Focus on software earnings this week

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  • S&P 500 still trades below July 27 range high of 4,607.
  • Arm files for largest IPO in years, valuation leaked at over $50 billion.
  • US ISM Services PMI for August comes out Wednesday.
  • Market closed for Labor Day on September 4.
  • Zscaler, Docusign, Asana, C3.ai and UiPath all release quarterly earnings this week.

The S&P 500 experienced its best performance last week since the second full week of June in percentage terms. The index of the 500 largest US public companies rose 2.5% last week, mostly owing to a major rally on Tuesday, August 29.

With the Labor Day holiday shutting down the market on Monday, the week in economic data is rather weak. The US ISM Services PMI for August arrives on Wednesday, and nothing else bears the same significance. The indicator is expected to show a services sector that is still expanding, albeit at a slower pace.

Software week is here, with Cathie Wood-favorite UiPath (PATH) releasing results for the second quarter on Wednesday. Before that, Tuesday offers up earnings calls from Asana (ASAN) and Zscaler (ZS). Docusign (DOCU) earnings come out on Thursday. Then further talk about the Arm IPO – the chip design company owned by SoftBank – is sure to occupy much of the conversation this week.

S&P 500 futures have swung lower by 0.4% early Tuesday, while NASDAQ 100 futures are off by 0.6%. Yields on US Treasuries have drifted lower at the start of the curve (3-month, 12-month, 2-year), while longer-dated Treasuries see their yields rising.

S&P 500 News: Software earnings are eating the calendar

You’ll remember Asana as the workplace platform founded by early Facebook employee Dustin Moskovitz that has many competitors in the project management software space such as Monday.com (MNDY). Wall Street analysts are shooting for adjusted earnings per share (EPS) of $-0.12 on revenue of $157.8 million. All analysts covering Asana in the quarter ending in July have raised their earnings expectations for this report.

Zscaler, a cloud security firm, also announces fiscal Q4 results after the market close on Tuesday. The company has beaten every Wall Street consensus for adjusted EPS and revenue over the last 20 quarters. The streak goes all the way back to 2018. For this quarter, the Street has a consensus target of $0.49 in adjusted EPS and $430.6 million. That would mean a 96% increase for adjusted EPS and a 35% annual growth rate for sales.

UiPath is next up on Wednesday. The process automation company has lost 78% of its value since going public in early 2021 but has never really left the conversation. It still has major backers on Wall Street, and others wonder if it might make a good takeover target. The market has a consensus forecast for $0.03 per share in adjusted EPS on $282 million. This would amount to a 16.5% annualized growth rate, and the receding growth rate is a primary reason the stock has lost so much value.

Another pandemic darling, Docusign reports on Thursday. The notary replacement service has a consensus estimate for $0.66 in adjusted EPS on $677.4 million. Sixteen out of 17 analysts covering the company have raised their earnings estimate for the quarter. Like UiPath, the stock price has been damaged since the Federal Reserve began raising interest rates and the revenue growth rate has come down to earth. The revenue growth rate forecast for this quarter is just 9% YoY, but Docusign is clearly moving toward better profitability.

Arm IPO could lead to overall market rally

More words will be spilled about the proposed IPO of Arm this week than any of these software firms. That’s because Arm’s IPO should sell at a valuation exceeding $50 billion and could be one of the largest IPOs in quite a while. 

Arm designs a special class of chips found in 99% of the world’s cellphones and then licenses these designs to most of the largest firms in the world, including Apple (AAPL) and Nvidia (NVDA). The latter famously tried to buy Arm for $40 billion in 2021 but gave up in early 2022 when it was clear that regulators did not like the combination.

Japan’s Softbank (SFTBY), which purchased the UK-based Arm in 2016 for $32 billion, wants to spin it out. Arm’s revenue, close to $2.7 billion annually, has sputtered recently. Some analysts have even questioned whether the important company is really a good bet anymore. Some other chip designers have begun shopping around alternatives to Arm’s stranglehold on the smartphone chip market. 

A Reuters report over the weekend claimed that talks are not focused on offering shares in the $47 to $51 range. This means Arm would be initiated at a valuation between $50 and $54 billion. Not too long ago, the expectation was that Arm would retail in the low $60-billion range. Although nearly all the major banks on Wall Street are helping to run the IPO, several analysts have publicly questioned whether Arm is past its prime and now requires too much R&D spending in order to stay ahead of the competition.

S&P 500 FAQs

The S&P 500 is a widely followed stock price index which measures the performance of 500 publicly owned companies, and is seen as a broad measure of the US stock market. Each company’s influence on the computation of the index is weighted based on market capitalization. This is calculated by multiplying the number of publicly traded shares of the company by the share price. The S&P 500 index has achieved impressive returns – $1.00 invested in 1970 would have yielded a return of almost $192.00 in 2022. The average annual return since its inception in 1957 has been 11.9%.

Companies are selected by committee, unlike some other indexes where they are included based on set rules. Still, they must meet certain eligibility criteria, the most important of which is market capitalization, which must be greater than or equal to $12.7 billion. Other criteria include liquidity, domicile, public float, sector, financial viability, length of time publicly traded, and representation of the industries in the economy of the United States. The nine largest companies in the index account for 27.8% of the market capitalization of the index.

There are a number of ways to trade the S&P 500. Most retail brokers and spread betting platforms allow traders to use Contracts for Difference (CFD) to place bets on the direction of the price. In addition, that can buy into Index, Mutual and Exchange Traded Funds (ETF) that track the price of the S&P 500. The most liquid of the ETFs is State Street Corporation’s SPY. The Chicago Mercantile Exchange (CME) offers futures contracts in the index and the Chicago Board of Options (CMOE) offers options as well as ETFs, inverse ETFs and leveraged ETFs.

Many different factors drive the S&P 500 but mainly it is the aggregate performance of the component companies revealed in their quarterly and annual company earnings reports. US and global macroeconomic data also contributes as it impacts on investor sentiment, which if positive drives gains. The level of interest rates, set by the Federal Reserve (Fed), also influences the S&P 500 as it affects the cost of credit, on which many corporations are heavily reliant. Therefore, inflation can be a major driver as well as other metrics which impact the Fed decisions.

 

Earnings of the week

Tuesday, September 5 – Zscaler (ZS), Asana (ASAN)

Wednesday, September 6 – UiPath (PATH), GameStop (GME), American Eagle Outfitters (AEO), C3.ai (AI)

Thursday, September 7 – DocuSign (DOCU)

Friday, September 8 – Kroger (KR), Rent the Runway (RENT)

What they said about the market – Raphael Bostic

Atlanta Fed Governor Raphael Bostic gave an interview over the weekend to The Associated Press in which he said he expects interest rates to remain high for quite awhile. This is especially due to American families still retaining strong balance sheets more than a year after the covid era ended.

“I think there’s still a fair amount of momentum in the economy. And when I talk to bankers and others, they will tell me that a lot of their customers still have savings balances that are higher than they were pre-pandemic. And so that is going to allow them to be more resilient then we might expect otherwise, while the other difficulties in the economy start to resolve themselves like supply chains and that kind of stuff. I think that’s pretty much what we’re seeing right now.”

S&P 500 forecast

The S&P 500 has been winding its way up from its bottom on August 18. Two mild pullbacks have already been overtaken, so it is clear that buying the dip on the index is still in style. The second dip arrived on August 25 but was quickly forgotten the same day. 

The S&P 500 index is still in rally mode, and don’t let anyone tell you differently. Bulls now will shoot for the July 18 range high at 4,607. That level sits inside a supply zone that ranges from 4,590 to 4,637 and hails from the first quarter of 2022.

The Relative Strength Index (RSI) is gradually increasing, closing on Friday at 58. September is historically a bad month for the stock market, but the observations do not tell us that a sell-off is imminent. This is particularly true after the index sold off for three weeks in a row in the first half of August. 

S&P 500 daily chart

 



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