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Market Snapshot
briefing.com
| Dow | 32966.74 | +304.99 | (0.93%) | | Nasdaq | 11438.50 | +59.02 | (0.52%) | | SP 500 | 3972.45 | +21.06 | (0.53%) | | 10-yr Note | -7/32 | 4.07 |
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| | NYSE | Adv 1606 | Dec 1361 | Vol 924 mln | | Nasdaq | Adv 2342 | Dec 2133 | Vol 5.2 bln |
Industry Watch
| Strong: Consumer Staples, Energy, Industrials, Materials, Industrials |
| | Weak: Financials, Consumer Discretionary |
Moving the Market
-- 10-yr Treasury note yield sitting above 4.00%, rising market rates continue to pressure to stocks
-- Earnings-driven gain in CRM boosting the Dow Jones Industrial Average
-- Concerns over sticky inflation following data releases this morning
-- S&P 500 defending its 200-day moving average (3,940)
-- Positive reaction to Atlanta Fed President Bostic (2024 FOMC voter) saying he favors a 25 basis points rate hike in March
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Closing Summary
02-Mar-23 16:30 ET
Dow +341.73 at 33003.48, Nasdaq +83.50 at 11462.98, S&P +29.96 at 3981.35
[BRIEFING.COM] The stock market traded lopsided for most of today's session. The Dow Jones Industrial Average was trading up right out of the gate, supported by gains in Salesforce (CRM 186.59, +19.24, +11.5%) following its better than expected earnings, guidance, and share buyback plan. The S&P 500 and Nasdaq, meanwhile, spent the morning pinned in negative territory, reflecting concerns about rising market rates.
The 10-yr note yield, which hit 4.00% overnight after the eurozone reported core CPI was up a record 5.6% year-over-year in February versus 5.3% in January, settled the day up eight basis points to 4.07%. Selling interest picked up in the Treasury market following the release of the weekly initial jobless claims and revised Q4 productivity data at 8:30 a.m. ET.
Initial claims remained remarkably low at 190,000 while unit labor costs rose 3.2% versus the advance estimate of up 1.1%. Translation: signs of a tight labor market and stubbornly high inflation (unit labor costs were up 6.3% from the same quarter a year ago).
Despite interest rates pressuring the stock market, downside moves were somewhat limited thanks to technical buying interest after the S&P 500 slipped below its 200-day moving average (3,940). The S&P 500 spent the majority of today's session oscillating around that level until things improved noticeably in the afternoon trade.
The afternoon rally effort, which had the S&P 500 close a whisker shy of its 50-day moving average (3,983), was attributed to Atlanta Fed President Bostic (2024 FOMC voter) saying he favors a 25 basis points rate hike in March. That view was spun as a dovish take on things. Notably, though, Mr. Bostic said just yesterday that the Fed needs to go to 5.00-5.25% and then leave its rate there well into 2024.
Mr. Bostic's remarks today came at an opportune time with the S&P 500 sitting right on top of a key technical support level, and the market itself seen by some as being short-term oversold, having declined as much as 6.4% from its close on February 2 (the day before the January employment report was released). To that end, his remarks became a convenient excuse for renewed buying interest.
Nine of the 11 S&P 500 sectors logged a gain today led by utilities (+1.8%) and information technology (+1.3%). The financials (-0.5%) and consumer discretionary (-0.3%) sectors were the lone holdouts in negative territory by the close.
Aside from Salesforce, other outsized movers included the likes of Okta (OKTA 80.91, +9.47, +13.3%), Snowflake (SNOW 135.28, -19.22, -12.4%), and Macy's (M 22.70, +2.27, +11.1%), which reported earnings, Silvergate Capital (SI 5.72, -7.81, -57.7%), which acknowledged it is evaluating the impact of recent events on its ability to continue as a going concern, and Tesla (TSLA ), which disappointed with a lack of specifics on new products and services at its Investor Day.
- Nasdaq Composite: +9.5% YTD
- Russell 2000: +8.0% YTD
- S&P Midcap 400: +7.8% YTD
- S&P 500: +3.7% YTD
- Dow Jones Industrial Average: -0.4% YTD
Reviewing today's economic data:
- Q4 Productivity-Rev. 1.7% (Briefing.com consensus 2.5%); Prior 3.0%; Q4 Unit Labor Costs-Rev. 3.2% (Briefing.com consensus 1.4%); Prior 1.1%
- The key takeaway from the report is the elevated unit labor costs, which were up 6.3% from the same quarter a year ago (which is when the Fed first started raising rates). Moreover, unit labor costs in the nonfarm business sector were up 6.5% in 2022, which is the largest annual increase since 1982.
- Weekly Initial Claims 190K (Briefing.com consensus 197K); Prior 192K; Weekly Continuing Claims 1.655 mln; Prior was revised to 1.660 mln from 1.654 mln
- The key takeaway from the report remains the same, which is to say the remarkably low level of initial claims -- a leading indicator -- remains indicative of a tight labor market where employers are reluctant to cut jobs, fostering a concern that tightness in the labor market will lead to sticky wage-based inflation pressures.
Looking ahead to Friday, market participants will receive the February IHS Markit Services PMI - Final (prior 50.5) at 9:45 a.m. ET and the February ISM Services PMI (Briefing.com consensus 54.5%; prior 55.2%) at 10:00 a.m. ET.
S&P 500 testing 50-day moving average
02-Mar-23 15:35 ET
Dow +350.33 at 33012.08, Nasdaq +80.04 at 11459.52, S&P +30.82 at 3982.21
[BRIEFING.COM] The S&P 500 is trending toward its 50-day moving average (3,982) ahead of the close.
The 2-yr note yield rose one basis point today to 4.91% and the 10-yr note yield rose eight basis points to 4.07%.
After the close today, Costco (COST), Dell (DELL), Broadcom (AVGO), Hewlett Packard Enterprise (HPE), Nordstrom (JWN), VMware (VMW), Marvell (MRVL), C3.ai (AI), and Zscaler (ZS) are among the more notable companies reporting earnings.
Looking ahead to Friday, market participants will receive the February IHS Markit Services PMI - Final (prior 50.5) at 9:45 a.m. ET and the February ISM Services PMI (Briefing.com consensus 54.5%; prior 55.2%) at 10:00 a.m. ET.
Small and mid cap stocks somewhat lagging
02-Mar-23 15:00 ET
Dow +304.99 at 32966.74, Nasdaq +59.02 at 11438.50, S&P +21.06 at 3972.45
[BRIEFING.COM] The main indices continued to extend their gains in the last half hour.
Notably, small and mid cap stocks are lagging their larger peers. The Russell 2000 (+0.1%) and S&P Mid Cap 400 (+0.2%) exhibit some of the slimmest gains among the major indices.
The upside moves brought most of the S&P 500 sectors into positive territory with the exception of financials (-0.7%) and consumer discretionary (-0.7%).
Energy complex futures settle the session in mixed fashion. WTI crude oil futures rose 0.5% to $78.07/bbl and natural gas futures fell 1.8% to $2.90/mmbtu.
Markets near highs, S&P 500 up +0.6%
02-Mar-23 14:30 ET
Dow +298.39 at 32960.14, Nasdaq +54.84 at 11434.32, S&P +21.80 at 3973.19
[BRIEFING.COM] The broader market is narrowly off highs in recent trading, the S&P 500 (+0.55%) situated in second place.
S&P 500 constituents Dexcom (DXCM 119.38, +8.62, +7.78%), Take-Two (TTWO 114.54, +5.84, +5.37%), and Kroger (KR 45.54, +2.16, +4.98%) dot the top of the S&P. DXCM gains in light of a Medicare ruling to expand Continuous Glucose Monitors (CGMs) coverage, TTWO was the subject of a report that Sony (SONY 82.88, -0.75, -0.90%) was eyeing the company in response to Microsoft's (MSFT 250.23, +3.96, +1.61%) deal for Activision (ATVI 77.50, +1.78, +2.35%), and KR moves higher on this morning's Q4 beat.
Meanwhile, Iowa-based asset manager Principal Fincl (PFG 85.17, -6.06, -6.64%) is today's top laggard following earnings.
Gold lower; Bostic favors 25 bps hike in March
02-Mar-23 14:00 ET
Dow +213.65 at 32875.40, Nasdaq +5.44 at 11384.92, S&P +9.13 at 3960.52
[BRIEFING.COM] The broader market moved higher over the previous half hour, the tech-heavy Nasdaq Composite (+0.05%) now narrowly in the green; helping the markets to that initial spike, Atlanta Fed President R. Bostic commented in the last half hour that he favors 25 basis point rate hike in March, but rates may need to go higher since policy has only recently entered restrictive space.
Gold futures settled $4.90 lower (-0.3%) to $1,840.50/oz, snapping a three-session winning streak juxtaposed against modest strength in yields and the greenback.
Meanwhile, the U.S. Dollar Index is up about +0.6% to $105.10.
Higher rates a going concern for the stock market
The equity futures market is casting some mixed signals for the start of today's trading. Currently, the S&P 500 futures are down 24 points and are trading 0.6% below fair value, the Nasdaq 100 futures are down 120 points and are trading 1.0% below fair value, and the Dow Jones Industrial Average futures are up 60 points and are trading 0.2% above fair value.
We might as well rename the Dow Jones Industrial Average futures to the Salesforce, Inc. (CRM) futures since Salesforce, which is up 16.2% following its much better than expected earnings results, guidance, and buyback plan, is accounting for the entirety of the expected gain in the Dow Jones Industrial Average at today's open.
The broader market, seen by way of the S&P 500 futures, is in a different spot. It is weaker predominately because market rates are higher (again).
The 10-yr note yield is the lead instrument today. It pushed above 4.00% overnight after the eurozone reported a record-high 5.6% year-over-year increase in core CPI for February, up from 5.3% in January. That is obviously moving in the wrong direction, so it is perhaps no surprise that Reuters reported today that ECB President Lagarde said a 50 basis points rate hike in March remains on the table.
The latter is a burgeoning fear for the market as it relates to the March FOMC meeting. The CME FedWatch Tool shows a 29.2% probability of a 50 basis points rate hike in March, up from 0.0% a month ago.
To be fair, the default expectation remains a 25 basis points rate hike in March, but if next week's February CPI report comes in on the hot side, look for a stronger shift in expectations for 50 basis points.
We might be seeing some shift today in that regard given that this morning's economic data, which did not align favorably at all with the Fed's desire to see some softening in the labor market and pleasing inflation numbers.
First, initial jobless claims for the week ending February 25 declined by 2,000 to 190,000 (Briefing.com consensus 197,000) and continuing jobless claims for the week ending February 18 declined by 5,000 to 1.655 million.
The key takeaway from the report remains the same, which is to say the remarkably low level of initial claims -- a leading indicator -- remains indicative of a tight labor market where employers are reluctant to cut jobs, fostering a concern that tightness in the labor market will lead to sticky wage-based inflation pressures.
Secondly, Q4 productivity was revised down to 1.7% (Briefing.com consensus 2.5%) from the preliminary estimate of 3.0%. Unit labor costs, meanwhile, were revised up to 3.2% (Briefing.com consensus 1.4%) from 1.1%.
The key takeaway from the report is the elevated unit labor costs, which were up 6.3% from the same quarter a year ago (which is when the Fed first started raising rates). Moreover, unit labor costs in the nonfarm business sector were up 6.5% in 2022, which is the largest annual increase since 1982.
Treasury yields extended their reach following the data and equity futures lost ground. The 2-yr note yield is up five basis points to 4.95% and the 10-yr note yield is up nine basis points to 4.08%.
The stage is set then for a weaker open for the broader market, which is digesting a good bit of earnings news beyond the Salesforce report, including results from retailers Macy's (M), Best Buy (BBY), American Eagle Outfitters (AEO), Burlington Stores (BURL), and Big Lots (BIG) that have been met with mixed reactions. Also, there has been a going concern evaluation notice for the second straight day. Yesterday, it was Novavax (NVAX) with the notice, and today, it is Silvergate Capital (SI) that is on the going concern hot seat.
In terms of the broader market, the going concern is that policy rates and market rates are headed higher, and are apt to stay higher for longer because inflation is loitering at levels above the Fed's comfort level.
-- Patrick J. O'Hare, Briefing.com
Macy's ringing up some big gains in wake of better-than-feared results and outlook (M)
Sluggish consumer spending has undermined many retailers lately, but perhaps no group has been hit harder than department stores, which was on display yesterday following Kohl's (KSS) huge earnings miss. Today, however, Macy's (M) better-than-feared results and outlook are providing a reprieve from the gloom while also highlighting the company's relative outperformance and competitive advantages.
- Macy's has made a habit of crushing analysts' EPS expectations. Over the past eight quarters, the company has exceeded EPS estimates by an average of $0.54. That's pretty impressive considering that the highly promotional environment has led to rampant markdown activity, margin compression, and erratic earnings relative to estimates across the retail space.
The secret to Macy's success lies in its pricing strategy, inventory management, and target customer base.
- CEO Jeff Gennette stated that the company didn't chase unprofitable sales, taking a more measured approach with its promotions. Gross margin did decrease by 240 bps yr/yr to 34.1%, but the drop is a bit misleading. In the year-earlier quarter, inventory levels were very tight across the retail landscape due to supply chain issues, enabling retailers to charge full price for most products. In contrast, inventory levels were high across the board in 2022, but Macy's managed the difficult situation better than most with inventory levels down 3% versus 2021.
Working in Macy's favor is its more affluent customer base which is better equipped to contend with high inflation.
- This is especially evident at its higher end banner, Bloomingdale's, where comparable sales increased by 1.2% on an owned basis. In comparison, comps fell by 3.3% at the Macy's brand, and dove by 7.2% at KSS. Beauty, women's, and men's apparel were among the strongest categories at Bloomingdale's, while handbags and textiles lagged.
- What's really fueling the stock's surge higher today is Macy's guidance. Expectations were quite low heading into the report, so a robust outlook wasn't needed to spark a rally. Macy's generally inline FY24 EPS and revenue forecast of $3.67-$4.11 and $23.7-$24.2 bln, respectively, eased investors worst case scenario fears.
The main takeaway is that while business is far from booming at Macy's, the company is outperforming its competitors and is better positioned to navigate through these macroeconomic headwinds. For now, that's good enough to ignite a rally and swing sentiment in a more positive fashion.
Kroger produces healthy gains as eat-at-home trends continue to fuel solid numbers in JanQ (KR)
Kroger (KR +3%) is producing healthy gains today on better-than-expected earnings in Q4 (Jan) and upbeat FY24 EPS guidance. The grocery retailer's sales growth of 5.4% yr/yr to $34.82 bln and identical sales without fuel growth of +6.2% were also decent, reflecting resilient eat-at-home trends. KR reported that the gap between food-at-home and food-away-from-home expanded during Q4, underpinning an increase in customers gravitating toward affordable meal options. KR's research showed that dining out is still three-to-four times more expensive than cooking at home.
- This trend paved the way for solid numbers in Q4, including adjusted EPS growth of 9% yr/yr to $0.99, significantly better than the consensus, which expected earnings to slip yr/yr.
- Meanwhile, KR's "Our Brands" portfolio, consisting of its private labels, continued to outpace total same-store sales growth, improving by +10.1%. The relative strength of KR's private labels echoes what we heard from Walmart (WMT) last month. The retail giant noted that private brand penetration advanced by over 160 bps in JanQ, illuminating a greater emphasis on value.
- Private labels will remain a vital component of KR's business as management commented it would continue to expand its Our Brands portfolio.
- Digital sales are also igniting a fire under overall sales growth, continuing to improve by double digits yr/yr, boasting 12% growth in Q4. Even as pandemic-related tailwinds that led to a flood of consumers utilizing online shopping continue to ease, KR is still seeing strength in its e-commerce services. As a result, the firm expects digital sales to continue outpacing overall food and home sales, targeting double-digit growth over the next three years.
- After WMT's bearish FY24 (Jan) earnings forecast last week, KR surprised investors with upside FY24 earnings guidance, projecting $4.45-4.60 per share. The company has been prudent in identifying areas where it can cut costs, focusing on many enhancements expected to drive an incremental $1.0 bln of savings in 2023.
- Less of a strong point was KR's FY24 adjusted comp guidance of +2.5-3.5%, a meaningful drop from the +5.8% posted in FY23. Part of the mild outlook stemmed from management's expectation of an easing in consumer prices weighted toward the back half of the year.
- Regarding KR's pending acquisition of Albertsons (ACI), CEO William McMullen stated that the company is cooperating with regulators and remains on track to close the transaction in early 2024.
Bottom line, KR's Q4 results reflect continually healthy eat-at-home trends despite stubborn inflationary pressures. KR's comp guidance may have been somewhat mild. However, we think grocery prices easing later this year will result in a net benefit for KR as consumers will have more spending power to increase their basket size. Lastly, KR's report is a good sign ahead of Costco's (COST) FebQ report today after the bell.
Snowflake facing an avalanche of selling as cautious outlook weighs on pricey shares (SNOW)
Data analytics company Snowflake (SNOW) is receiving a chilly response this morning despite reporting better than expected Q4 results that featured positive earnings for the second straight quarter and healthy 54% top-line growth.
- The upside Q4 performance, however, is being overshadowed by a disappointing product revenue outlook for 1Q24 and FY24 that indicates a further slowdown in growth is looming.
- Echoing the same message from many other tech executives over the past two quarters, SNOW CEO Frank Slootman noted that some customers, especially on the international side, are taking a more cautious approach with spending. Consequently, the company's bookings underperformed its expectations as multi-year bookings declined by 15% yr/yr.
- It's important to keep in mind that SNOW's business model is predicated on consumption, and that its partnerships with hyperscalers like Amazon (AMZN) Web Services are key drivers for its growth. As we've seen throughout this earnings season, enterprises are slowing their cloud spending due to macro concerns. For instance, AWS's revenue growth decelerated to 20% in Q4 from 28% in Q3 and 33% in Q2. It was a similar story for Microsoft's (MSFT) Azure, which generated Q4 growth of 38% compared to 42% and 46% in the prior two quarters.
- Along with sluggish spending from international customers, larger customers in North America and younger cohorts of customers are ramping usage with SNOW at slower paces. This is reflected in SNOW's Q1 product revenue guidance of $568-$573 mln, which missed analysts' expectations and equates to yr/yr growth of 44-45% versus 54% in Q4. Likewise, its FY24 product revenue outlook of $2.705 bln missed the mark while indicating a sharp deceleration in growth to about 40% from 70% in FY23.
- In this environment, many companies and their investors would gladly accept a high double-digit revenue growth rate. The problem for SNOW, though, is that the stock is still quite expensive, despite spiraling lower by nearly 55% since the beginning of 2022. Currently, the stock is trading with a P/S of about 26x. It's tough to justify that valuation in a slowing growth environment.
- The good news is that SNOW is making steady progress on margins and profitability. Non-GAAP product gross margin for Q4 came in at 75%, up three percentage points from last year. Even better, the company believes that more favorable pricing with its cloud service providers will lead to further margin expansion this year, supporting its expectation for a one percentage point yr/yr increase in Non-GAAP operating margin this year to 6%.
Lastly, SNOW also authorized a $2.0 bln share repurchase program, which should be supportive to EPS growth this year. The main takeaway, though, is that SNOW's slowing growth and its pricey valuation make it an easy target, sending investors to the exits.
Salesforce shocks investors with impressive beat-and-raise despite macro headwinds (CRM)
Salesforce (CRM +13%) is trading sharply higher following its Q4 (Jan) earnings report last night. The key takeaway here is that CRM broke its pattern of reporting upside in the current quarter but guiding lower or possibly in-line. This time, the company reported a big beat and guided well above analyst expectations. And if that were not enough, CRM also increased its share repurchase program to $20 bln.
- What we find interesting is that the results/guidance were very good despite the macro picture not really changing much. In Q4, CRM said it continued to see the same measured environment it has talked about over the past two quarters. CRM continues to see elongated sales cycles, additional deal approval layers, and deal compression. Furthermore, its guidance assumes these trends persist with no material improvement or deterioration.
- From a product standpoint, MuleSoft and Tableau outperformed internal expectations. Geographically, CRM saw strong new business growth in the UK, France and Switzerland, while the US sales environment remained measured. In Q4, Americas revenue grew 15%, EMEA grew 13% (20% CC) and APAC grew 18% (30% CC). From an industry perspective, CRM saw strong growth in public sector, travel, transportation and hospitality, while financial services and high tech sectors showed weakness.
- The metric that stands out is cPRO (current Remaining Performance Obligation), which grew 12% yr/yr to $24.6 bln, well ahead of prior guidance of +7%. What's more is that the cPRO guidance for Q1 (Apr) at +11% is quite robust as well. cRPO is basically what is left on current contracts yet to be billed. It's a good gauge for the near term sales pipeline.
- CRM is also benefitting from a doing a much better job in terms of aligning its cost structure with its growth outlook. Elliott Mgmt has been pushing them on this. CRM has been cutting jobs in its sales department, it has been significantly consolidating its real estate footprint and CRM says it's more closely scrutinizing every dollar of investment. Non-GAAP operating margin jumped to 29.2% from 15.0% last year. Margins came in stronger than CRM had expected, but Q4 included some one-time benefits.
Overall, this was a great report for CRM, especially the robust guidance. However, we cannot help but think about how the change at CEO perhaps played a role here. Recall that CRM disbanded its co-CEO structure when Bret Taylor left on January 31. Marc Benioff is now sole CEO. CRM has been known for low balling guidance then beating by a lot. We wonder if Mr. Benioff wanted to change course and provide a more realistic guidance picture. If there was a change, that should reveal itself in the coming quarters. Regardless, this was an impressive beat-and-raise and good for them to do this in a still-difficult macro environment.
Okta's massive JanQ EPS beat highlights the need for identity management software (OKTA)
Identity and access management security software developer Okta (OKTA +9%) is trying to breach prior resistance levels after delivering another quarter of double-digit earnings upside, solid revenue growth, and upbeat guidance. OKTA was coming off a significantly better-than-feared Q3 (Oct) report that ignited a powerful rally, sending shares over 20% higher. For Q4 (Jan), the company registered many of the same highlights as last quarter, keeping its stock trending upward.
- Adjusted EPS returned to positive territory after seven consecutive quarters in the red or breakeven, climbing to $0.30 from $(0.18) in the year-ago period. Resilient sales growth of 33.2% yr/yr to $510 mln, which topped consensus, helped fuel OKTA's buoyant bottom-line result. Adjusted operating margin of 9%, a massive improvement from the (6)% in 4Q22, was also a contributing factor.
- OKTA's business was weighted more toward upsells versus new business, no matter the size of the customer.
- Not everything shined in Q4; the macroeconomy remains depressed. Management noted that new customer growth was where challenging economic conditions significantly hurt the business. OKTA still added 550 new customers during Q4, bringing the total to 17,600, a 17% jump yr/yr. However, this was the lightest quarter of yr/yr growth in FY22, decelerating from the +22% jump in Q3, +26% in Q2, and +48% in Q1. A similar theme played out in OKTA's larger $100,000+ ACV customer base, which continued to decelerate to 27% growth.
- Furthermore, although OKTA has not experienced a meaningful shift in sales cycles or close rates, consistent with its remarks last quarter, its customers started requesting shorter-term contracts, reflecting a more conservative outlook.
- Also worth pointing out, given OKTA's global presence, FX headwinds continue to weigh on top-line numbers.
- To adapt to the difficulties ahead, OKTA has already undertaken several actions to reduce its cost structure and increase organizational efficiency. For example, last month, shares popped on OKTA's restructuring plans that involved a reduction in its workforce by 5%. The company is also narrowing its F&D scope, focusing on core product development, eliminating redundant software, and building operations in lower-cost regions across Europe and Asia Pacific. Management is confident these moves will result in margin expansion.
- As a result, OKTA's FY24 earnings outlook crushed consensus, predicting EPS of $0.74-0.79, a massive advancement from the $(0.04) delivered in FY23. However, FY24 revenue expectations of $2.155-2.170 bln, merely in line with consensus, reflect the numerous macroeconomic-related obstacles still standing in OKTA's path.
Bottom line, OKTA's Q4 report underscored the need for identity management software to protect against cyberattacks even during a softening economic environment. The potential costs of a cyberattack can vastly outweigh the price of OKTA's software, fueling the more-defensive nature of its offerings. There are still headwinds OKTA will need to steer through over the near term, especially given its reliance on small and medium-sized businesses (~80% of its customer base). However, long-term dynamics are continuing to look more favorable.
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