VIDEO: Massive Union Pacific Move Benefits These 2 Holdings

In today’s Portfolio video, Chris Versace discusses the drift we are seeing in the market today as we get ready for the pace of things to accelerate in a meaningful Wednesday morning. 

He touches on the market’s expectation for a big reversal in the July ADP Employment Change Report and how that could shape the Fed Chair Powell’s presser comments. Chris also discusses how these two Portfolio holdings are benefiting from the massive Union Pacific UNP-Norfolk Southern NSC transaction. 

Building on the topic of M&A, he discusses how we plan to treat speculated acquisition activity in the cybersecurity space and what it could mean for our Portfolio cybersecurity play, as well as two financial holdings. 

Transcript

CHRIS VERSACE: Hey, folks. Chris Versace here, Tuesday, July 29. And following a jaunt hire earlier this morning, as of now, you've probably seen the market has traded off just modestly. I would say, however, that a number of our holdings are moving higher today, including Marvell shares. If you haven't seen it, the catalyst for that was the stronger than expected June quarter performance and guide up for Corning's optical business. We covered it along with some other, what we'll call, connect the dots comments in our opening alert to you today. So I would suggest you check it out.

We talked a little bit about not only Corning and Marvell, but also about JetBlue and American Express and a few others. So certainly, a note worth taking a look at. But I will say, that as we just look at the market today, we're in a little bit of no man's land. Yes, we have some economic data, but not really anything market moving, in my opinion. We're continuing to get some earnings reports rolling in, which means we will continue to do, as I just mentioned, connect the dots. But by and large, the market is waiting for what the Fed is likely to say tomorrow, Wednesday afternoon, and what we're going to see from earnings out of big tech.

I say that because as you probably know, after tomorrow's market close, we'll get quarterly results from Microsoft and Meta. And then on Thursday, it's Apple and Amazon. So in our note yesterday, we talked a little bit about why, depending on what this collective group has to say, we could see a positive inflection point for consensus EPS earnings for the S&P 500 in the second half of the year. We talked a lot about it. And just real cut to the quick, the second half EPS numbers or the growth rate for EPS numbers for the second half, I should say, have been coming down over the last few months.

Big tech constitutes a very, very large percentage, 20% for those four names reporting in the next couple of days. And based on their guidance, we can lump in NVIDIA. So about 25%, 26% or so of the S&P 500. And if the market sees positive numbers, we could start to see those second half EPS numbers for the S&P 500 start to move higher after falling lower. Hence, a potential inflection point.

But before we get to those two big events tomorrow, we are going to have ADP's employment report. That will be at around 8:15 tomorrow morning. I'll be breaking the numbers down with the Schwab Network. But what's the market expecting? Well, it's actually a nice rebound to about job creation of about 78,000 jobs in the month of July, a sharp reversal from the 33,000 ADP found or lost during the month of June.

Now, our expectation is that we will see positive employment growth, where we're cribbing that from the flash July PMI report. But certainly, the color that ADP brings, boy, that would be nice to see, as well as we get ready for Friday's July employment report. Now, as we think about ADP's report, let's remember that's just private sector jobs. When we get the employment report, we'll get the Bureau of Labor statistics view on not only the private sector, but the public sector. And it was the public sector that really surprised to the upside in the June employment report.

Of course, we want to see continued strong gains for the economy, as it relates to private sector job growth. So let's see what ADP has to say. And we will go from there. And yes, that is the last major data point that we will get before the Fed concludes its policy meeting tomorrow, issues its policy decision, and we hear from the Fed Chair. We've talked quite a bit about what we expect from the Fed Chair to say. And by that, I mean, potentially deliver some sobering comments that the market may not like, just given what we've seen on the inflation front of late and the impact of tariffs as its role in driving that inflation pressure.

So we'll revisit all of that once again, refresh really after tomorrow's ADP employment report. But I want to spend a few minutes just talking about some other things that are going on. You've probably noticed a very big M&A transaction being announced. Yes, I'm referring to the $72 billion deal for Union Pacific to buy Norfolk Southern, creating a first ever in the US transatlantic railway. Now, we're not involved with that. We are interested as to what the implications and ramifications are. But when we read the details of the transaction, there was something that really jumped out at us. Morgan Stanley is one of the advisors for Union Pacific. And Bank of America is the exclusive financial advisor to Norfolk. That means that the transaction should translate into some very nice investment banking fees for those two holdings in the portfolio.

And honestly, while that is a very big transaction, we are hearing rumblings of other transactions. I'm, of course, referring to the news or the reports, I should say, that Palo Alto networks is nearing a more than $20 billion deal to buy CyberArk. Now, when we think about M&A, I think these are two great examples here between Union Pacific and Norfolk Southern and Palo Alto Networks and CyberArk, because typically, why does M&A happen? When we think about smart M&A, at least, it tends to happen because companies are looking to expand their product offering, increase their geographic exposure or footprint, or shore up their technology landscape.

And I think when we look at that, we can see combinations of across those two different transactions. And as it relates to cybersecurity, there's little question that it is an evolving landscape, especially one that is becoming even more intricate and more demanding when it comes to technology. And to that, we just have to think about how bad actors are using AI to drive their cyber attacks. So we'll see what happens if Palo Alto actually does acquire CyberArk. If it does, it could trigger a mini wave of follow on activity from others, akin to cybersecurity game of musical chairs. It could also push our shares of the cyber ETF higher. We'll have to watch that given our current price target.

But candidly, I think we're going to let it run, given the growing market and growing demands for cybersecurity. But we will probably revisit that price target, as cybersecurity companies start to report their quarterly results and update their guidance next week. And then finally, to the extent that we see Palo Alto acquire CyberArk or any of that cybersecurity musical chairs follow on wave of M&A, just like we did with Union Pacific, we are going to read the details of any announced transaction very carefully, because we'll be interested in seeing who is advising whom.

As we collect those data points, we will, obviously, think more about the larger M&A market, but we continue to see Morgan Stanley extremely well positioned for that, and Bank of America as well. But remember, just given the two different business mixes, Morgan Stanley has a lot more earnings leverage tied to investment banking than Bank of America. We'll continue to watch our pickup points. And if we do see a larger pickup in M&A, along with a continued improvement in the IPO market, boy, that could, excuse me, give us a reason to revisit our Morgan Stanley price target at $150, and maybe down the road, the one for Bank of America, as well.

Now, I also want to make one last comment just real quick. This morning when PayPal reported, it made the comment that as it moved through the quarter, it observed a slight softening in US retail spending. Now, I'm not going to say that PayPal is the end all, be all of the consumer and retail spending. Surely, they have a role. But I will say this, that comment is going to have us take a deeper look at what Visa has to say about consumer spending trends in the US and abroad, but especially in the US, when they report after today's market close. And then on Thursday, we'll do it again when Mastercard reports.

So with that in mind, folks, we've got a lot coming your way. Things are really going to heat up tomorrow morning, and the pace is just going to be blistering for the rest of Wednesday, Thursday, and into Friday. So please be sure to check your emails, check your alerts. We want to make sure you're getting our latest thoughts. And should we make any moves with the portfolio, we want to make sure that you are right there with us. Thanks for watching.