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Market Snapshot
briefing.com
| Dow | 31795.95 | -42.82 | (-0.13%) | | Nasdaq | 10976.27 | -222.70 | (-1.99%) | | SP 500 | 3827.55 | -31.63 | (-0.82%) | | 10-yr Note | +7/32 | 4.02 |
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| | NYSE | Adv 1846 | Dec 1271 | Vol 1.0 bln | | Nasdaq | Adv 2639 | Dec 2032 | Vol 5.1 bln |
Industry Watch
| Strong: Health care, Energy, Industrials, Consumer Staples |
| | Weak: Communication Services, Information Technology, Consumer Discretionary, Real Estate |
Moving the Market
-- Disappointing quarterly results from Alphabet and Microsoft
-- Pullback in Treasury yields; 10-yr note yield falling towards 4.00%
-- Strength below index level performance, which is weighed down by mega caps
-- Bank of Canada raising policy interest rate by 50 bps versus the expected 75 bps
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Closing Summary
26-Oct-22 16:30 ET
Dow +2.37 at 31841.14, Nasdaq -288.12 at 10910.85, S&P -28.51 at 3830.67
[BRIEFING.COM] The stock market had a choppy session today. The S&P 500 was above its 50-day simple moving average (3860.02) and up 0.7% at today's high. It closed with a loss of 0.7%. The major averages were steered by price action in the mega cap stocks.
Alphabet (GOOG 94.82, -10.11, -9.6%) and Microsoft (MSFT 231.32, -19.34, -7.7%) led the downside charge following their earnings reports, yet worries about what may come for Apple (AAPL 149.35, -2.99, -2.0%) and Amazon.com (AMZN 115.66, -4.94, -4.1%), when they report later this week, undercut the heavily-weighted and widely-held stocks.
The Dow Jones Industrial Average was able to close just a whisker above the flat line thanks in part to the earnings-driven gain in Visa (V 203.33, +8.95, +4.6%). Gains were limited, however, due to a big loss in Boeing (BA 133.79, -12.86, -8.8%). The company reported disappointing quarterly results and said its path to recovery is taking a bit longer than expected driven by the challenging macro environment. Supply constraints continue to impact production in both its commercial and defense businesses.
There was underlying strength in today's trade, however, as the Invesco S&P 500 Equal Weight ETF (RSP) closed with a 0.2% gain. Also, advancers led decliners by a roughly 4-to-3 margin at both the NYSE and the Nasdaq.
Factors supporting the broader market included favorable quarterly results from names like Harley-Davidson (HOG 41.80, +4.68, +12.6%) and Bristol-Meyers (BMY 74.45, +1.68, +2.3%), a growing belief that the Fed will soften its approach after the November meeting, and a pullback in Treasury yields. The 10-yr note yield fell nine basis points to 4.02% and the 2-yr note yield fell four basis points to 4..42%.
Roughly half of the 11 S&P 500 sectors closed with a gain, led by energy (+1.4%) amid rising oil prices. WTI crude oil futures rose 3.4% to $87.86/bbl.
Meanwhile, the communication services sector (-4.8%) was the worst performer by a wide margin, largely due to Alphabet and Meta Platforms (META 129.82, -7.69, -5.6%). Information technology (-1.1%) was another top laggard thanks to its mega cap components, but its losses were limited by big earnings-driven gains in Enphase Energy (ENPH 291.87, +26.28, +9.9%) and Visa.
Small and mid cap stocks fared better than their larger peers today. The Russell 2000 (+0.5%) and S&P Mid Cap 400 (+0.2%) both logged a modest gain on the day.
Ahead of Thursday's open, Comcast (CMCSA), Anheuser-Busch InBev (BUD), Caterpillar (CAT), Merck (MRK), Northrop Grumman (NOC), Honeywell (HON), AutoNation (AN), McDonald's (MCD), Mastercard (MA), and Altria (MO) are set to report earnings.
Thursday's economic data includes:
- 8:30 ET: Advance Q3 GDP (Briefing.com consensus 2.3%; prior -0.6%), advance Q3 Chain Deflator (Briefing.com consensus 5.3%; prior 9.0%), weekly Initial Claims (Briefing.com consensus 220,000; prior 214,000), Continuing Claims (prior 1.385 mln), September Durable Orders (Briefing.com consensus 0.6%; prior -0.2%), and Durable Orders ex-transportation (Briefing.com consensus 0.2%; prior 0.2%)
- 10:30 ET: Weekly natural gas inventories (prior +111 bcf)
Reviewing today's economic data:
- Weekly MBA Mortgage Application Index -1.7%; Prior -4.5%
- September Adv. Intl. Trade in Goods -$92.2 bln; Prior -$87.3 bln
- September Adv. Retail Inventories 0.4%; Prior 1.4%
- September Adv. Wholesale Inventories 0.8%; Prior was revised to 1.4% from 1.3%
- September New Home Sales 603K (Briefing.com consensus 575K); Prior was revised to 677K from 685K
- The key takeaway from the report is that it reflects how the spike in mortgage rates has created affordability pressures for lower-income buyers. The jump in median and average selling prices was skewed by higher-priced homes accounting for a larger percentage of total new homes sold.
Dow Jones Industrial Average: -12.4% YTD
S&P Midcap 400: -15.9% YTD
S&P 500: -19.6% YTD
Russell 2000: -19.6% YTD
Nasdaq Composite: -29.9% YTD
Market little changed ahead of the close
26-Oct-22 15:35 ET
Dow +8.18 at 31846.95, Nasdaq -224.15 at 10974.82, S&P -27.59 at 3831.59
[BRIEFING.COM] The stock market is little changed heading into the close.
After the close today, Meta Platforms (META), Ford (F), KLA Corp. (KLAC), Teladoc (TDOC), Molina Healthcare (MOH), O'Reilly Auto (ORLY), V.F. Corp (VFC), and United Rentals (URI) headline the earnings reports.
Ahead of Thursday's open, Comcast (CMCSA), Anheuser-Busch InBev (BUD), Caterpillar (CAT), Merck (MRK), Northrop Grumman (NOC), Honeywell (HON), AutoNation (AN), McDonald's (MCD), Mastercard (MA), and Altria (MO) are set to report earnings.
Thursday's economic data includes:
- 8:30 ET: Advance Q3 GDP (Briefing.com consensus 2.3%; prior -0.6%), advance Q3 Chain Deflator (Briefing.com consensus 5.3%; prior 9.0%), weekly Initial Claims (Briefing.com consensus 220,000; prior 214,000), Continuing Claims (prior 1.385 mln), September Durable Orders (Briefing.com consensus 0.6%; prior -0.2%), and Durable Orders ex-transportation (Briefing.com consensus 0.2%; prior 0.2%)
- 10:30 ET: Weekly natural gas inventories (prior +111 bcf)
Energy prices rise; stocks continue to fall
26-Oct-22 15:05 ET
Dow -42.82 at 31795.95, Nasdaq -222.70 at 10976.27, S&P -31.63 at 3827.55
[BRIEFING.COM] The major averages are little changed in the last half hour continuing a steady trend lower.
Meta Platforms (META 128.98, -8.54, -6.2%) continues to move lower ahead of its earnings report after the close.
Energy complex futures settled the session higher. WTI crude oil futures rose 3.4% to $87.86/bbl. Natural gas futures rose 0.8% to $5.66/mmbtu.
Separately, the CBOE Volatility Index is down 2.5%, or 0.72, to 27.74.
Assurant slips following Q3 guidance, Universal Health jumps after Q3 beat
26-Oct-22 14:25 ET
Dow +68.59 at 31907.36, Nasdaq -183.80 at 11015.17, S&P -17.61 at 3841.57
[BRIEFING.COM] The benchmark S&P 500 (-0.46%) is firmly in second place on Wednesday afternoon.
S&P 500 constituents Assurant (AIZ 136.43, -16.31, -10.68%), F5 Networks (FFIV 140.99, -12.48, -8.13%), and Seagate Tech (STX 53.67, -4.33, -7.47%) dot the bottom of today's standings. AIZ slips on Wednesday after last night's Q3 prelim report; specifically, Truist analysts pegged AIZ's report as displaying higher than expected Q3 catastrophe losses as management cited weakness in Global Lifestyle related to a softer macro where FX remained a headwind, FFIV dips following underwhelming guidance, while STX missed and guided down in addition to announcing staffing cuts.
Meanwhile, Universal Health (UHS 108.91, +12.23, +12.65%) is atop the index following last night's Q3 beat.
Gold propped up by falling yields, dollar
26-Oct-22 14:00 ET
Dow +97.73 at 31936.50, Nasdaq -171.12 at 11027.85, S&P -14.09 at 3845.09
[BRIEFING.COM] The tech-heavy Nasdaq Composite (-1.53%) has carved out an afternoon bottom in the last half hour, still at the bottom of the standings, down 171 points.
Gold futures settled $11.20 higher (+0.7%) to $1,669.20/oz, aided today by a firm decline in the dollar and an equally noticeable move lower in treasury yields.
Meanwhile, the U.S. Dollar Index is down about -1.0% to $109.08.
Spotify stumbles on weak gross margin guidance as macroeconomic softness weighs (SPOT)
Spotify (SPOT -12%) missed the mark in Q3, falling short on earnings and gross margins. Although revs topped estimates, as did total monthly active users (MAUs) and premium subscribers, investors remain concerned with the streaming platform's weak margins.
Gross margins fell 200 bps yr/yr to 24.7%, slightly below SPOT's forecast of 25.2%. The company pointed to three primary factors that caused the contraction: an accrual adjustment from a renewal of a large publishing contract, adverse impacts on top-line advertising growth due to macroeconomic weakness, and currency fluctuations.
SPOT tried to alleviate concerns by pointing out that it is not seeing anything from its Q3 results that would change its view of the margin potential it outlined at Investor Day in June. That is, SPOT is still targeting 40% margins over the long haul. Nevertheless, investors are not displaying much confidence in this target being achieved anytime soon following SPOT's margin decline in Q3, as well as its underwhelming near-term outlook. The company expects gross margins to dip another 20 bps sequentially in Q4, guiding to 24.5% margins.
Outside of SPOT's weak margins, the company still delivered some solid highlights in Q3.
- Revs saw a 21.4% bump yr/yr, growing to €3.04 bln as total MAUs and premium subs climbed by double-digits, boasting 20% and 13% growth, respectively.
- It is also worth noting that SPOT's MAU growth accelerated slightly from Q2, where the metric grew by just 19% yr/yr.
- Heading into Q4, SPOT expects MAU net additions to finish FY22 materially higher, a more upbeat outlook than its prior expectation of MAU net addition growth coming in at roughly similar levels to FY21.
- Founder and CEO Daniel Ek also dished out some upbeat color on the business's ability to grow market share in the event of a worsening economy. Mr. Ek pointed to how SPOT benefited from a lower advertising cost during the pandemic's early stages, which drove its customer acquisition cost down, helping it capture additional market share.
Still, the market is struggling to shake what looks to be a challenging road ahead for SPOT regarding moving the needle on margin growth. With shares stuck in a downward trend, losing over 60% on the year, SPOT has significant ground to make up. However, SPOT has a commanding presence in the audio streaming market, which should help it find its footing sooner rather than later.
Microsoft heads lower despite upside as Azure guidance was underwhelming (MSFT)
Microsoft (MSFT -6%) is trading lower despite reporting upside for EPS and revenue for Q1 (Sep) last night. After a very rare EPS miss in Q4 (Jun), it was nice to see MSFT return to reporting upside again. However, we think the main reasons for the weakness today is Azure coming up a bit light in SepQ and the DecQ guidance was a bit weak. MSFT also made some cautious comments on some other segments during the call.
- Let's start with Azure, which we think is the main reason for today's weakness. Azure grew 35% (+42% constant currency, or CC), which was a point below the +43% CC prior guidance and a decline from +46% CC in JunQ. Probably the bigger eye-opener was the DecQ guidance at just +37% CC. The declines have been driven by the continued moderation in Azure consumption growth as MSFT helps customers optimize current workloads, while they prioritize new workloads.
- Recall in our preview, we noted that the NY Post reported on Monday (see InPlay archive for link) that Amazon (AMZN) was freezing hiring in parts of its web services division. That made us nervous about Azure, and especially the guidance for DecQ. And that turned out to be the case. It also makes us nervous for when Amazon reports its AWS segment tomorrow after the close.
- Also, recall in our preview, we expressed concerns about a weakening online ad space following SNAP's disappointing results last week. Last night, MSFT noted reductions in customer advertising spend, which also weakened late in the quarter. That impacted Search and news advertising and LinkedIn. We never like to see a quarter end badly because it likely means the next quarter will be weak as well. And the timing for the weakness is not great, considering that Netflix is launching its first ad-supported subscription plan next month (powered by Microsoft).
- The weakness extends beyond Azure and online ads. In its consumer business, PC market demand further deteriorated in September, which impacted its Windows OEM and Surface businesses. Also, FX had a big impact on results as the US dollar strengthened. FX decreased total company revenue by 5 points. The silver lining was that the FX impact was generally in-line with the company's expectations.
Overall, the headline numbers were good for Microsoft, and a nice bounce back after a rare miss last quarter. However, Azure has been a stellar growth segment for MSFT, but it seems to be slowing a bit. That DecQ Azure guidance is a pretty big sequential decline (Amazon may report a similar decline for its AWS segment tomorrow, so use caution). Then when you add in weakness in online ads, PCs and FX, that makes for several headwinds. Also, the stock had been rebounding a bit since mid-October, which tells us sentiment may have been a bit too high heading into this report.
Alphabet's third straight earnings miss shows gravity of the advertising spending slowdown (GOOG)
For the first time in over five years, Alphabet (GOOG) has missed quarterly EPS expectations in three consecutive quarters as advertisers continue to scale back on spending. In Q3, total advertising revenue increased by a pedestrian 2.5%, while total revenue growth of just 6% marked GOOG's lowest growth rate in recent history -- excluding the 2Q20 pandemic quarter.
On the one hand, the weak results aren't overly surprising in the wake of Snap's (SNAP) bleak earnings report and outlook from October 21. Recall that the social media company disclosed that advertising revenue growth decelerated further during Q3 due to macroeconomic headwinds, increased competition, and Apple's (AAPL) privacy changes. On the other hand, GOOG's business has generally held up better than SNAP's and other digital advertising dependent companies like Meta Platforms (META) and Pinterest (PINS).
In fact, it can be argued that GOOG's search ad segment has benefitted from the challenges facing social media companies. Search is essentially insulated from AAPL's iOS changes, which has made targeted advertising much more difficult. Therefore, advertisers may view GOOG's dominance in search as a much safer option with a stronger return on investment. Even search, though, has succumbed to the downturn in advertising spending this quarter as revenue grew by a modest 4% to $39.5 bln, missing analysts' expectations. Unsurprisingly, mortgages, loans, and crypto were a few of the weakest areas.
Search wasn't the only issue for GOOG in Q3.
- Another unwanted first for GOOG was that YouTube posted its first ever revenue decline, down about 2% yr/yr to $7.07 bln, missing analysts' expectations by a wide margin. A combination of macro-related pressures (inflation, rising interest rates, stronger dollar) and intensifying competition from TikTok are taking a toll on YouTube.
- The company is battling TikTok by prioritizing YouTube Shorts. During last night's earnings call, GOOG stated that Shorts has about 30 bln daily views, which is the same figure it disclosed last quarter.
- Monetizing Shorts in a meaningful way is the next major step for GOOG. Early next year, the company plans to introduce revenue sharing with content creators.
- One of the more surprising items from the earnings report was that total expenses increased by nearly 18% yr/yr to $52 bln. GOOG has made it a point that it intends to slow its hiring pace, but that doesn't appear to be the case just yet as it added nearly 13,000 employees during Q3.
- With operating expense growth outpacing revenue growth by a good clip, GOOG's operating margin slid to 25% from 32% in the year-earlier quarter.
- CFO Ruth Porat did note during the earnings call that Q4 headcount additions will slow to less than half of the number added in Q3.
- In the Other Revenue category (Google Play, Apps, Pixel phones), GOOG is seeing a slowdown in consumer spending, particularly on Google Play as gaming activity has decreased. For the quarter, Other Revenue inched higher by 2% to $6.9 bln.
Google Cloud was a bright spot with revenue growing by 38% and operating loss improving to ($699) mln from ($858) mln last quarter. The solid growth is encouraging, illustrating that large enterprises are still investing in technology at a healthy rate, despite the macroeconomic uncertainty. Overall, though, it was a discouraging quarter that showed that even GOOG is not immune to this pullback in advertising spending.
Texas Instruments slides on Q4 guidance as weakness broadens into the industrial market (TXN)
Texas Instruments (TXN -1%) may have topped earnings and sales estimates in Q3, but its Q4 guidance and bearish commentary spurred a sell-the-news reaction resonating throughout the market today. TXN expects most of its end markets to decline sequentially in Q4, setting up its EPS and revenue forecasts to come in meaningfully below consensus. TXN expects earnings of $1.83-2.11, a 15.5% drop yr/yr at the midpoint, and revs of $4.4-4.8 bln, a 5% dip at the midpoint and TXN's first quarterly decline since 2Q20.
The most surprising comment TXN made was that the weakness in personal electronics is now leaking into the industrial market, which, combined with automotive, comprises over 60% of total revs and has also been an outperformer for TXN in recent quarters. This was also notable given that General Electric (GE) remarked that some of its end markets within the industrial sector shone brightly in Q3, including aerospace and automation.
- So what happened with industrial in Q3? TXN did not dive too deep into the specifics, stating that there was not a single place or group of customers where weakness sprung, only that weakness is broadening, illustrated by a softening in order rates. TXN followed this up by commenting that weakness is trickling into most of its markets moving into Q4, aside from automotive. As a result, TXN's industrial market growth was about flat sequentially.
- Although not as surprising as the slowdown in the industrial market, personal electronics weakened further from Q2, declining by a mid-teens percentage.
- Conversely, automotive remained an area of strength for TXN in Q3, boasting around 10% growth sequentially. TXN also expects automotive to see sequential growth in Q4, an outlier compared to its other markets.
- TXN is very optimistic about the long-term trends within automotive, buoyed by the electrification of vehicles, advanced driver assistance systems, and infotainment screens. Still, TXN acknowledged that given the lasting tailwind experienced in automotive, the market will eventually roll over.
- Taiwan Semi (TSM) shared similar comments earlier this month, noting that although automotive remains a steady end market, it may start to see the possibility of adjustment down the road.
- Other pockets of relative strength stemmed from communications equipment, which was up high single digits from Q2, and enterprise systems, which climbed by mid-single digits sequentially.
Overall, TXN's near-term outlook is sparking added nervousness amongst investors that weakness, mostly confined to personal electronics, will continue to spread throughout many additional markets, having a materially adverse effect on the broader economy. Although the short run is shaping up to be volatile, TXN remains a solid choice within the semiconductor industry, given its market presence and its commitment to return free cash flow to investors through its $15 bln share repurchase program and consistent dividend hikes.
General Electric held back by its Renewable Energy segment again, but spin offs remain on track (GE)
Ongoing struggles in General Electric's (GE) Renewable Energy segment, which experienced a 41% nosedive in orders, caused the industrial company to miss 3Q22 EPS estimates and cut its FY22 EPS and free cash flow guidance once again. In Q2, the company reduced its FY22 free cash flow outlook to $5.5 bln from $6.5 bln, while CEO Larry Culp stated that the company is trending toward the lower end of its $2.80-$3.50 EPS guidance. Now, the company is forecasting free cash flow of $4.5 bln and EPS of $2.40-$2.80.
Along with GE's Power segment, Renewable Energy is set to be spun off into a separate company called Vernova, currently scheduled for early 2024. Before that transaction occurs, GE will spin off its Healthcare unit in early 2023. Ultimately, GE will become a standalone aviation company, providing jet engines, aircraft parts, and maintenance for commercial and defense customers.
Similar to recent quarters, the Aerospace segment was the clear standout in Q3.
- Revenue jumped by 25% to $6.7 bln, led by a 33% increase in services. Surging demand for air travel is providing the primary catalyst as airlines order more parts and take their aircraft in for more maintenance due to rising flight activity.
- Aerospace was also the only segment to achieve margin expansion. Higher services volume and favorable pricing pushed segment margin higher by 280 bps to 19.1%.
- Based on the strong earnings reports from the commercial airline industry, it's not surprising that GE's outlook for Aerospace is bullish. Specifically, the company reaffirmed its expectation to generate top-line growth of more than 20% for FY22, with margins in the high-teens.
- The Power Segment, which manufacturers gas and steam turbines for the oil and gas industry, saw orders increase by 20%, but revenue was lower by 5% to $3.5 bln. Supply chain issues are still problematic, causing uneven timing for shipments of certain turbines. GE is anticipating low-single-digit growth for Power in FY22 with margins expanding.
- In the earnings press release, Culp confirmed that the Healthcare segment is on track to be spun off during the first week of January. With that transaction fast approaching, it was a good time for Healthcare to post one of its strongest quarters in recent history. Driven by strong backlog execution, revenue increased by 10% to $4.6 bln, and margin stabilized, increasing by 100 bps sequentially.
- Last quarter, lockdowns in China created significant supply chain disruptions, preventing GE from fully meeting the healthy demand. Revenue in Q2 was up by just 4% while margin contracted by 300 bps to 14.4%.
The main takeaway is that GE's downwardly revised FY22 EPS and free cash flow guidance is weighing on the stock, offsetting notable strength in the Aerospace segment. However, next quarter figures to be the last quarter in which this current version of GE is intact. Once the Healthcare and Energy segments are spun off, GE's Aerospace segment will be free to fully capitalize on the ongoing recovery in the airline industry.
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