earnings, the company reported a 20% increase in gross profit to $2.23 billion. Although Block’s net income of $195 million for the quarter was cut in half from Q1, it was nearly double the $102 million in Q2 2023.
Year-to-date, SQ stock is down 13%, showing signs of recovery during the last week, having gained 8%. Presently priced at $63.37, SQ stock is aligned with its 52-week average of $64.26. This is still significantly lower than the forecasted average price target of $87.94 twelve months ahead, and close to the bottom outlook of $55 per share.
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Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.