Weekly Market Review: Late Recovery Following Hotter Inflation Data

The broader U.S. market averages rebounded sharply on Friday, but still ended the week with fractional losses. Communication Services and Energy names led the way lower last week, while Consumer Staples names edged higher. 

Investors digested the latest round of inflation data, which led some market watchers to believe that the Federal Reserve could continue raising interest rates in the second half of the year.

On Wednesday, it was announced that core consumer prices (CPI), increased 5.9% in June, excluding food and energy. This was higher than expected, as was the report of 8.2% core growth on producer prices (PPI) a day later.

Following the inflation reports, Fed funds futures are now pricing in a 29% chance that the FOMC could increase interest rates by a full percentage point at its meeting on July 27.

The Week Ahead

Earnings season heats up next week, with 72 companies in the S&P 500 scheduled to post quarterly results. The following companies headline the reporting calendar:

July 18: Bank of America (BAC) and International Business Machines (IBM)

July 19: Johnson & Johnson (JNJ)

July 20: Tesla (TSLA)

July 21: AT&T (T)

July 22: American Express (AXP) and Verizon (VZ)

Aggregate S&P 500 profit is projected to grow just 5.6% in the second quarter, or actually show a 3.4% decline, excluding the Energy sector. Financial names are expected to post the largest earnings drop in the period.

Next week will be relatively quiet on the economic front. The ECB will announce its next interest rate decision on Thursday and IHS Markit will post the preliminary purchasing managers’ index data for July on Friday.

Given a slowing growth outlook and the prospect of higher interest rates, it could become hard to come by investment gains in 2022. As a result, deciding what and when to buy can be challenging for any investor.

However, the fact remains that investments with upside potential and other positive signals are out there if you dig a little deeper.

One such Healthcare name is worth a closer look and is our Stock of the Week.

Stock of the Week: Encompass Health (EHC)

The company operates rehabilitation hospitals and also manages home-health and hospice networks.

The stock gained nearly 2% last week and is showing signs that it has the potential to continue this relative outperformance into the second half of 2022.

Here’s why:

Encompass is carrying a lot of operating momentum into the second half of the year, as was evidenced by the better-than-expected quarterly results that management delivered back in April.

The company earned $0.97 a share in the first quarter, as revenue increased 8% from a year ago, to $1.33 billion.

In the meantime, the stock offers investors growth at a reasonable price. Encompass is valued at 12.1x expected earnings over the next four quarters. This represents a discount to the broader market, as well as the 17.3% average annual earnings growth expected over the next three to five years.

Wall Street agrees that the company is attractively valued. All 11 active analysts tracked by TipRanks rate the shares and buy and the average price target of $76.55 reflects 55.3% upside potential.

In the meantime, the company carries an “Outperform” Smart Score of 10/10 on TipRanks. This data-driven stock score is based on 8 key market factors.

On top of the positive aspects mentioned already, the Smart Score indicates that shares have seen insider buying, in addition to improving sentiment from hedge funds and financial bloggers.

FYI: This is just 1 of the 20+ stocks selected for the Smart Investor portfolio, a weekly newsletter that blends big data, and market insights.