It’s been a tough month for S&P 500 stocks. September slumps are common, and this month is historically the worst for the index. But new factors are emerging that could keep this month’s losing streak going.
Inflation looks stickier than expected. The Federal Reserve just said interest rates will stay higher for longer. Consumer confidence is falling. Investors are panicking. I spent a ton of time browsing X this weekend, reading retail and institutional trader reactions to last week’s bloodbath. And, honestly, a lot of the analysis was a bit too panicky, eschewing historical perspective for a Chicken Little-style “the sky is falling” screed.
I’m still bullish on the S&P 500’s long-term prospects. Still, the rest of 2023 remains up in the air. If you’re panicky about stocks short-term, you may want to sell these S&P 500 stocks before it’s too late.
S&P 500 Stocks: Nvidia (NVDA)
Nvidia (NASDAQ:NVDA) is a tough stock to bet against, but with today’s bearish sentiment groundswell, it’s also one of the stocks primed to reverse course (if just temporarily). Shares have already pulled back the past three weeks, marking a 15% decline. But if market-wide bearish sentiment holds, Nvidia could easily dip into the mid-$300s.
Even tech perma-bull Cathie Wood is selling Nvidia in spades. She trimmed almost 42,000 NVDA shares from her ARK Genomic Revolution ETF (BATS:ARKG) in the past month, locking in a substantial gain but serving as a harbinger of trouble for the S&P 500 monolith.
Ultimately, nothing really or substantially changed for this “Magnificent 7” S&P 500 stock. But we’re in an era where rates will remain higher for longer. That leads to investors increasingly cycling away from high-flying tech and into safer, fixed-income-focused investment strategies. In that world, stocks like Nividia and its 100x price-to-earnings ratio are primed to fall as those traders take profit and wait out the coming storm.
Adobe (ADBE)
Adobe (NASDAQ:ADBE) transitioned largely to a software-as-a-service (SaaS) model in recent years. Instead of lifetime software licensing, Adobe mostly focuses on recurring subscriptions. The move paid off, as Adobe’s Creative Cloud subscriptions ballooned throughout 2022, making up more than half the firm’s revenue that year. However, shifting winds and consumer trends present a problem for that business model.
Consumers face tighter household budgets, so they’re liable to cut expenses wherever they can. And, while a monthly payment for an occasional-use product like Adobe’s Photoshop or other software might be fine in strong economic times, it’s often the first to go in a constrained economy. Likewise, a glut of free options exist today that serve many of the same functions as Adobe’s product suite, creating less brand loyalty as the switching cost is fairly low.
Adobe is also facing tighter margins in the SaaS sector, although a glance at its financials doesn’t reveal the full extent of the issue. Adobe marked record revenue in its most recent report, with subscription revenue growing 12% year-over-year (YoY). But, at the same time, direct expenses for its Subscription segment rose – generating a 90% gross profit margin on the segment compared to 91% the previous year. That might seem a slim difference, and it is. But as Adobe fights to maintain retention, it’s spending elsewhere supporting the SaaS model – further eating into this S&P 500 stock’s bottom line.
S&P 500 Stocks: Netflix (NFLX)
Netflix (NASDAQ:NFLX) already suffered from the death of FAANG in favor of the Magnificent 7 in the S&P 500, but there’s a further downside for the streaming stock. Although shares, alongside other media stocks, are rising on the hope the writer’s strike is nearly over, a temporary bump isn’t enough to save this stock. Critically, company Chief Financial Officer Spencer Neumann seems bearish. Neumann spoke at a recent investment event, and, though Netflix’s PR team says his remarks are nothing new, his sentiment still serves as a red flag for investors.
Investors should focus on Neumann’s remarks that Netflix’s future growth stats will likely come from revenue per member rather than overall revenue. This means that Netflix is hinging its hopes on squeezing as much cash from existing users as possible rather than growing its market share.
As the company rolls out an ad service and cuts down on password sharing, they’re working to protect its bottom line by extracting value from existing consumers. Almost 80% of Americans hate seeing ads on their streaming service, and fighting password-sharing proliferation won’t likely lead to password pirates creating a new account.
Netflix is admittedly in a tough spot. But the service built itself on an ad-free foundation while turning a blind eye to password sharing. That worked well in a low-interest-rate environment where cash came from elsewhere, but in a world where every cent matters, Netflix will begin pinching those pennies from consumers. But those streamers are pinching pennies at home, and Netflix likely won’t win the battle for the household budget.
Micron Technology (MU)
Micron Technology (NASDAQ:MU) is a strong AI play for investors seeking diversification beyond Nvidia alone. But MU, though strong on its own merit, faces many of the same problems as Nividia that we covered above.
Critically, for Micron’s short-term future, most of its shares are owned by institutional investors. Many of these institutional investors follow similar trading strategies and trends. So, if winds shift against MU in light of new economic developments, the stock could slide rapidly in a domino effect. As a possible harbinger of that risk, insiders are selling shares hand over fist. In the past three months, insiders sold nearly $7 million worth of shares. That alone could spook institutional investors and send shares tumbling.
Ultimately, MU is a strong stock with (arguably) more upside potential than Nividia, considering the latter’s valuation. The company is growing, including a massive India-based packaging plant announced this week. But retail investors holding the S&P 500 semiconductor stock should be nervous by the outsized influence institutional investors hold over the stock, and consider their own position accordingly.
S&P 500 Stocks: Airbnb (ABNB)
Airbnb (NASDAQ:ABNB) is on a roll, but its momentum may soon slow. The company just joined the index, and shares rallied on the inclusion this month. But economic and regulatory winds are shifting, posing a problem for the short-term rental matchmaker and online travel agency.
Already, cities, including New York, are banning short-term rentals. More, including countries throughout Europe, are limiting or restricting short-term stay lengths. This impact on Airbnb’s bottom line is obvious, as lessened supply in hot regions will reduce demand. Furthermore, Airbnb is increasingly forced to expand ad expenses as Google pushes paid and sponsored ads above organic searches. That’s a pricy proposition, but, critically, Airbnb is directly expensing the ad cost to providers – further increasing an already costly experience for those renting homes or rooms.
As more providers become comfortable with renting their property, they may see the ad fee as unnecessary – considering they could advertise their property independently and manage the rental independently, saving a ton in the process. Ultimately, Airbnb is beginning to bite the hands feeding it, the actual property owners and many may decide to jump ship if the costs become too high.
Realty Income (O)
Realty Income (NYSE:O), renowned as the “Monthly Dividend Company,” holds a special significance for S&P 500 value investors. With a well-diversified portfolio of commercial properties, it has long been a reliable source of cash flow for investors. But beneath the surface of dependable dividends, this real estate investment trust faces challenges and limited growth prospects. The REIT sector has witnessed a sharp decline of 30% since 2021, largely driven by the twin forces of rising interest rates and a tightening economic environment. And “higher rates for longer” may mean the pain has just begun for Realty Income.
The company’s real estate and leasehold interests are vulnerable to inflation and interest rate hikes. These factors are enough to put a damper on investor enthusiasm. Realty Income itself acknowledges the difficulty of keeping pace with inflation and other escalating costs through rent increases. Recent signs of rising inflation, with this month showing a similar trajectory, have sent a warning signal to Realty Income investors. Simultaneously, higher interest rates exert additional pressure on the REIT’s property holdings.
Analysts are also expressing reservations about Realty Income’s growth potential. Some assessments suggest that without viable opportunities aligning with its current business model, Realty Income might be compelled to embrace higher-risk strategies as competition intensifies for its traditionally targeted assets. While Realty Income has always been synonymous with stability, the pursuit of greater growth at the expense of that stability could potentially jeopardize the company’s financial health.
Best Buy (BBY)
Somehow, Best Buy (NYSE:BBY) is one of the few specialized brick-and-mortar stores adapted to an online shopping economy. But, though it outlasted past competitors like Circuit City, Best Buy faces a new wave of challenges today.
CEO Corie Barry told analysts recently that the company is facing a crime wave. Notably, thieves are bold enough to break in and “just grab” merchandise before “running out.” Inventory shrinkage, or loss, is a major problem for physical retail stores, and theft makes shrinkage much more difficult to manage. As some states and localities tweak laws to make shoplifting borderline legal, if it’s below a certain monetary threshold, businesses like Best Buy feel the effects most.
But, shrinkage aside, even Best Buy execs aren’t particularly bullish on the company’s short-term prospects. Barry told investors on a call that the rest of 2023 represents “a low point in tech demand.” She does, however, expect trends to reverse in 2024. Still, if management isn’t excited about the rest of the year and its holiday shopping season, investors should also be wary about this S&P 500 stock’s prospects for the rest of 2023.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.