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We recently hedged the market outlook for the second half of the year in equities with a bullish thesis that economic conditions will prove resilient despite rising interest rates. A potential confirmation that inflation peaked in July’s data, consistent with the recent decline in commodity prices, may open the door to a “spike in hawkishness” regarding Fed policy. As long as the labor market remains stable, everything indicates that the United States can emerge from the current soft patch.

Equity valuations are attractive, with the possibility that better than expected macro data in the future will positively alter market risk sentiment. Opponents and bears will scramble to find excuses to chase after bullish stocks. We expect the S&P 500 ETF (SPY) to trend higher over the next few months, targeting $420 (around 4,200 in the index). Improving market conditions in the fourth quarter may lead to a rally towards $450 as a price target for the year ahead. The call is to be bullish, and we highlight five trade ideas for the current Q2 earnings season.

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Five Second Quarter Income Exchange Ideas

The setup and theme here is a group of tech and consumer names that have been beaten all year and are heading into upcoming reports with otherwise low expectations. We believe it is possible that these companies will outperform, triggering a reversal to the upside and a sustained rally in equities. With all the talk of a recession and record inflationary headwinds, perhaps it’s all about “selling the rumor mill and buying the news.”

Buy – Meta Platforms, Inc. (META)

  • Publication of results on Wednesday July 27 after market close
  • Consensus EPS of $2.60, down 28% year-over-year
  • Consensus revenue of $29 billion, flat year-over-year

The challenges for meta-platforms have been well known. The company is looking for its next phase of growth and has oriented its strategy towards the “metaverse” which remains several years away from contributing materially to growth. Heavy spending on research and development, as well as a broader slowdown in its major social media platforms resulted in a weaker earnings environment.

That being said, it is important to remember that META remains profitable with strong cash generation. The bullish case heading into the second quarter report is that CEO Mark Zuckerberg may have been able to pull some levers in the quarter to control costs and find operational efficiencies to support margins. We see room for higher and lower momentum that should be able to lift stocks higher with a retest of $220 in the charts this year. This is a great opportunity to buy a high quality market leader that trades at just 15x forward earnings with significant upside over the next few years.

META chart

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Buy – Advanced Micro Devices, Inc. (AMD)

  • Publication of its second quarter results on August 2 after market close
  • Consensus EPS of $1.04, up 64% YoY
  • Consensus revenue of $6.5 billion, up 70% year over year

Not too long ago, AMD might have been called the “Pepsi” compared to the “Classic Coke” of its competitors when considering Nvidia (NVDA) in graphics and Intel (INTC) in computing. In other words, AMD arguably came up with a 2nd tier product with a head start in terms of chip technology. Fast forward, the tables have turned with AMD pioneering major innovations and its value proposition generating significant market share gains over the past few years across multiple categories. We expect these trends to continue to support a positive long-term outlook for the company.

Beyond recent weakness in the chip sector from what was a record high in 2021. AMD’s appeal is its exposure to multiple themes across cloud networking, artificial intelligence, 5G communications, games and smart devices which are still high growth opportunities.

For the next report, the company is expected to generate revenue growth of nearly 70% based on the impact of its “Xilinx” acquisition in 2021 and move into the server business. This layer of diversification further bolsters the business, helping it curb more volatile gaming-related PC sales.

Management’s comments on improving semiconductor supply chain conditions along with some positive indications could be a catalyst for stocks to rally behind the report. We like the stock setup which has returned to 2020 levels with an opportunity here to buy AMD at a historically low forward P/E multiple of less than 20x.

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Buy – Paycom Software, Inc. (PAYC)

  • Q2 results are expected on August 2 after market close
  • Consensus EPS of $1.12, up 15% YoY
  • Consensus revenue of $308 million, up 27% year over year

The bullish case with PAYC is simple. The company, one of the largest providers of cloud-based human capital “HR” management software, continues to benefit from a strong pace of hiring and tight labor market conditions. In June, the US economy added +372k jobs, well above the consensus of +268k. The increase in the number of people hired represents a positive operating environment for the company, which generates revenue per user with the client companies connected to the platform.

The trend this year has been strong profitability even as stocks have sold off sharply from 2021 highs on deeper pessimism about growth prospects. We like the stock here at around $300 per share ahead of the next second-quarter earnings report and believe it may beat estimates. .

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Buy – PayPal Holdings, Inc. (PYPL)

  • Expected publication of second quarter results on August 2 (not yet confirmed)
  • Consensus EPS of $0.87, down 24% year-over-year
  • Consensus revenue of $6.8 billion, up 9% year-on-year

PayPal is the perennial fintech that has been crushed over the past year amid the market selloff. The silver lining of the 75% decline from its all-time high is that the stock has turned into more value-oriented trading with a forward P/E ratio of 19x. Indeed, the fundamentals are strong, including positive free cash flow, recurring profitability and an increase in total payment volume as a key growth metric.

For the next earnings report, we will be looking for a higher pace which may also help EPS beat expectations. This is a stock that should be able to lead the market higher and will benefit from improving macro conditions, including signs of weaker inflation and more positive consumer sentiment. Our price target on PYPL is $110, which represents a multiple of 27.5x on its consensus 2022 EPS.

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Buy – The Walt Disney Company (DIS)

  • Expected to announce results on August 10 after market close
  • Consensus EPS of $0.99, up 24% YoY
  • Consensus revenue of $21 billion, up 23% YoY

The pessimists calling for a catastrophic recession with a collapse in consumer spending must have forgotten to tell visitors to Disney theme parks. Indications are that the resorts are packed with Florida’s daily resort booking system that sells out almost every day. A big takeaway from the latest quarterly report is that the parks and experiences segment generated record operating margin despite some lingering Covid disruptions. We expect an even stronger result in the second quarter earnings report, helping to dispel any concerns that visitors will stay away.

Separately, reports suggest that Disney’s investments in digital with Disney+ and ESPN+, as well as its interest in HULU are working well. Some of the most-watched streaming series on any platform this year include Disney originals like “The Book of Boba Fett” and “Obi-Wan Kenobi” which may have helped subscriber numbers soar. outperform.

This will be the company’s third fiscal quarter report, and we believe DIS shares appear to be trading increasingly cheap at a forward P/E of 17x to enter consensus EPS for the year. 2023 and the growth momentum continues. Notably, stocks are trading below $100, dating back to lows near the pandemic crash of 2020, as we say the company’s outlook is now stronger than ever. Look for actions to blast with rhythm across the board. We believe the $125 stock price range will be in play over the next few months.

DIS card

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Final Thoughts

It’s been a historically difficult year for investing, but the bottom line is that it’s important to look ahead. Headlines of record inflation and the Fed being forced to scramble are basically old news at this point. The upside here is that many of these headwinds are being priced into setting an environment where more favorable conditions through 2023 can be very positive for risk assets.

Even with a bullish view, we don’t expect the market to move in a straight line and volatility should be a recurring theme. Nevertheless, getting invested and increasing exposure to equities can make sense as part of a diversified portfolio. The SPY ETF is an excellent option as a long-term core portfolio.

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