VIDEO: This Is How Skyworks' Poor Outlook Affects Our Thinking on Apple

In today’s Daily Rundown video, Chris Versace discusses today’s rash of economic data, including fresh signs of persistent inflation, and what it means for the outcome of today’s Fed policy meeting. 

He also discusses what stood out in Amazon’s AMZN earnings report last night, and how the disappointing outlook issued by Skyworks Solutions SWKS is impacting our thinking on Apple AAPL.

Transcript

CHRIS VERSACE: Hey, folks, Chris Versace. May 1, starting off a new month. But as you know, it's an extremely busy day today, filled with not only a sea of economic data the latest helping of quarterly earnings reports. We've also got the Fed meeting on tap that will conclude at 2:00 pm. And, of course, Fed Chair Powell will host his press conference afterward. It's going to be must-see TV as we look to triangulate what the Fed is going to tell us about how it sees the economy shaping up, and also the path forward for monetary policy.

Candidly, our thinking is the Fed isn't going to do anything. They'll leave rates unchanged. Fed Chair Powell is going to admit that, yes, recent inflation data has not been encouraging-- not the good data that they've been looking for-- but they're likely to leave monetary policy alone. It is restrictive. Give it more time to do the job that it is supposed to do.

That's our thinking. Of course, we'll adapt and adjust based on what we learn. But before we get into the meat of today's video, I do want to say thank you to everybody who joined me in the forum yesterday for our initial set of office hours. We had a lot of good questions, talked about a lot of different stocks. You know, all in all, it was simply great, in my opinion. And I'm really looking forward to our next edition of office hours this Thursday in the forum between 12:00 PM and 1:00 PM Eastern Standard Time. I hope you will join me there.

Now, let's dig into today's data. The ISM Manufacturing for April came out, and still contracting, but not as much as in recent months. However, the Prices Subindex jumped to the highest level we've seen so far in 2024. You know, we're not missing this. I'm sure the Fed's not going to miss this. It's a clear sign that inflation is persistent and, candidly, moving in the wrong direction. So not a good thing from that perspective.

When we look at S&P Globals, final April manufacturing PMI, yes, manufacturing activity, it found, did slow compared to the last few months. But here, too, input-output costs are at elevated levels. So you put these two together, they are going to result in some downward revisions for those rolling GDP forecasts by the Atlanta Fed and others. And the data, as I kind of tipped a second ago, the Fed is going to see it, and it's another reason that they will be emboldened to slow-walk their way to rate cuts. Candidly, I think it's going to mean that rate cut expectations could slip from currently one to maybe none. But again, that's as we see the landscape today. We have a lot more data coming.

Let's talk about the ADP Employment Change Report for the month of April. Surprise, in terms of the number of jobs that were created during the month, positive, obviously, for consumers and spending. So, too, were the fact that wages remain at elevated levels-- job stayers 5% year-over-year, job changers up more than 9% year-over-year. So again, another sign that inflation kind of remains in place. But from a consumer spending perspective, more people working. Real wage growth. This is a positive.

We also had the March construction spending report out today. And when we kind of look through it, headline down slightly. But remember, we have to parse that between residential and non-residential. Non-residential construction was actually up slightly on a month-over-month basis, but as you know, we really focus on the year-over-year figures. They're far more telling to us. And in that regard, they were up about 13.7% year-over-year in March-- extremely positive for our shares of Vulcan Materials, United Rentals, and, indirectly, Waste Management.

So put all that economic data together, as I said, we are going to see some downward revisions to those rolling GDP forecasts. The inflation commentary is going to keep the Fed on watch, not likely to signal anything coming. Not seeing the good data. And yes, rates will be higher for longer.

But again, we're going to get a lot more from the Fed-- their policy statement at 2:00 PM, Fed Chair Powell, as I said earlier, at 2:30 PM with his press conference. And by and large, I think we know what he's going to say. The big unknown is if someone asks him a question like, hey, Fed Chair Powell, given the data that we've seen, especially that super-hot ISM manufacturing prices print this morning, what are the odds that the Fed might have to do one more rate hike? Well, that would be a big question, and the answer, of course, would be something the market would really lean into.

But here's the thing. I don't think Fed Chair Powell is going to take bite at that question. I think, rather, he's going to say, yes, the Fed, of course, will remain data-dependent, and yes, recent data has been discouraging, but monetary policy is in restrictive territory. We're inclined to give it more time to do its job.

Now, that's the answer I'm thinking that he's going to give. If he comes out with something a little more hawkish, that will be something the market will probably react to, and not in a good way. But again, you have my thinking on it. I think he's going to continue to toe the line.

I don't think he wants to upset the market. I don't think he wants to upset expectations about the economy. You know, the last thing I think he wants to do is signal that, perhaps, the soft landing that the market is expecting-- or no landing, as has been the case over the last few months-- is in jeopardy. We've only got two real data points for the second quarter. We're going to get a lot more. There's a lot more time for the Fed to rethink its speed-of-the-economy thoughts.

And that's kind of where we are too. We're not going to jump the gun. We're going to get the April services PMIs out later this week. We'll get retail sales, housing, all for the month of April, in the next couple of weeks. And we'll have a much better sense of the true speed of the economy. No need to jump the gun here and now.

Now, let's shift. We had a bunch of earnings out. And look, without a doubt, Amazon's quarterly results last night, they showed an acceleration in Amazon Web Services. The operating profit growth was tremendous, and they posted their first double-digit operating margin.

Last week, when we talked about Waste Management, we were talking about a resetting of margin expectations higher. I think we're going to see the same thing happen with Amazon as well. And that's going to lift EPS expectations for the bottom line. We're going to see a rash of price target increases. We will be revisiting our current Amazon price target with an upward bias, sharing that with you later today.

We also had earnings out from Mastercard, and the stock's down a little bit. What's going on here is the company softened, I would say, its top-line expectations to just a little bit lower than it had been looking before, and still low double-digits. But are we surprised by this? Let's think about the comments that we've gotten over the last couple of days from other companies about the consumer being a little more selective.

I don't think it's that surprising. On the earnings call, we will be looking to hear a lot more about its expectations for the overall market share gains of cards and mobile payments. But we also want to hear much more about its joint venture in China, because that is so far unexplored, untapped potential, and that could be a game-changer for Mastercard for its business later this year, 2025 and beyond. So that's what we'll be listening for there.

And quickly, let's just touch on Apple. You know, one of its suppliers, Skyworks, came out with, I mean, honestly, horrible guidance for the current quarter-- well below expectations. And Skyworks shares are getting punished.

But we have to remember that we've gotten a number of different data points about the smartphone market and how it looks to be improving compared to the most recent quarters. We're seeing a rebound in the Android marketplace. So you know, so when you put all that together, along with more recent comments from Corning, Taiwan Semiconductor, and NXP Semiconductor, we kind of have to ask the question, is it the market, or is something else going on inside of Skyworks-- maybe some share loss?

We do know that the RF semiconductor market is very competitive, and from time to time, we do see shiftings of market shares based on new model wins and other programs. So that's something we want to be very sensitive to. We don't want to read too much into what Skyworks' guidance has to say. That's why the smart move is to really compare Skyworks's, again, disappointing guidance with what we hear tonight from Qualcomm and from RF semiconductor company Corvo. I think that context will give us a much clearer picture of what's going on in the smartphone market.

However, because Skyworks is a supplier into Apple, we do want to stick with our current plan for Apple shares. Remember, the company is going to report on Thursday. We're going to want to digest their earnings results and their guidance before we make our next move with Apple.

Now, what is our longer-term, medium to longer-term plan with Apple? We do want to own more shares ahead of the eye on device upgrade cycle really taking off. So our thinking is, let's get the company's quarterly results in. Let's let their guidance settle into the shares. If it's disappointing, it could give us that opportunity to pick up more Apple shares at a better price. And, of course, that's something that we would like to do.

One last thing. In our opening comments today, we did kind of share our updated shopping list. I want to just quickly revisit that. Applied Materials, Waste Management, NVIDIA, Universal Display, Apple, Microsoft, Labcorp, and Trade Desk, two of our newer additions. And just building on my comments about Apple, if we think about its weight in the S&P 500 and the NASDAQ Composite, if Apple's results aren't pristine-- in other words, they underwhelm, along the lines of kind of what we saw with AMD or even Supermicro today-- we could see Apple shares trade off. And given those weights, we could see the S&P 500 and the NASDAQ trade off as well.

So for us, again, that's another reason to just stay on the sidelines, let this report-- and others between now and then-- get absorbed in the marketplace. Our thinking is that that could reverberate through on Friday given Apple's reporting Thursday night. We'll want to take the weekend to kind of let the market reset, maybe find its footing as we come into next week, and then we can start to revisit our shopping list.

So that's our thinking. But again, a lot of stuff coming today, this afternoon. So please, be sure to check your emails, your Alerts. We wouldn't want you to miss any updates to our thinking, price target changes, or anything else that we might have to say about the portfolio. Thanks for watching.

At the time of publictaion, TheStreet Pro Portfolio is long AMZN and AAPL.