Five things to know before the stock market opens

Trading review: current reports, trends, indices, stock prices, bonds, foreign currency, commodities, and analyst recommendations. 08:20.

1. Stock market

Trading in Tel Aviv will open this morning against the backdrop of uncertainty surrounding the agreement between the USA and Iran and good reports from two AI stocks on Wall Street. The price of oil is rising this morning by 0.5% to $89.5, completing six consecutive days of gains, the longest winning streak since April. Cautious optimism is being recorded this morning in the markets in light of the uncertainty surrounding the agreement between the USA and Iran and good reports from two AI stocks on Wall Street.

Bank stocks are expected to be in focus again today. After yesterday's excellent report from Bank Hapoalim, this morning Bank Leumi reported the highest quarterly profit ever for a bank in Israel - 2.83 billion shekels. In contrast, the International Bank, managed by Eli Cohen, recorded an 8.5% decrease in net profit. Dual-listed stocks will not have much influence this morning, most of them without a significant arbitrage gap. Two of them will balance each other out: Tower will fall by about 3% at the opening, Camtek will rise by a similar rate. Nayax, which lost about 25% in the last two days, will open with a rise of over 3%.

Yesterday, slight declines were recorded after a volatile day that was mostly spent in declines of up to 1%, which weakened towards the end of the day. The TA-35 index, which traded with declines for most of the day, moved to a slight rise towards the close. On the other hand, the TA-90 index continued the negative trend. TA-125 finished with a slight decline of 0.1%. The banking index stood out with an opposite trend with a rise of 2.5% after the publication of good reports from Bank Hapoalim. In contrast, the insurance index fell by 2%.

Elbit Systems dragged the entire defense sector down. The company published financial reports with 16% growth in revenue and 28% in net profit. It seems that investors expected more, especially in light of the high valuation of the stock. Nayax continued its sharp negative reaction after the disappointing reports it published the day before yesterday and shed a quarter of its value in two days. The company showed a 28% increase in revenue but moved to a loss following one-time expenses for stock-based compensation. The investment house William Blair estimates that the sharp decline in the stock following the reports is actually a buying opportunity. At William Blair, they point to long-term growth engines such as expansion in the electric vehicle charging field and expansion into financial services (including the application to establish a bank in the USA), and slightly raised the revenue forecast for 2026 to about $518 million.

Torii also reacted with a sharp decline after the publication of the report for the second quarter, which was published this morning. Here too, it seems that investors were disappointed despite the nice growth the company showed in both revenue and profit, but the expectation was for better results.

Also yesterday: Teva stock stood out positively following the announcement by the rating agency Moody's on raising the company's credit rating. Oil and gas stocks, Delek and Tamar Petroleum, led the gains in the oil and gas index, against the backdrop of the global surge in energy prices.

In Asia, a mixed trend is being recorded: KOSPI in South Korea is jumping by about 5%, Nikkei in Japan is unchanged, Hang Seng in Hong Kong is falling by 1%, the Shanghai index in China rose with a slight decline. An early positive signal for the chip sector on Wall Street, the two from South Korea, SK Hynix and Samsung Electronics, are jumping this morning, and it comes after the strong reports of Corowave and the optimistic forecast of Super Micro, the two jumped sharply in after-hours trading on Wall Street. Futures in New York are trading this morning with a slight rise of up to 0.2%.

Yesterday, Wall Street closed with declines, led by technology stocks, after hopes for the reopening of the Strait of Hormuz faded and doubts increased regarding the possibility that the USA and Iran would reach a broader agreement that would end the conflict. The S&P 500 fell by 0.3%, the Nasdaq lost 0.6%, and the Dow Jones fell by 82 points, 0.2%. The communications services sector was the weakest in the index, as Alphabet (Google) and AppLovin lost 3% and 5%, respectively. Alphabet has been under pressure recently, on its way to a fourth day of declines out of five, after Google announced last week the reorganization of its artificial intelligence divisions. The technology sector also fell. Nvidia, which started the day with gains following its announcement of a partnership with six large asset managers to raise more than $500 billion for AI infrastructure, lost the gains. Apple fell by more than 1%. The declines stemmed from the rise in oil prices and the increase in uncertainty surrounding the conflict in the Middle East. A senior official in Iran's Supreme National Security Council reiterated that the Strait of Hormuz would not be reopened until Iran's demands were met, according to Reuters. WTI futures rose by about 1% and traded above $83 per barrel, while Brent climbed by about 1% above $88.

Investors are turning this morning to key inflation data: the Consumer Price Index (CPI) for July will be published this afternoon and the Producer Price Index (PPI) will be published on Thursday. The data may be especially important after the weak employment report published recently, which complicated the situation for the Federal Reserve.

Israeli companies on Wall Street: Elbit fell sharply despite excellent results for the quarter - the company concluded it with further growth in the order backlog to a new record of $32 billion (compared to $28 billion at the end of last year). Ilya Fainer, an analyst at Leader Capital Markets, estimates that "the reaction in the stock mainly reflects the very high expectations of investors on the eve of the reports, and the high sensitivity in the stock after the sharp gains recorded in recent months". The trading and investment platform, eToro, also fell after announcing an agreement to acquire the American brokerage TradeZero.

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2. Bond markets

At Meitav, they note that the corporate bond market in Israel continues to demonstrate impressive resilience, but also complacency. The investment-grade corporate bond indices (Tel Bond Shekel and Tel Bond 60) have achieved a significantly higher yield since the beginning of the year than the corresponding indices abroad. "The gap can be explained, among other things, by the fact that in Israel, unlike many other countries, the interest rate is in a downward trend, which also supports the corporate channel".

"However, in our assessment, investors are underpricing the risk. The real estate stock index has fallen by more than 20% from the peak, but the bond spreads of companies in the sector have remained close to historical lows. In 2022-2023, a similar decline in real estate stocks was accompanied by a significant increase in bond spreads. The decline in real estate company stocks has fundamental economic reasons, concerning not only the damage to profitability, but also the weakening of the financial strength of companies in the sector".

Also in the corporate bond market - the rating agency Moody's raised the credit rating of the pharmaceutical giant Teva to Baa3 from Ba1, with a stable outlook. This is the international credit rating given to Teva, and according to Moody's, the rating upgrade reflects the success of the pharmaceutical company's "return to a path of growth" strategy. Moody's noted Teva's diversification of income sources, the improvement in operating profit margins and free cash flow, alongside the expectation that Teva will continue to reduce its debt in the next year to year and a half. The price of Teva bonds (maturing in 10 years) which trade on the Frankfurt Stock Exchange with a yield to maturity of 5.83%, has risen in the last year by 2.3%.

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3. Commodity and currency markets

The volatility in the foreign exchange market continues, as the dollar returns to strengthen and its representative rate was set at 3 shekels. This is after it fell at the beginning of the week for the first time since July below the 3 shekel threshold. At Meitav, they say that in the absence of security shocks, the shekel's rate is expected to depend mainly in the coming months on the behavior of the American stock market. Rafi Gozlan, chief economist at IBI Investment House, estimates that "the strengthening of the shekel in the current environment is not trivial". According to him, "the increase in expectations for an interest rate hike in the USA supports the dollar globally, while the pressure for the shekel to weaken may increase if the rise in yields also leads to a weakening in the stock market. Locally, the halting of the downward trend in the exposure rate of institutional investors, political uncertainty, and the policy of the Bank of Israel, which attaches very high importance to the exchange rate, all these are factors that support stabilization and even a tendency for the shekel to weaken from current levels".

Also in the currency market - the effect of the joint intervention of Japan and the USA in the foreign exchange market is fading, and the yen is weakening again and approaching 160 yen to the dollar - a level considered a threshold at which the authorities in Japan may consider further intervention. This is a significant reversal for the Japanese currency, which strengthened sharply after the joint intervention last month. One of the reasons for the yen's weakness is the continued activity of Carry Trade transactions. According to Derek Halpenny from MUFG Bank, the trend may continue as long as stock markets show resilience and volatility in the markets remains low.

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4. Macro

An important inflation report to be published this afternoon may give the Federal Reserve a little breathing room in its fight against inflation. The Consumer Price Index (CPI) for July, to be published by the Bureau of Labor Statistics, is expected to indicate only a moderate rise: 0.1% in the general index and 0.2% in the core index, which does not include volatile food and energy prices, according to the Dow Jones consensus. In annual terms, the indices are expected to stand at 3.4% and 2.5%, respectively - a decrease of 0.1 percentage points in each of them compared to June.

Although the annual inflation rates will still be significantly higher than the Fed's 2% target, two consecutive moderate monthly figures may allow members of the Fed's Open Market Committee to buy a little time before they decide on a change in interest rates. Bank of America, for example, still expects three interest rate hikes in the coming months. The bank's economists wrote to clients that the weak employment report for July "did not change the overall picture in the labor market - it is stable. And more importantly, the Fed's response to the data is heavily biased towards inflation data, as evidenced by the recent statements of senior Fed officials".

According to the bank, if the Fed's core inflation index records an average increase of 0.25% per month over the next two months, "it is almost guaranteed that the Fed will start raising interest rates in September". On the other hand, an average increase of less than 0.2% will delay the interest rate hike, while any figure between these two thresholds will make the September decision a "coin toss". In such a case, the decision will depend on Fed Chair Kevin Warsh - and on the question of whether recent reports that he is open to interest rate hikes if necessary actually reflect his position, or whether his more dovish statements at the July press conference better reflect his response to the data.

For us, the focus this week will be on inflation data with the publication of the Consumer Price Index for July, which will be published on Friday. The forecast of the Harel investment house is for a rise of about 0.3% led by a seasonal rise in vacation and housing prices. Despite the positive index, inflation in the last 12 months is expected to remain around 1.6%.

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5. Forecast

Strategists at JPMorgan raised their forecast for the S&P 500 index for the second time in two months, citing the strength of corporate earnings and the return that the huge investments in artificial intelligence are beginning to yield. The team led by Dubravko Lakos-Bujas now expects the American stock index to rise to 8,000 points, a target reflecting a rise of about 3% from the closing level on Friday. In June, the strategists raised the target to 7,800 points, compared to 7,600 points previously. The new forecast is slightly higher than the average of 20 strategists included in the Bloomberg survey.

The second-quarter earnings season provided evidence that the capital expenditures of technology giants operating AI infrastructure on a massive scale, known as "hyperscalers", are turning into revenue through demand from customers, the bank's analysts said. They pointed to stronger growth in the cloud sector and an increase in the order backlog of Alphabet, Amazon, and Microsoft, which they said should reduce concerns regarding the return on the capital they are investing. "As the high order backlog turns into revenue that will be recognized in the reports, cloud growth is expected to remain well-supported, thereby providing confirmation for the increase in capital expenditures on AI," they wrote. "Among all hyperscalers, demand indicators remain high and continue to rise."

The S&P 500 index has returned to peak levels after corporate earnings jumped by 32%, one of the strongest gains ever recorded. Much attention has been paid to the technology giants' spending on AI and its impact on cash flow. The bank expects investments in AI to continue to rise, with the technology expected to account for more than half of the total capital expenditures, amounting to about $1.5 trillion, of S&P 500 companies this year. According to the forecast, the share of technology in spending is expected to continue to grow. Strategists at banks including Deutsche Bank, Citigroup, and Goldman Sachs are also among the most optimistic voices regarding American stocks this year. On average, the strategists expect the S&P 500 index to rise to 7,845 points by the end of the year, about 1% above its current level.