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U.S. Market Faces Worst Meltdown Since 2020: Here's Why

The leading indices of the U.S. stock market — Dow Jones, S&P 500 and Nasdaq — fell 3.9%, 4.3% and 5.2%, respectively on Sep 14, following the release of the consumer price index (CPI) data that tracks the inflation rate of the country. The continued inflationary pressure seems to be the key reason for the rout in U.S. stocks.

Higher Inflation Rate

Per the data released by the U.S. government yesterday, CPI was up 8.3% year over year for the month of August 2022, higher than the expected 8.1%. Moreover, CPI rose 0.1% month over month against the expectation of a 0.1% decline.

Core CPI, which excludes the more volatile costs of food and energy, was up 6.3% year over year, higher that the estimated 6.1% for the month of August. Price of “Core” products rose 0.6% during August compared to the month of July.

The higher-than-expected inflation rate was the primary reason behind the rout in the U.S. stock market yesterday. A higher inflation rate points to another significant increase in the Fed rate at its policy meeting next week.

Fed Rate Uptrend Likely

The rising inflationary pressure has been a hot topic since early 2022 when the inflation rate reached a four-decade high. The high rate of increasing costs of products, last seen during the 1980s, led the Fed to raise the lending rates by a whopping 75 basis points (bps). The Fed had also indicated during its last meet that it might continue to raise the rates by similar levels during its next meetings based on the inflation scenario.

Based on the current scenario, there is a consensus that the Fed will surely raise the rate next week during its meeting. Almost two-thirds of investors expect a 75 bps increase in rates, while a third estimate a hike of 100 bps. Prior to the surprising inflation report for the month of August, 91% of investors were expecting a 75 bps hike, while the remaining 9% were expecting a 50 bps hike. However, following the latest CPI data, none of the investors expect a 50 bps hike.

Impact on Medical Devices Sector

The Medical Devices companies are already reeling under inflationary pressure along with supply-chain disruptions. The latest CPI data shows that the inflationary pressure is likely to continue for these companies in the upcoming few quarters, hurting their margins. Moreover, rising Fed rates will likely put additional pressure on margins as it will lead to a higher cost of capital, which may drive interest expenses higher.

Pacific Biosciences of California PACB or PacBio, Avantor AVTR and PerkinElmer PKI were among the companies that led the decline in Medical Devices companies as they fell 11.7%, 8.9% and 6.8%, respectively yesterday.

Shares of PACB, AVTR and PKI have declined 70%, 43.7% and 34%, respectively, so far this year compared with the S&P 500’s decrease of 18.2%.

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We note that PacBio had reported a wider year-over-year adjusted loss of 34 cents per share for the second quarter of 2022 although revenues were up almost 16%. The widening loss was due to a significant increase in sales, general and administrative expenses, and research and development expenses. Adjusted total operating expenses of $89.6 million climbed 74.6% year over year. On the second-quarter earnings call, PacBio lowered its financial outlook for full-year 2022 due to broader macroeconomic factors like rising inflation, global supply-chain constraints, volatile capital markets and COVID-led lockdown restrictions. The company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Although Avantor’s second-quarter 2022 adjusted EPS gained 5.7% year over year, it missed the Zacks Consensus Estimate, reflecting higher-than-expected costs and expenses. AVTR lowered its adjusted EPS guidance for 2022 from $1.48 - $1.54 to $1.43-$1.49 on its second-quarter earnings call. The company has Zacks Rank #4 (Sell).

For second-quarter 2022, PerkinElmer reported flat year-over-year revenues while its adjusted earnings declined 18%. Although PKI’s gross margin expanded during the second quarter, rising operating expenses resulted in a decline in operating margin. Continued inflationary pressure is likely to hurt PerkinElmer’s bottom-line going forward. For 2022, the company expects adjusted EPS in the range of $7.80 to $7.90. However, this may change going forward to reflect rising costs. The company has a Zacks Rank of 3.

Macroeconomic factors like tighter financial conditions, global supply-chain constraints and the ongoing geopolitical conflict also raise apprehensions about the financial strength of the companies within the Medical Devices sector. Results for the quarter ending September 2022 will provide more clarity on the extent of the impact of inflationary and other macro headwinds.

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