Market snapshot: stocks retreat but Jet2 surges 10%

The waves of doubt from Asia washed on to US shores, where Samsung Electronics shares had fallen by 7% despite a blockbuster set of numbers. Not only does this bring into question AI valuations alongside an increasingly high bar of expectation, the imminent second-quarter earnings season in the US is now primed for the most severe of tests and thus the possibility of widespread disappointment to all but the strongest of profit reports.

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The calls are becoming increasingly loud that the levels of capital investment could struggle to produce the productivity gains and profits to justify a decent rate of return, if at all. As such, US markets struggled to make headway Tuesday as investors sought solace in sectors such as healthcare and financials as the rotation continued, and in the likes of Walmart Inc (NASDAQ:WMT) which announced product price cuts to maintain its domestic dominance.

Sentiment was also negatively affected on what is becoming a ceasefire in the Middle East in name only. Reports of an Iranian attack on a liquefied natural gas tanker in the Strait of Hormuz was followed by retaliatory US strikes in the region, leading to a spike of more than 3% in oil prices. The US also reimposed crude oil sales sanctions on Iran, all of which casts real doubt on the longer-term outlook for peace in the Middle East.

While the Federal Reserve’s minutes later today will not include this latest development, the central bank’s clear focus on inflation will need to be reassessed, putting the possibility of a rate hike this year back on the table.

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Even so, losses in US markets were relatively contained, with the main indices comfortably ahead in the year so far. Gains of 10.1% for the Dow Jones, 9.6% for the S&P500 and 11.1% for the Nasdaq have been achieved despite a cocktail of concerns over recent months, although these pressures are beginning to show some ominous signs that volatility is here to stay.

Inevitable gains for index heavyweights Shell (LSE:SHEL) and BP (LSE:BP.) were insufficient to stem an opening decline in the FTSE100, where a broad-based markdown across almost all sectors reflected a strongly risk-off approach.

The mining sector is at the eye of the storm, while International Consolidated Airlines Group SA (LSE:IAG) fell on the oil price rise despite two broker upgrades. The moves were symptomatic of investor concern despite the defensive appeal of the premier index, whose gains were further shaved but still stands higher by 6.5% in the year to date.

Jet2 FY

Jet2  Ordinary Shares (LSE:JET2) has reset expectations lower through the year, due largely to a fast-moving late booking environment which was then compounded by the Middle East conflict. Operating profit of £439.6 million in the year to 31 March represented a fall of 2% on the previous year, in line with the range guidance in April of £435 to £440 million, but well below the previous £453 million at the half-year numbers. Gatwick start-up costs of £11 million, from where the group began flying in March, and increased industry costs of £50 million were additional headwinds.

Even so, there were a number of more positive statements within the results, such as revenues which grew by 4% to £7.48 billion, a record for the group. Passenger numbers also flew to new highs, up by 5% to 20.83 million, while a healthy net cash balance of £2.01 billion enabled the announcement of a fresh £250 million share buyback programme, which is a clear statement of confidence in prospects. In terms of the immediate outlook, there has been strong booking momentum in recent weeks, while the 7.7% increase in on-sale capacity for the summer also positions the group well.

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Of course, the macro environment remains cloudy and the propensity of customers to book late will continue to provide challenges. More broadly, investing in airline shares generally has never been for the faint hearted. The ferocity of competition and economic pressure remain as potential headwinds, as do some of the other issues which have historically blighted the sector, such as virus outbreaks, industrial action, volcanic dust clouds and higher fuel costs. The current macroeconomic and geopolitical concerns add to a potentially dangerous mix, underlying some of the potential hazards of investing in the airline sector.

However, and contrary to popular belief, Jet2 is no minnow. It is the third-largest airline in the UK behind British Airways and easyJet (LSE:EZJ), ahead of TUI and Virgin Atlantic. The company has opted to remain on AIM rather than seeking a full listing, and its £2.6 billion market cap makes it the second-largest company on its chosen index. If it were to switch to a full listing, it would comfortably enter the upper end of the FTSE250 index.

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The share price reached its peak in June last year, since when a profit warning in September has led to a decline of 24.5% over the last 12 months, as compared to a loss of 4.7% for the wider FTSE AIM 100. Some of that fall has been softened by a 21% bounce in the price over the last three months, much of which was a read across from the takeover bid for easyJet and the possibility of further M&A activity in the sector. And there's been a 10% rally on these results to  10-month high.

However, it remains to be seen whether Jet2 can break out of the current holding pattern, with the shares still 20% shy of pre-pandemic levels, although with a robust balance sheet and clear expansionary plans, the intention is evident. Indeed, the market consensus of the shares as a cautious buy and a strongly positive reaction to the update reflect guarded optimism that Jet2 will deliver on its ambitions.