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Weekly Market Review: Tech Earnings and Dovish Fed Drive Gains

This week was all about haves and have-nots.

Technology stocks led the way higher. A trifecta of blowout earnings from Amazon (AMZN), Apple (AAPL) and Facebook (FB) on Thursday drove the Nasdaq Composite and S&P 500 to end July on a positive note.

However, Apple is the only one of these three names in the Dow Jones Industrial Average and the blue-chip index fell fractionally this week.

Economic data was equally mixed.

An economic recession was confirmed on Thursday, following the print of a 33% decline in second-quarter GDP. Two readings of July consumer activity also fell short of expectations. Weekly jobless claims increased sequentially for the second straight time.

However, on Wednesday the FOMC said it will continue to backstop the U.S. economy which continues to reel from coronavirus-related shutdowns. Chairman Jerome Powell extended lending facilities through the end of year and indicated the Fed has no plans to raise interest rates.

Coronavirus Update

While it may no longer be the top news story in the financial press, the coronavirus pandemic is still with us. As testing increases, there have been 18 million cases recorded globally and we’re likely to reach 5 million cases in the U.S. next week.  

This week, the postponement of 17 Major League Baseball games following outbreaks within three teams was a reminder that “returning to normal” may not be a linear process. If the pandemic continues to spread, it will likely hamper the positive trajectory of economic recovery reported in recent months.

What to Expect Next Week

One thing that will be front-and-center on a lot of minds next week, is discussion about a fourth economic relief plan from Congress. Both sides failed to reach agreement on a proposed $1 trillion package last week and the $600 weekly Federal unemployment addendum expired on Friday.

The pace of earnings reports will slow next week, but there are still 132 S&P 500 companies on the calendar. Walt Disney’s (DIS) report on Tuesday headlines the reporting calendar.

To date, 82% of the 312 companies in the S&P 500 have exceeded profit expectations in the second quarter, which is well ahead of the historical average of 65%.

On the economic front, the big piece of data will be the July jobs report on Friday. Economists are calling for the creation of 2 million non-farm payrolls last month and for the headline unemployment rate to fall to 10.5%.

Following the snap-back recovery in stocks the past few months, we believe that investment gains will be harder to come by in the second half of the year.

As a result, deciding what and when to buy can be challenging for any investor.

However, the fact remains that attractive investments are out there, if you’re willing to dig a little deeper.

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

Stock of the Week: Dropbox (DBX)

The company is a leader in the online file storage market. The stock gained more than 6% this week and we believe this positive momentum can continue throughout the second half of the year. Here’s why:

Dropbox is a clear beneficiary of the work-from-home trend, as many offices and schools remain closed.

As a result, the company surpassed analyst expectations last quarter. Dropbox earned $0.17 a share in the first quarter, as revenue increased 18% from a year ago, to $455 million.

Management also boosted revenue guidance for the second quarter. The company will next post results in early August.

We believe the company will continue to benefit from demand for remote file access, even after coronavirus fear dissipates.

Wall Street agrees. The average analyst price target of $26.25 represents 15.4% upside potential from current levels.

It’s also worth noting that the stock carries a Smart Score of 10/10 on TipRanks. This proprietary score utilizes Big Data to rank stocks based on 8 key factors that have historically been a precursor of future outperformance.

On top of the positive aspects mentioned already, the Smart Score indicates that the company has seen improving sentiment from hedge funds and financial bloggers.

FYI: This is just 1 of the 20+ stocks selected for the Smart Investor portfolio. That’s where we share more detailed insights on our weekly stock picks.

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