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Market Snapshot
briefing.com
| Dow | 33125.13 | +360.57 | (1.10%) | | Nasdaq | 12988.83 | +290.56 | (2.29%) | | SP 500 | 4212.13 | +59.58 | (1.43%) | | 10-yr Note | +1/32 | 3.80 |
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| | NYSE | Adv 1987 | Dec 895 | Vol 822 mln | | Nasdaq | Adv 2824 | Dec 1577 | Vol 4.4 bln |
Industry Watch
| Strong: Information Technology, Consumer Discretionary, Materials, Industrials, Communication Services |
| | Weak: Utilities, Energy, Health Care |
Moving the Market
-- Reacting to mixed reports that a debt ceiling deal may be imminent, yet support from party members on both sides of the aisle is not guaranteed
-- Strength from mega cap stocks
-- Digesting hotter than expected inflation data in the form of the PCE Price Indices
-- S&P 500 maintaining a position above the 4,200 level
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Closing Summary
26-May-23 16:15 ET
Dow +328.69 at 33093.25, Nasdaq +277.59 at 12975.86, S&P +54.17 at 4206.72
[BRIEFING.COM] The stock market closed out the week on an upbeat note. Angst about the debt ceiling seemingly eased somewhat following reports that a debt ceiling agreement could be near, although no such agreement was announced before the close. Also, mega caps continued to rally today, boosting index performance, and economic data pointed to continued resilience for the U.S. economy.
The Vanguard Mega Cap Growth ETF (MGK) rose 1.9% while the Invesco S&P 500 Equal Weight ETF (RSP) rose 0.8%. The market-cap weighted S&P 500 gained 1.3% and closed above 4,200 -- at its highest level since last August.
Semiconductor stocks also continued to rally today, driving a 6.3% gain in the PHLX Semiconductor Index (SOX). This came after Marvell (MRVL 65.51, +16.04, +32.4%) reporting pleasing earnings and guidance. For the week, the PHLX Semiconductor Index gained 10.7%, leaving it up 18.4% for the month.
Positive responses to other corporate news also propped up the broader market. Retailers Costco (COST 507.26, +20.71, +4.3%) and Gap (GPS 8.34, +0.92, +12.4%) logged nice gains after reporting better than expected earnings and/or guidance, along with Workday (WDAY 216.07, +19.66, +10.0%), Pinduoduo (PDD 71.42, +11.40, +19.0%), and others.
Many stocks came along for the upside ride. Advancers led decliners by a better than 2-to-1 margin at the NYSE and a slightly less than 2-to-1 margin at the Nasdaq. Most of the S&P 500 sectors logged a gain, led by information technology (+2.7%) and consumer discretionary (+2.4%). The energy sector (-0.4%), meanwhile, was the weakest performer.
Notably, today's rally was not deterred by rising expectations of a 25 basis points rate hike at the June FOMC meeting. According to the CME FedWatch Tool, there is a 66.5% probability of a 25 basis points rate hike in June, up from 51.7% yesterday and 13.7% a month ago. This followed this morning's data, which showed continued strength in the economy, helping to quell worries about a hard landing.
Personal income rose 0.4% month-over-month in April while personal spending surged 0.8% in nominal terms and 0.5% in real terms. PCE inflation jumped 0.4%, leaving it up 4.4% year-over-year, versus 4.2% in March, while core-CPE inflation also increased 0.4% month-over-month, leaving it up 4.7% year-over-year versus 4.6% in March. In other news, nondefense capital goods orders excluding aircraft -- a proxy for business spending --jumped 1.4% month-over-month in April.
The 2-yr note yield rose seven basis points to 4.56% and the 10-yr note yield fell one basis point to 3.80%.
- Nasdaq Composite: +24.0% YTD
- S&P 500: +9.5% YTD
- Russell 2000: +0.7% YTD
- S&P Midcap 400: +0.5% YTD
- Dow Jones Industrial Average: -0.2% YTD
Reviewing today's economic data:
- Personal income increased 0.4% month-over-month in April (Briefing.com consensus 0.4%) following a 0.3% increase in March. Personal spending increased 0.8% month-over-month (Briefing.com consensus 0.4%) following an upwardly revised 0.1% increase (from 0.0%) in March. The PCE Price Index increased 0.4% month-over-month (Briefing.com consensus 0.3%) and was up 4.4% year-over-year versus 4.2% in March. The core-PCE Price Index, which excludes food and energy, was up 0.4% (Briefing.com consensus 0.3%) and was up 4.7% versus 4.6% in March.
- The key takeaway from the report is the combination of a robust 0.5% increase in real spending and the uptick in the year-over-year rates for the PCE Price Index and core-PCE Price Index. That combination will give the Fed some pause about pausing its rate hikes in June.
- Durable goods orders increased 1.1% month-over-month in April (Briefing.com consensus -1.0%) following an upwardly revised 3.3% increase (from 3.2%) in March. Excluding transportation, durable goods orders declined 0.2% month-over-month in April (Briefing.com consensus -0.1%) following a 0.3% increase in March.
- The key takeaway from the report is that nondefense capital goods orders excluding aircraft -- a proxy for business spending -- increased 1.4% month-over-month.
- The Advance Intl. Trade in Goods Report for April showed a widening in the deficit to $96.8 billion from an upwardly revised $82.7 billion deficit (from -$84.6 billion) in March. Adv. Retail Inventories jumped 0.2% while Advance Wholesale Inventories declined 0.2%.
- The key takeaway from the report is on the trade side, which showed exports of goods being $9.5 billion less than march exports and imports of goods being $4.5 billion more than March imports.
- The final University of Michigan Consumer Sentiment Index for May checked in at 59.2 (Briefing.com consensus 57.8) versus the preliminary reading of 57.7. The final reading for April was of 63.5. In the same period a year ago, the index stood at 58.4.
- The key takeaway from the report is that consumer sentiment was better than the mid-month look, yet sentiment worsened versus April as worries about the economic outlook increased.
Looking ahead to Tuesday, market participants will receive the following economic data:
- March FHFA Housing Price Index (prior 0.5%) and March S&P Case-Shiller Home Price Index (prior 0.4%) at 9:00 ET
- May Consumer Confidence (prior 101.3) at 10:00 ET
Treasuries settle mostly lower
26-May-23 15:35 ET
Dow +337.00 at 33101.56, Nasdaq +285.65 at 12983.92, S&P +56.56 at 4209.11
[BRIEFING.COM] Things are little changed at the index level over the last half hour.
The 2-yr note yield rose seven basis points today, and 29 basis points this week, to 4.56%. The 10-yr note yield fell one basis point today, but rose 11 basis points this week, to 3.80%. The U.S. Dollar Index rose 1.0% this week to 104.23.
As a reminder, markets will be closed on Monday for Memorial Day.
Energy complex settles mixed
26-May-23 15:05 ET
Dow +360.57 at 33125.13, Nasdaq +290.56 at 12988.83, S&P +59.58 at 4212.13
[BRIEFING.COM] The major indices are clinging to narrow ranges near their best levels.
Energy complex futures settled the session in mixed fashion. WTI crude oil futures rose 1.1% to $72.65/bbl and natural gas futures fell 2.2% to $2.42/mmbtu.
The S&P 500 energy sector is among the top laggard today, down 0.1%.
Separately, JPMorgan Chase (JPM 137.33, +1.66, +1.2%) will eliminate 500 jobs this week, according to CNBC
Broadcom, Netflix outperforming in S&P 500 on Friday
26-May-23 14:25 ET
Dow +302.71 at 33067.27, Nasdaq +264.79 at 12963.06, S&P +50.29 at 4202.84
[BRIEFING.COM] The S&P 500 (+1.21%) is firmly in second place to this point on Friday.
S&P 500 constituents Broadcom (AVGO 800.18, +71.38, +9.79%), Arista Networks (ANET 169.01, +12.81, +8.20%), and Netflix (NFLX 382.85, +23.85, +6.64%) pepper the top of today's action. AVGO moves higher ahead of next week's earnings and a tgt raise at Oppenheimer, while NFLX makes new 52-week highs despite recent negative press about the company's password sharing crackdown.
Meanwhile, Massachusetts-based utilities firm Eversource Energy (ES 68.30, -2.56, -3.61%) after UBS cut their tgt on the stock following yesterday's FY23 guidance.
Gold adds to monthly losses this week
26-May-23 14:00 ET
Dow +286.17 at 33050.73, Nasdaq +265.05 at 12963.32, S&P +48.93 at 4201.48
[BRIEFING.COM] With about two hours to go on Friday the tech-heavy Nasdaq Composite (+2.09%) holds a commanding lead once more, up more than 265 points.
Gold futures settled less than $1 higher at $1,944.30/oz, down about -1.9% on the week, and extending losses to about -2.7% on the month.
Meanwhile, the U.S. Dollar Index is up less than +0.1% to $104.26.
Lots to digest in debt ceiling, inflation, and earnings reports
It has been an active news cycle this week and it just may stay active over the extended holiday weekend given that a debt ceiling deal has yet to be reached.
There are reports this morning that a deal could be close that caps federal spending for two years in exchange for raising the debt ceiling; however, defense spending would be allowed to continue to increase. At the same time, there are reports that suggests some House members on both sides of the aisle aren't exactly on board with what they are hearing about the potential terms of a debt ceiling agreement.
The latter is key in this situation. Negotiators for the White House and the Speaker's office might reach an agreement, but they still need to get the votes to pass it, and at this point, that doesn't sound like a slam dunk.
If it is reported today or over the weekend, then, that an agreement has been reached, keep in mind that it isn't a done deal until it passes the House and Senate.
The first quarter is a done deal and we're still hearing better-than-expected results for that calendar quarter and fiscal quarter from most companies. Costco (COST), Workday (WDAY), Gap, Inc. (GPS), Ulta Beauty (ULTA), Deckers Outdoors (DECK), and Marvell Technology (MRVL) all exceeded consensus earnings estimates, yet the response to those reports has been mixed. WDAY, GPS, and MRVL are all up nicely; ULTA and DECK are down; and COST is little changed.
Moving on to the second quarter, there was a spate of economic data this morning that was mostly supportive to the second quarter growth outlook.
- Personal income increased 0.4% month-over-month in April (Briefing.com consensus 0.4%) following a 0.3% increase in March. Personal spending increased 0.8% month-over-month (Briefing.com consensus 0.4%) following an upwardly revised 0.1% increase (from 0.0%) in March. The PCE Price Index increased 0.4% month-over-month (Briefing.com consensus 0.3%) and was up 4.4% year-over-year versus 4.2% in March. The core-PCE Price Index, which excludes food and energy, was up 0.4% (Briefing.com consensus 0.3%) and was up 4.7% versus 4.6% in March.
- The key takeaway from the report is the combination of a robust 0.5% increase in real spending and the uptick in the year-over-year rates for the PCE Price Index and core-PCE Price Index. That combination will give the Fed some pause about pausing its rate hikes in June.
- Durable goods orders increased 1.1% month-over-month in April (Briefing.com consensus -1.0%) following an upwardly revised 3.3% increase (from 3.2%) in March. Excluding transportation, durable goods orders declined 0.2% month-over-month in April (Briefing.com consensus -0.1%) following a 0.3% increase in March.
- The key takeaway from the report is that nondefense capital goods orders excluding aircraft -- a proxy for business spending -- increased 1.4% month-over-month.
- The Advance Intl. Trade in Goods Report for April showed a widening in the deficit to $96.8 billion from an upwardly revised $82.7 billion deficit (from -$84.6 billion) in March. Adv. Retail Inventories jumped 0.2% while Advance Wholesale Inventories declined 0.2%.
- The key takeaway from the report is on the trade side, which showed exports of goods being $9.5 billion less than March exports and imports of goods being $4.5 billion more than March imports.
The Treasury market didn't necessarily like what it saw in this morning's data, as selling pressure picked up following the releases. The 2-yr note yield is up 10 basis points to 4.59% and the 10-yr note yield is up two basis points to 3.8%. Notably, the fed funds futures market is now leaning in favor of a 25 basis points rate hike at the June meeting, showing a 57.4% probability of such a move versus 51.7% yesterday and 13.7% a month ago.
That shift has tempered some of the enthusiasm in the equity futures market, but it hasn't stamped it out altogether. While the Fed might be inclined to raise rates again in June, today's data has served to keep recession/hard landing fears at bay.
Currently, the S&P 500 futures are up seven points and are trading 0.2% above fair value, the Nasdaq 100 futures are up 44 points and are trading 0.3% above fair value, and the Dow Jones Industrial Average futures are up 45 points and are trading 0.2% above fair value.
-- Patrick J. O'Hare, Briefing.com
RH reclining as luxury furniture retailer changes course and ramps up markdown activity (RH)
One key takeaway from this most recent earnings season is that retailers are seeing a significant decrease in demand for higher priced discretionary items, and that apparently extends to the luxury furniture category. Last night, RH (RH) reported Q1 results that surpassed downbeat expectations, but it also issued downside revenue guidance for Q2 and cut its FY24 adjusted operating margin forecast.
- Never one to hold back, CEO Gary Friedman once again lamented the poor luxury housing market, stating during the earnings call that he's never seen the high-end housing market down at these levels as interest rates climb to 20-year highs.
- However, he also took ownership for an aggressive pricing strategy that took prices too high when conditions were strong two years ago, that's now working against the company.
- In a surprising reversal, Mr. Friedman now says that RH is going to become more promotional and increase markdowns as it looks to clear out discontinued inventory. In prior quarters, the messaging has mainly been that RH isn't going to participate in price wars, choosing to protect its brand and sacrifice "lower quality" market share for margins.
- This change of heart speaks to a further deterioration in demand, which is reflected in the 23% yr/yr revenue decline for Q1 -- RH's worst decrease in recent history. Based on RH's Q2 outlook for a revenue decline of about 22%, it's clear that the company isn't anticipating a turnaround anytime soon.
- Now, the margins that RH sought to protect are set to contract as it lowers prices. On that note, RH is forecasting Q2 adjusted operating margin of 14.0-14.5% compared to 14.9% in Q1, and it also cut its FY24 adjusted operating margin guidance to 14.5-15.5% from 15.0-17.0%.
RH's stated motivation behind increasing its markdown activity is to clear out old inventory, but we also wonder if it's becoming more competitive on price in order to avoid further market share losses.
- Earlier this week, competitor Williams-Sonoma (WSM) issued a Q1 earnings report that stacks up quite favorably to RH's. For instance, total revenue only dropped by about 7% yr/yr, while Pottery Barn's comps were almost flat at (0.4%) -- pretty impressive given the tough climate.
- WSM also reaffirmed its FY24 revenue guidance of (3%) - 3% to $8.413-8.93 bln, while RH's FY24 revenue outlook calls for a decrease of 14%.
Ultimately, we believe that RH's decision to relent on prices is probably the right call. In fact, the company was probably a couple quarters late in changing its direction. While margins will take a hit, at least RH's products will become more accessible, enabling the company to showcase the high quality of its furniture to a wider base of customers.
Autodesk trades sideways as FY24 guidance signals a continuation of current economic patterns (ADSK)
Autodesk (ADSK) has had its ups and downs today after missing Q1 (Apr) earnings expectations but still raising its FY24 (Jan) EPS outlook and reiterating its revenue and billings forecasts. The CAD software developer used across the industrial sector delivered a decent Q1 report. Still, given that it was primarily a continuation of last quarter's trends, investors are not expressing much enthusiasm, keeping shares within their lengthy sideways pattern.
- ADSK posted adjusted EPS of $1.55, hitting the higher end of its $1.50-1.56 forecast but falling just short of analyst expectations. Similarly, revenue growth of 8.5% yr/yr to $1.27 bln landed at the high end of ADSK's $1.260-1.275 projection and met analysts' target.
- As ADSK flagged last quarter, its transition from upfront to annual billings for multi-year contracts, which began March 28, adversely impacted its billings growth in Q1. Total billings still increased 4% to $1.2 bln, reflecting solid renewal rates and early renewals, but were partly offset by the roughly one month of the ongoing transition.
- The macroeconomic environment remains challenging primarily because of FX headwinds and exiting Russia, which will go away toward the year's second half. Consistent with many other SaaS firms lately, deals are under higher scrutiny, which caused quarterly timing differences for contract renewals in Q1. As a result, revenue that would have been realized in Q1 is being pushed further out.
- However, on the bright side, product usage continued to climb modestly in the quarter, with bid activity on BuildingConnected (ADSK's SaaS construction network) sustaining at record levels. ADSK also mentioned that it continued to witness cautious optimism from channel partners. Additionally, consistent with yr/yr momentum, subscription growth decelerated in North America while accelerating in EMEA.
- Management was also encouraged by customers not swaying from their digital transformation paths, utilizing automation as supply chains and the general economy remain challenging, presenting solid tailwinds for ADSK. This favorable trend was reflected in improving renewal rates, consistent net revenue retention, and expanding adoption, pushing remaining performance obligations (RPO), which provides insight into future revenue, 15% higher yr/yr to $5.39 bln.
- Looking ahead, ADSK's downbeat Q2 (Jul) guidance underscores a continuation of current patterns, while its mostly reiterated FY24 outlook calls for a minor recovery in the second half of the year, bolstered by a strong cohort of enterprise business agreements. ADSK raised its adjusted earnings forecast to $7.07-7.41 from $6.98-7.32 while reaffirming its sales target of $5.355-5.455 bln and billings of $5.025-5.175 bln.
The main takeaway from ADSK's Q1 report is that market dynamics remain unchanged from last quarter. Margin headwinds from FX impacts will persist throughout the year, and switching to annual billings puts a drag on free cash flow in FY24 and, to a lesser degree, in FY25. Also worth noting is that the switch could reduce the unbilled portion of ADSK's RPO if customers choose annual contracts, negatively affecting growth rates.
Deckers no longer a one-trick pony; it has a second $1 bln brand in HOKA (DECK)
Deckers (DECK +4.5%) wrapped up FY23 on a strong note with a huge EPS and revenue beat for Q4 (Mar). However, the stock initially traded lower after the report, most likely because we got our first look at FY24 guidance and it was not bad, but not great either. The outlook for revenue was in-line but EPS guidance was below analyst expectations.
- The knock on DECK over the years has been that it has been a one trick pony, with just the Ugg brand. However, Hoka (running shoes) has been emerging as that long-awaited second star in DECK's arsenal and helps smoothe out DECK's seasonality. It is now DECK's second largest brand and its fastest grower with FY23 sales up 58% yr/yr to $1.4 bln. Growth at its other brands has been more modest: Teva (sandals, boots), Sanuk (sandals) and Koolaburra (sheepskin footwear).
- It is pretty remarkable that FY23 marked the fourth consecutive year HOKA has grown revenue by more than 50%. UGG posted higher sales at $1.9 bln, but that was down 3% (up slightly in constant currency). As you can see, HOKA is the big sales driver and the main reason the stock has been a huge mover, up nearly 80% over the past year.
- A couple of things on the guidance. We think investors were a bit let down by the FY24 HOKA brand guidance of +20%. It appears the 50+% streak will end in FY24, but that is not surprising. As a brand gets really big, the percentage growth naturally slows. However, we think the size of the drop maybe surprised people. Part of this appears to stem from DECK's decision to focus more efforts on channel repositioning to push online sales for HOKA.
- In terms of the EPS shortfall, that appears to be related to DECK saying on the call that it plans to boost hiring in areas that had been delayed previously. DECK will invest so that its supply chain footprint can match the growing scale of its business. Also, DECK plans to boost marketing spend to grow awareness of the HOKA brand in international markets.
Overall, this was another great quarter for DECK. HOKA has been a huge winner for the company. The stock had been pulling back in recent weeks, perhaps on concern about the quarter and the FY24 guidance. While the EPS guidance was disappointing, we think it's the right decision in the long run to invest in the business and build brand awareness.
Costco sees expected sales slowdown in big-ticket items, but membership continues to flourish (COST)
For the third consecutive quarter, Costco (COST) fell short of sales expectations as consumers continue to rein in spending on costlier discretionary items like electronics, jewelry, and home furnishings. The Q3 top-line miss doesn't come as a huge surprise, though, following disappointing results from smaller rival BJ's Wholesale (BJ) on Tuesday, that also included softer-than-expected sales. Furthermore, other big box retailers like Target (TGT) and Home Depot (HD) have recently issued downside guidance, citing weakening consumer spending trends as the culprit.
COST's performance on the bottom-line is a little less clear cut.
- Some may recall that during the height of the shipping congestion issues on the west coast two years ago, COST leased its own ships and thousands of containers in order to mitigate the severe freight challenges it was experiencing. As the bottlenecks at ports have eased and as shipping rates have dropped, COST has been downsizing its charter shipping activities. In Q3, the company completely discontinued the remainder of its shipping program, resulting in a $0.50/share non-recurring impairment charge for its charter assets.
- Due to the one-time nature of this charge, and the fact that it's unrelated to the company's operational performance, it seems that it should be excluded from COST's EPS number. If that is the case, then COST's adjusted Q3 EPS came in at $3.43, which is above the consensus estimate. If that charge is included, though, then the company actually missed EPS estimates by its widest margin in over five years.
A key metric that is more straightforward is comparable sales.
- Overall, comps came in at +3.5% when excluding the impacts of FX and gas deflation. That's the weakest comp growth for COST in several years.
- While traffic growth remained solid, increasing by 4.8%, the average ticket size decreased by 4.2% due to the sluggish demand for big-ticket items. More specifically, big-ticket discretionary departments saw a 20% decrease in the e-commerce channel, which was down by 10% overall in Q3.
The good news for COST is that renewal rates are still very strong, staying at all-time high levels of 92.6% for the U.S. and Canada. Membership also continues to show healthy growth with paid household members increasing by about 7% yr/yr to 69.1 mln. This indicates that COST's value proposition of buying food items in bulk is still resonating strongly with consumers and that the company is likely gaining share against traditional grocery store chains.
The main takeaway is that while COST is feeling the same pressures of a discretionary spending slowdown as other big box retailers, its positioning as a value provider within the grocery and essential product categories gives it a significant edge. However, with a frothy forward P/E of about 34x, it seems that the stock is fully valued in our view -- especially since COST's growth rates are slowing.
Marvell looking Marvell-ous; after recent guide downs, in-line guidance seen as a win (MRVL)
Marvell (MRVL +27%) is looking "Marvell-ous" today after the company reported Q1 (Apr) results last night. At first glance, the modest Q1 upside and in-line Q2 (Jul) guidance does not seem to warrant such a big move in the stock. However, after big guide-downs the last two quarters, investors are taking in-line guidance as a win. Plus management was more notably more bullish on its largest segment.
- Digging into the Data Center segment, which is Marvell's largest end market at 33% of AprQ sales, segment revenue fell 32% yr/yr and 12% sequentially to $435.8 mln. A couple of things. First, this result was better than guidance of a mid-teen sequential decline. Second, the weakness is largely from just one subsegment. Storage was responsible for the majority of the overall sequential decline. The good news is MRVL expects sequential growth to start in Q2 in storage.
- Marvell's cloud sub-segment saw stronger demand for its optical data center interconnect products from expanding AI deployments. MRVL expects expect cloud revenue to grow 10+% sequentially in Q2. However, the enterprise on-premise portion of its data center segment will decline and offset growth from cloud. As a result, overall data center end market should be be flat sequentially in Q2. But that is a big step from a -12% sequential decline this quarter and -21% sequential decline the prior quarter. Basically, Marvell's largest segment appears to finally be stabilizing.
- Quickly on AI. Marvell rose yesterday on the ridiculously bullish guidance from NVDA. Marvell says it has a leading position in network connectivity for AI. It expects tremendous growth for its PAM4 optics, DCI and Ethernet switches.
- Enterprise Networking, Marvell's second largest end market (27%), saw revenue jump 27% yr/yr to $364.6 mln. This was flat sequentially, but again this was better than prior guidance of a high single-digit decline. This segment benefitted from a strong ramp in custom ASICs offset by a planned reduction in channel and customer inventory of merchant products. Looking ahead to Q2, MRVL expects segment revenue to decline by 10+% sequentially due to inventory corrections.
- Its other big market is Carrier Infrastructure at 22% of revs. This was the only segment that grew sequentially, up 5% to $289.9 mln. MRVL saw strong demand for its wireless products as 5G adoption expands into new geographic regions. That drove 25% sequential growth in wireless revenue, but that was partially offset by inventory digestion in its wired end market. Segment revs are expected to decline mid-single-digits sequentially in Q2 due to continued inventory digestion in wired.
The key takeaway here is that Marvell did not guide down again and we were afraid it might do that. Inventory corrections can be tricky and take longer than expected, just ask WDC and STX. Last quarter, MRVL was talking about a difficult inventory correction in Data Center. Management was notably more bullish on this call, saying it sees many positive signs in Data Center. Pockets of weakness remain in other segments (on-premise, merchant products, wired), but Marvell was generally more positive on this call and investors are responding to that.
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