Market Snapshot
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| Dow | 32141.47 | +300.33 | (0.94%) | | Nasdaq | 10754.83 | -156.02 | (-1.43%) | | SP 500 | 3816.65 | -14.02 | (-0.37%) | | 10-yr Note | +27/32 | 3.94 |
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| | NYSE | Adv 1657 | Dec 1388 | Vol 1.0 bln | | Nasdaq | Adv 2078 | Dec 2556 | Vol 4.7 bln |
Industry Watch
| Strong: Energy, Utilities, Industrials, Financials |
| | Weak: Communication Services , Health Care, Information Technology, Consumer Discretionary |
Moving the Market
-- Disappointing quarterly results from Meta Platforms (META); other mega caps also trading down
-- Positive reaction to other earnings reports from names like ServiceNow (NOW) and KLA-Tencor (KLAC), and Dow components Caterpillar (CAT), Honeywell (HON), Merck (MRK), and McDonald's (MCD)
-- Pullback in Treasury yields; 10-yr note yield falling below 4.00%
-- S&P 500 finds technical resistance at 50-day moving average
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Closing Summary
27-Oct-22 16:30 ET
Dow +194.17 at 32035.31, Nasdaq -178.32 at 10732.53, S&P -23.30 at 3807.37
[BRIEFING.COM] Today's trade was mixed as market participants reacted to a slew of earnings reports since yesterday's close. The S&P 500 tested its 50-day moving average (3,850) early on, but couldn't break meaningfully above that level. Ultimately, the major indices all closed near session lows.
Aside from earnings news, other factors that moved the market today included a decision by the ECB to raise its key policy rates by 75 basis points each, an advance Q3 GDP report that showed the U.S. economy returning to expansion mode, and a 10-yr note yield that settled the session below 4.00%.
The 10-yr note yield fell eight basis points to 3.94% and the 2-yr note yield fell nine basis points to 4.33% as participants hold onto the notion that the Fed may take a less aggressive rate-hike approach coming out of its November 1-2 FOMC meeting.
Like the performance of the three main indices, the advance-decline line reflected a mixed market. Advancers led decliners by an 11-to-10 margin at the NYSE and decliners led advancers by roughly the same margin at the Nasdaq.
Meta Platforms (META 97.94, -31.88, -24.6%) suffered a huge loss following its disappointing earnings report. Other mega cap stocks exhibited similar weakness, namely Apple (AAPL 144.80, -4.55, -3.1%) and Amazon.com (AMZN 110.96, -4.70, -4.1%), which weighed on the S&P 500 (-0.6%) and Nasdaq Composite (-1.6%).
Meanwhile, the Dow Jones Industrial Average (+0.6%) was able to maintain a positive position thanks to earnings-driven gains in Caterpillar (CAT 212.14, +15.18, +7.7%), Honeywell (HON 196.49, +6.22, +3.3%), Merck (MRK 99.74, +1.33, +1.4%), and McDonald's (MCD 265.11, +8.50, +3.3%).
Roughly half of the S&P 500 sectors closed in the red. The poor performance from Meta Platforms drove the S&P 500 communication services sector (-4.1%) to last place today. The information technology (-1.3) and consumer discretionary sectors (-0.7) also struggled as their respective mega cap components, Apple and Amazon.com, weighed on sector performance.
Industrials (+1.1%), led by Honeywell and Caterpillar, sat atop the leaderboard for the 11 sectors.
Separately, the U.S. Dollar Index made a sizable move today, up 0.8% to 110.61 with EUR/USD -1.2% to 0.9962. This followed the ECB's decision, which stoked concerns of an economic slowdown.
Exxon Mobil (XOM), Chevron (CVX), AbbVie (ABBV), Colgate-Palmolive (CL), Booz Allen Hamilton (BAH), NextEra Energy (NEE), and Grainger (GWW) are set to report earnings ahead of Friday's open.
Looking ahead to Friday, market participants will receive the following economic data:
- 8:30 ET: September Personal Income (Briefing.com consensus 0.3%; prior 0.3%), Personal Spending (Briefing.com consensus 0.4%; prior 0.4%), PCE Prices (Briefing.com consensus 0.3%; prior 0.3%), Core PCE Prices (Briefing.com consensus 0.4%; prior 0.6%), and Q3 Employment Cost Index (Briefing.com consensus 1.2%; prior 1.3%)
- 10:00 ET: September Pending Home Sales (Briefing.com consensus -5.1%; prior -2.0%) and final October University of Michigan Consumer Sentiment survey (Briefing.com consensus 59.6; prior 59.8)
Reviewing today's economic data:
- Q3 GDP-Adv. 2.6% (Briefing.com consensus 2.3%); Prior -0.6%; Q3 Chain Deflator-Adv. 4.1% (Briefing.com consensus 5.3%); Prior 9.0%
- The key takeaway from the report is that it ends a two-quarter streak of negative GDP prints. It also suggests the economy held up well in the third quarter as it started to acclimate to rising interest rates. Real final sales of domestic product, which excludes the change in private inventories, increased a solid 3.3%.
- Weekly Initial Claims 217K (Briefing.com consensus 220K); Prior was revised to 220K from 214K; Weekly Continuing Claims 1.438 mln; Prior was revised to 1.383 mln from 1.385 mln
- The key takeaway from the report is that the initial claims data suggest the labor market continues to hold up well, which of course is something that will continue to draw the Fed's attention.
- September Durable Orders 0.4% (Briefing.com consensus 0.6%); Prior was revised to 0.2% from -0.2%; September Durable Orders Ex-Transportation -0.5% (Briefing.com consensus 0.2%); Prior was revised to 0.0% from 0.2%
- The key takeaway from the report is that it revealed some softening in business spending, which was evident in the 0.7% decline in nondefense capital goods orders excluding aircraft.
Dow Jones Industrial Average: -11.9% YTD
S&P Midcap 400: -15.9% YTD
S&P 500: -20.1% YTD
Russell 2000: -19.6% YTD
Nasdaq Composite: -31.0% YTD
Earnings after the close and ahead of Friday's open
27-Oct-22 15:30 ET
Dow +275.37 at 32116.51, Nasdaq -155.32 at 10755.53, S&P -15.48 at 3815.19
[BRIEFING.COM] The three main indices trade just off session lows heading into the close.
After the close, Apple (AAPL), Amazon (AMZN), T-Mobile US (TMUS), Intel (INTC), Capital One (COF), Pinterest (PINS), and Eastman Chemical (EMN) headline the earnings reports.
Exxon Mobil (XOM), Chevron (CVX), AbbVie (ABBV), Colgate-Palmolive (CL), Booz Allen Hamilton (BAH), NextEra Energy (NEE), and Grainger (GWW) are set to report earnings ahead of Friday's open.
Looking ahead to Friday:
- 8:30 ET: September Personal Income (Briefing.com consensus 0.3%; prior 0.3%), Personal Spending (Briefing.com consensus 0.4%; prior 0.4%), PCE Prices (Briefing.com consensus 0.3%; prior 0.3%), Core PCE Prices (Briefing.com consensus 0.4%; prior 0.6%), and Q3 Employment Cost Index (Briefing.com consensus 1.2%; prior 1.3%)
- 10:00 ET: September Pending Home Sales (Briefing.com consensus -5.1%; prior -2.0%) and final October University of Michigan Consumer Sentiment survey (Briefing.com consensus 59.6; prior 59.8)
Small and mid caps continue to outperform
27-Oct-22 15:05 ET
Dow +300.33 at 32141.47, Nasdaq -156.02 at 10754.83, S&P -14.02 at 3816.65
[BRIEFING.COM] The stock market is little changed in the last half hour.
Notably, small and mid cap stocks continue to show strength compared to their larger peers. The Russell 2000 (+1.0%) and S&P Mid Cap 400 (+0.4%) have enjoyed decent gains for the entirety of today's session thus far.
Energy complex futures settled the session in mixed fashion. WTI crude oil futures rose 1.4% to $89.08/bbl while natural gas futures fell 3.9% to $5.44/mmbtu.
West Pharm, Invitation Homes underperform in S&P 500 after earnings
27-Oct-22 14:30 ET
Dow +303.27 at 32144.41, Nasdaq -151.26 at 10759.59, S&P -12.59 at 3818.08
[BRIEFING.COM] The S&P 500 (-0.33%) is firmly ensconced in second place among the major averages at this point on Thursday. In the last half hour, all three major averages stepped to session lows.
S&P 500 constituents West Pharm (WST 224.48, -29.92, -11.76%), Invitation Homes (INVH 31.32, -2.33, -6.92%), and Micron (MU 52.95, -2.50, -4.51%) pepper the bottom of the index. WST and INVH dip following earnings, while MU following general chip/tech weakness. Peer Wolfspeed (WOLF 87.28, -19.16, -18.00%) sits at the bottom of the PHLX Semiconductor Index (SOX) following last night's downside Q2 guidance.
Meanwhile, California-based cloud computing software firm ServiceNow (NOW 415.72, +49.31, +13.46%) is atop the standings following last night's Q3 beat.
Gold modestly lower on Thursday
27-Oct-22 14:00 ET
Dow +308.06 at 32149.20, Nasdaq -129.00 at 10781.85, S&P -8.27 at 3822.40
[BRIEFING.COM] With about two hours to go the tech-heavy Nasdaq Composite (-1.18%) remains today's top laggard, now within breathing room of session lows.
Gold futures settled $3.60 lower (-0.2%) to $1,665.60/oz, slightly weaker after yesterday's near two-week highs, as the dollar moved modestly higher.
Meanwhile, the U.S. Dollar Index is up about +0.6% to $110.43.
Honeywell's Q3 results glistened, especially compared to its industrial counterparts (HON)
Honeywell (HON +3%) is doing well today after posting a solid earnings beat in Q3 and providing a reasonably uplifting near-term outlook. Additionally, the global conglomerate, operating within four main fields (Aerospace, Building Technologies, Performance Materials and Technologies, and Safety and Productivity), posted earnings that stood out in a much more positive light than peers 3M (MMM) and General Electric (GE), which both ran into headwinds leading to reduced guidance earlier this week.
That is not to say that HON did not face similar hurdles. The strengthening U.S. dollar remained a thorn in HON's side, trimming $0.05 off the company's Q3 EPS and shaving 3 pts off its Q4 sales outlook. FX impacts were the primary driver behind 3M's lowered FY22 guidance. Also, supply chain constraints continued to temper total volume growth in Q3. GE experienced around a 4 pt hit to its Q3 revs due to a sour combination of supply chain and macroeconomic pressures.
Nevertheless, HON still delivered solid results in Q3, doing a good job leaping over these obstacles in the process.
- Adjusted EPS jumped 11.4% yr/yr to $2.25, exceeding the high-end of its prior guidance by $0.05 on a 90 bp improvement to operating margins yr/yr in the quarter.
- Meanwhile, although revs only met analyst expectations, increasing 5.6% yr/yr to $8.95 bln, HON delivered double-digit organic growth across three segments, reflecting strong demand despite widespread macroeconomic uncertainty.
- Building Technologies was a positive standout, boasting organic sales growth of 19% on resilient demand for HON's fire products and building management systems. Another bright spot was Aerospace, where organic sales grew 10% as commercial aviation sales grew by double-digits for the sixth-straight quarter. Aerospace would have performed better, too, if not for HON's large defense business, which weighed on top-line growth. However, HON commented that it viewed Q3 as an inflection point, leading to sequential improvement in Q4.
- Robust aerospace demand emulates what we saw with GE, where its Aerospace segment led all other segments in Q3.
- Regarding supply chain constraints, HON noted that the situation is improving, pointing to sequential volume gains for the third consecutive quarter.
- Improving supply chains was a key component of HON's relatively upbeat outlook. The company expects Q4 revs of $9.1-9.4 bln, a 10-13% increase yr/yr, marking HON's highest quarterly growth rate since 2Q21. HON also upped the low end of its FY22 adjusted EPS forecast, guiding to $8.70-8.80 from $8.55-8.80.
Bottom line, HON's Q3 results resonated much more with investors than its industrial counterparts. Clearly, HON is amid many favorable dynamics, such as the ongoing recovery in the aviation industry and improving supply chains. These tailwinds should help fuel continual top and bottom-line growth and will be a driver behind HON's commitment to buying back at least $4 bln of shares in FY22.
McDonald's arches look pretty golden with nice Q3 beat; adult Happy Meals was a surprise hit (MCD)
McDonald's (MCD +3%) is up nicely today after reporting a nice EPS and revenue beat. But what really stood out were its same store comps. At +9.7%, this was the third quarter in a row where comps were better than analyst expectations and really impressive considering that MCD was lapping strong +12.7% comps a year ago.
- US comps at +6.1% also impressed us because MCD was lapping robust +9.6% comps a year ago, a period when people were going out more thanks to widespread vaccine deployment. Comps were driven by a higher average check supported by strategic price increases and positive guest counts.
- Also, MCD struck gold with its Happy Meals for adults, which spurred a lot of nostalgia among its adult consumers. About 50% of its supply of collectibles was sold in the first four days of the promotion. Also, this led to increased visits, which drove the highest weekly digital transactions ever in the US business. This is also helping Q4 get off to a great start as October US comps should be up in the low-double digits.
- Outside the US, IOM comps were up +8.5%. IOM includes more developed markets, mainly in Europe. MCD concedes it is seeing increasing consumer unease. DL comps were +16.7% with growth across all geographies. However, China remains a challenge with ongoing COVID resurgences and low consumer confidence. However, MCD remains on track to open about 800 restaurants in China this year, an all-time high.
- It was not all positive news. MCD concedes that its operating margin remains pressured by significant commodity and wage inflation as well as elevated energy costs. Unfortunately, MCD expects these pressures will continue to impact margins for the next several quarters.
Overall, this was an impressive quarter for MCD, especially the US comps. We had some concerns in light of mixed results from other fast food operators, but MCD's value pricing, especially on its rewards app, is drawing in customers. And the adult Happy Meal was a stroke of genius. Finally, the stock has been trapped in a long term sideways trading range in the $230-270 area. We will see if this is enough to finally break above that range and hold it.
Meta Platforms crashing as plan to ramp up expenses causes mass exodus out of the stock (META)
In the aftermath of Alphabet's (GOOG) and Snap's (SNAP) weak earnings reports, it came as no surprise that eroding advertising demand and rising competition from TikTok also battered Meta Platforms' (META) results in Q3.
As a result of those headwinds, the downward trend in revenue growth continued as META's top line fell by 4.5% yr/yr, marking a new low for the company. What is catching investors off-guard, though, is META's rising expenses and its rapidly contracting margins. For the quarter, total expenses jumped by 19% yr/yr to $20.05 bln, outpacing revenue growth by a wide margin. This led to a massive 16 percentage point yr/yr decline in operating margin to 20%, and, ultimately, to META's sizable EPS miss.
The earnings miss only partly explains why the stock is getting crushed today.
- META's FY23 expense and capex guidance of $96-$101 bln and $34-$39 bln, respectively, is what's really causing the stampede out of the stock. Based on the updated FY22 guidance, this equates to yr/yr expense and capex growth of 15% and 12% at the mid-point of the guidance ranges.
- It's not difficult to understand investors' frustrations. When revenue growth is still trending lower, as META's Q4 revenue guidance indicates (-7% at the midpoint), and the company still intends to ramp expenses up in this environment, moving on from the stock becomes an appealing option.
- META does plan to trim its workforce and CEO Mark Zuckerberg expects the company to be smaller in FY23. However, Zuckerberg hasn't wavered on his metaverse aspirations, even as META's bread-and-butter Family of Apps (Facebook, Instagram, WhatsApp) segment continues to sputter.
- META's spending next year will focus on AI infrastructure to support the build out of the metaverse and the expansion of Reels -- META's short-format video platform.
- On the topic of Reels, the application is growing quickly with more than 140 bln plays on Facebook and Instragram, up 50% from six months ago. The news isn't all positive, though, because Reels is cannibalizing revenue from META's other social media apps. Specifically, the company says it deliberately took a $500 mln hit to revenue in Q3 due to Reels growth displacing revenue from platforms with higher monetization rates.
- If investors were confident in Zuckerberg's strategy to pour capital into the Reality Labs (Quest AR/VR hardware, metaverse) division at the expense of the bread-and-butter advertising business, then the stock would be holding up much better. Unfortunately, there's little evidence at this point to suggest that Reality Labs will soon turn a corner. In Q3, Reality Labs' revenue tumbled by nearly 50% to $285, while the operating loss worsened to $(3.7) bln from $(2.6) bln in the year-earlier period.
- There's no relief on the horizon, either, with META expecting losses for Reality Labs to expand considerably next year.
META's freefall since late last year is quite astounding. The stock's ~68% yr/yr collapse is really a reflection of a loss of confidence in the company's earnings and cash flow generation capabilities. While the degradation of advertising demand is clearly an industry-wide problem that's out of META's control, it's the self-inflicted wounds of ramping up spending while others are clamping down that's creating significant frustration among investors.
Caterpillar inches higher on sustained healthy demand across its primary segments in Q3 (CAT)
Caterpillar (CAT +9%) is inching much higher today after constructing massive earnings and revenue beats in Q3. The heavy machinery manufacturer was coming off its first sales miss in nearly a year last quarter as supply chain constraints led to sales being left on the table. Although these issues still seeped into Q3, CAT delivered exceptional revenue growth despite this challenge, as demand remained robust across most of its end markets.
- What immediately stood out was CAT's relative price inelasticity, evidenced by its 20.9% spike in revs yr/yr to $14.99 bln on higher sales volume despite continual price hikes. The higher sales volume was driven by improving dealer inventories, which, although in some regions, including North America, remained at relatively low levels due to supply chain disruptions, still increased by about $700 mln compared to a $300 drop in the year-ago period.
- CAT conceded that its adjusted operating margin growth of 280 bps yr/yr to 16.5% was not up to its expectations. However, it was still solid growth given higher material and freight costs, as well as lingering manufacturing inefficiencies. CAT's margin expansion helped fuel its widest earnings beat since 1Q21, boasting adjusted EPS of $3.95.
- Digging deeper, CAT's three primary segments, Construction Industries (~42% of Q3 revs), Resource Industries (~21%), and Energy & Transportation (~41%), all saw double-digit growth yr/yr in the quarter. The leader was Resource Industries, which climbed 30% yr/yr from supportive commodity prices. CAT expects production and utilization levels to remain elevated in Q4.
- CAT's other remarks on Q4 were mostly optimistic. The company expects top-line growth in Q4, both on a yr/yr and sequential basis, driven by broad-based strength, reflecting sustained demand and favorable price realization.
- Specifically, residential construction (~25% of Construction Industries revs) is moderating as financial conditions tighten. However, nonresidential construction (~75% of Construction Industries revs) is expected to only strengthen, at least in North America, supported by government-related infrastructure investments. Outside North America, with the exception of Latin America, nonresidential construction is softening, especially in China and the EMEA region, as Europe's economic conditions deteriorate.
- In Energy & Transportation, sales momentum is expected to continue into Q4 as order rates have remained robust.
Bottom line, demand across CAT's three primary segments remains sound, and the company expects that to carry over into Q4. This sentiment echoes what we have heard from others in the construction industry recently, including AGCO (AGCO), Nucor (NUE), and Steel Dynamics (STLD). Lastly, CAT's numbers and commentary are good signs for its peers, including Cummins (CMI), which reports Q3 earnings today after the bell, and Terex (TEX), which reports Q3 earnings on November 3. CAT's numbers also bode well for Deere (DE), which reports OctQ earnings on November 23.
Ford Motor underwhelms with its Q3 report, was not as impressive as GM's report (F)
Ford Motor (F -1%) is trading roughly flat following its Q3 earnings report last night. The results were generally in-line for EPS and revs, which was a bit of a letdown following a huge EPS beat in Q2 with nice revenue upside. The results were also a bit disappointing after General Motors (GM) reported very strong results on Tuesday.
- Adjusted EBIT fell 40% yr/yr to $1.80 bln, but that was still above prior guidance of $1.4-1.7 bln. Recall that Ford guided lower last month, which lowered expectations for Q3. It was also a bit disappointing to see Ford guide to the low end on FY22 adjusted EBIT. It now expects FY22 adjusted EBIT of $11.5 bln vs $11.5-12.5 bln prior guidance. So, to beat in Q3 and still guide to the low end for FY22 tells us Q4 adjusted EBIT could be on the weaker side.
- The relative shortfall vs GM lies somewhat in the strategy to build vehicles that are lacking certain parts due to supply chain constraints. The idea is to get them all ready and when those final parts come in, boom they will quickly be ready to send to dealerships. Last quarter, Ford announced it would build 40-45K of such vehicles whereas GM built 90K.
- The difference is that GM completed a lot more of its vehicles in Q3 -- nearly 75% of them, which led to a huge beat in adjusted EBIT. Ford, on the other hand, did not appear to make as much progress. This is important because these vehicles are mostly high-margin trucks and SUVs. Ford expects to complete and ship these vehicles in Q4, but Ford's numbers lacked this big tailwind in Q3.
- Besides earnings, Ford says it plans to wind down its investment in its Argo AI joint venture, which is developing autonomous driving technology. The timeline to achieve profitable commercialization of L4 autonomy at scale is going to take much longer than Ford previously expected. As such, Ford will shift its capital spending from the L4 technology being developed by Argo to internally developed L2+/L3 technology. This news sort of adds to the disappointment on top of the Q3 results.
- Finally, we think investors were disappointed that Ford was perhaps not as optimistic as GM was in terms of the supply chain improving. GM said on Tuesday that it has seen gradual improvement, including for semiconductors. Ford did say supply chain constraints began to ease in Europe, but did not really address the topic very much from a US perspective. And that seems to be evident in Ford's inability to complete those "vehicles on wheels" whereas GM made very good progress.
Overall, the stock is actually holding up better than we thought it might. We think perhaps the cautious guidance last month prepared investors for a weak Q3 result. The good news is that Q4 should get that added push from those high margin vehicles getting completed. But between the two, GM had the more impressive quarter for sure.
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