Market Snapshot
briefing.com
| Dow | 32903.04 | -139.65 | (-0.42%) | | Nasdaq | 12942.29 | -75.31 | (-0.58%) | | SP 500 | 4183.26 | -23.53 | (-0.56%) | | 10-yr Note | +4/32 | 3.64 |
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| | NYSE | Adv 1259 | Dec 1624 | Vol 2.1 bln | | Nasdaq | Adv 1792 | Dec 2679 | Vol 6.0 bln |
Industry Watch
| Strong: Consumer Staples, Utilities, Real Estate, Health Care |
| | Weak: Consumer Discretionary, Financials, Energy, Materials, Industrials |
Moving the Market
-- China's weaker-than-expected Manufacturing PMI stoking growth concerns
-- Lingering concerns about Fed policy, yet concerns seem to have eased somewhat as participants digest commentary from Philadelphia Fed President Harker (2023 FOMC voter) and Fed Governor Jefferson (FOMC voter)
-- Uncertainty about the official passage of the debt ceiling deal
-- Relative weakness in the mega cap stocks
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Closing Summary
31-May-23 16:30 ET
Dow -134.51 at 32908.18, Nasdaq -82.14 at 12935.46, S&P -25.69 at 4181.10
[BRIEFING.COM] The stock market closed out this last day of the month on a downbeat note. Uncertainty about the passage of the debt ceiling deal is still looming, yet concerns about growth and Fed policy drove a lot of the action today. The major indices spent most of the day trading in a fairly narrow ranges near their worst levels of the session.
The market started to climb off session lows, though, as investors recalibrated the likelihood of a rate hike at the June FOMC meeting. This was in response to some less-hawkish commentary from a few Fed officials on the heels of Cleveland Fed President Mester (not an FOMC voter) telling FT that she sees no compelling reason to pause the rate hikes.
Fed Governor Jefferson (FOMC voter) said he thinks that "...skipping a rate hike at the coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming" and Philadelphia Fed President Harker (2023 FOMC voter) said he thinks the Fed can "take a bit of a skip for a meeting."
Still, Fed officials continue to imply that further rate hikes could happen after the June meeting. According to the CME FedWatch Tool, the probability of a 25-basis points hike at the June meeting fell to 32.0% from a high just north of 70% seen earlier today and 66.6% yesterday.
Market participants also received the Fed's Beige Book for May, yet that release didn't move the market much since economic activity was little changed overall.
Despite the afternoon improvement, the major indices all turned lower ahead of the close after the S&P 500 found some resistance on a retest of its early session high. Concerns about global growth, which had been the biggest factor driving early weakness, remained in play.
Growth concerns were brought to the fore after China reported weaker-than-expected Manufacturing PMI and Non-Manufacturing PMI data for May. The former reflected the second consecutive month of contraction in manufacturing activity. In addition, the weekly MBA Mortgage Applications Index fell 3.7% week-over-week and Chicago PMI fell to 40.4 in May (Briefing.com consensus 46.1) from 48.6 in April.
S&P 500 sector performance was a reflection of growth concerns. The economically-sensitive energy (-1.9%), industrials (-1.4%), and materials (-1.1%) sectors showed some of the biggest declines. On the flip side, the defensive-oriented utilities (+1.0%) and health care (+0.9%) sectors were among the top performers.
Mega cap stocks declined with the broader market today after their big run of late. The Vanguard Mega Cap Growth ETF (MGK) fell 0.6%; the Invesco S&P 500 Equal Weight ETF (RSP) fell 0.9%; and the market-cap weighted S&P 500 fell 0.6%.
Treasuries settled with gains across the curve. The 2-yr note yield fell 10 basis points to 4.39% and the 10-yr note yield fell six basis points to 3.64%.
- Nasdaq Composite: +23.6% YTD
- S&P 500: +8.9% YTD
- Russell 2000: -0.7% YTD
- Dow Jones Industrial Average: -0.7% YTD
- S&P Midcap 400: -1.0% YTD
Reviewing today's economic data:
- The weekly MBA Mortgage Applications Index fell 3.7% (prior -4.6%) with purchase applications declining 3% while refinancing applications dropped 7%.
- Chicago PMI fell to 40.4 in May (Briefing.com consensus 46.1) from 48.6 in April.
- The JOLTS - Job Openings totaled 10.103 million in April from a revised 9.745 million in March (from 9.590 million).
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:15 ET: May ADP Employment Change (Briefing.com consensus 160,000; prior 296,000)
- 8:30 ET: Weekly initial jobless claims (Briefing.com consensus 233,000; prior 229,000) and continuing claims (prior 1.794 million); Q1 Productivity Rev. (Briefing.com consensus -2.7%; prior -2.7%) and Unit Labor Costs Rev. (Briefing.com consensus 6.3%; prior 6.3%)
- 9:45 ET: May IHS Markit Manufacturing PMI - Final (prior 48.5)
- 10:00 ET: May ISM Manufacturing Index (Briefing.com consensus 47.1; prior 47.1); April Construction Spending (Briefing.com consensus 0.2%; prior 0.3%)
- 10:30 ET: Weekly EIA Natural Gas Inventories (prior +96 bcf)
- 11:00 ET: Weekly EIA Crude Oil Inventories (prior -12.46M)
Market breadth more mixed compared to earlier in the session
31-May-23 15:35 ET
Dow -113.96 at 32928.73, Nasdaq -56.70 at 12960.90, S&P -17.57 at 4189.22
[BRIEFING.COM] Things are little changed at the index level over the last half hour.
Market breadth skews negative, but margins have narrowed compared to earlier in the session. Shortly after the open, decliners lead advancers by a 2-to-1 margin at the NYSE and a 5-to-3 margin at the Nasdaq. Now, decliners lead advancers by a roughly 4-to-3 margin at both the NYSE and the Nasdaq.
Treasuries settled with gains across the curve. The 2-yr note yield fell 10 basis points to 4.39% and the 10-yr note yield fell six basis points to 3.64%.
Market rethinks June rate hike
31-May-23 15:10 ET
Dow -139.65 at 32903.04, Nasdaq -75.31 at 12942.29, S&P -23.53 at 4183.26
[BRIEFING.COM] The major indices all turned slightly lower recently.
Market participants are recalibrating the probability of a rate hike at the June FOMC meeting following new Fed commentary. Fed Governor Jefferson (FOMC voter) said he thinks "...skipping a rate hike at the coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming." Philadelphia Fed President Harker (2023 FOMC voter) said he thinks the Fed can "take a bit of a skip for a meeting," according to CNBC.
According to the CME FedWatch Tool, the probability of a 25-basis points hike at the June meeting has been reduced to just 27.5% from a high just north of 70% seen earlier today and 66.6% yesterday.
Energy complex futures settled lower, building on yesterday's losses. WTI crude oil futures fell 2.3% to $68.13/bbl and natural gas futures fell 2.5% to $2.25/mmbtu.
May Beige Book says economic activity was little changed
31-May-23 14:30 ET
Dow -113.10 at 32929.59, Nasdaq -48.55 at 12969.05, S&P -17.77 at 4189.02
[BRIEFING.COM] The major averages held their levels after the release of the Fed's latest Beige Book which showed that overall economic activity was little changed overall in April and early May. Currently, the S&P 500 (-0.42%) is the worst-performing major average.
Other points of interest from the report included: Employment increased in most Districts, though at a slower pace than in previous reports. Overall, the labor market continued to be strong, with contacts reporting difficulty finding workers across a wide range of skill levels and industries. Staffing firms reported slower growth in demand. As in the last report, wages grew modestly.
Additionally, prices rose moderately over the reporting period, though the rate of increase slowed in many Districts. Contacts in most Districts expected a similar pace of price increases in the coming months. Overall, nonlabor input costs rose, but many contacts said cost pressures had eased and noted price declines for some inputs, such as shipping and certain raw materials. Home prices and rents rose slightly on balance in most Districts, after little growth in the prior period.
Expectations for future growth deteriorated a little, though contacts still largely expected a further expansion in activity. Contacts in several Districts noted a rise in consumer loan delinquencies, which were returning closer to pre-pandemic levels. High inflation and the end of Covid-19 benefits continued to stress the budgets of low- and moderate-income households, driving increased demand for social services, including food and housing.
Gold rises ahead of Beige Book
31-May-23 13:55 ET
Dow -158.12 at 32884.57, Nasdaq -52.85 at 12964.75, S&P -21.22 at 4185.57
[BRIEFING.COM] With about two hours to go on Wednesday the tech-heavy Nasdaq Composite (-0.41%) is the "best" performing major average, down only 53 points owing in part to a recent rally off afternoon lows; market participants await the Fed's May Beige Book which is on tap for the top of the hour.
Gold futures settled $5 higher (+0.3%) to $1,982.10/oz even as the dollar turned higher.
Meanwhile, the U.S. Dollar Index is up about +0.3% to $104.48, in the midst of a dip off session highs.
Keeping an eye on softening mega-cap stocks
The futures for the equity indices are on the softer side of things this morning and one can take their pick of plausible explanations for why that is.
Behind door number one you have the popular excuse that market participants are feeling uncertain about the official passage of the debt ceiling deal. That deal, having passed the House Rules Committee in a 7-6 vote, will go to the floor for a full House vote tonight that is expected to take place at 8:30 p.m. ET. House Majority Whip Emmer (R-MN) said they have the votes to pass the debt ceiling bill tonight, according to CNBC.
Behind door number two are growth concerns, which were piqued by China reporting weaker-than-expected Manufacturing PMI (actual 48.8; expected 51.4; prior 49.2) and Non-Manufacturing PMI (actual 54.5; prior 56.4) data for May. The disappointing data there has reportedly been the catalyst for today's downturn in WTI crude futures ($67.28, -2.18, -3.1%) and copper futures ($3.63, -0.03, -0.8%).
Behind door number three are lingering worries about the Fed raising rates further or at least not cutting them anytime soon. Cleveland Fed President Mester (non-FOMC voter) said in an interview, according to FT, that she sees no compelling reason to pause the rate hikes now.
And door number four is hiding the view that the mega-cap stocks are overbought and due for a pullback that is expected to pressure the broader market given that their strength seems to be the only thing propping up the broader market.
Currently, the S&P 500 futures are down 21 points and are trading 0.5% below fair value, the Nasdaq 100 futures are down 75 points and are trading 0.4% below fair value, and the Dow Jones Industrial Average futures are down 113 points and are trading 0.3% below fair value
That's not bad overall compared to Advance Auto Parts (AAP), which is plummeting 28% after badly missing Q1 EPS estimates, slashing its FY23 EPS guidance, and cutting its dividend to $0.25 per share from $1.50 after dealing with an unfavorable product mix and higher than planned investments to narrow competitive price gaps in the professional sales channel.
AAP, fortunately, is an outlier today. Most stocks are simply drifting lower, which suggests there isn't any real anxious selling. That is what makes us think the driving factor this morning is behind door number four.
The mega-cap stocks have been on a tear, none more so than NVIDIA (NVDA) which is trading 1.9% lower in pre-market action without any company-specific headline to account for the weakness. Note, too, that NVDA had been up as much as 7.7% in yesterday's trading, rocking a $1 trillion plus market capitalization before it rolled in the afternoon trade and finished with a 3.0% gain.
The weight of the mega-cap stocks, should they fall, will be tough to escape without a full-throttled reallocation into the other areas of the market that have been bypassed so far this year. That may not happen given the nagging growth concerns that continue to raise questions among investors about how willing they are to pay for earnings that could ultimately be at risk of large downward revisions in a low growth/no growth environment.
That consideration could become more prominent in coming months. For now, the consideration is that mega-cap weakness could lead the market's latest rally effort to the exit door.
-- Patrick J. O'Hare, Briefing.com
Ambarella's AI aspirations clouded over by customer inventory reduction efforts (AMBA)
Ambarella (AMBA), a developer of computer vision (CV) chips for automotive, security, and industrial applications, is plunging lower after issuing a soft revenue outlook for Q2 that missed expectations. In fact, this marks the third consecutive quarter in which AMBA fell short with its revenue forecast, reflecting a combination of supply chain issues in China and, more recently, inventory reduction efforts from its customers.
- AMBA did manage to top EPS estimates once again in Q1 (revenue was basically inline), extending an impressive streak of earnings beats that spans over five years. However, the upside performance loses its luster when looking at the company's performance on a yr/yr basis.
- For instance, EPS decreased from $0.44 in the year-ago quarter to ($0.15) this quarter, representing AMBA's first net loss in over five years.
- Meanwhile, revenue dove by 31% yr/yr to $62.1 mln, mainly due to a substantial decrease in IoT revenue as customers aggressively took down their inventory levels.
During the earnings call, CEO Fermi Wang heavily focused on AMBA's AI opportunities, stating that the company's transformation into an AI company is well underway. Previously, Mr. Wang typically described AMBA as a CV-centric company, but it's not difficult to understand the change in semantics given the incredible hype surrounding AI technology -- especially in the wake of NVIDIA's (NVDA) spectacular earnings report from last week.
- In any event, AI-based products now account for about 45% of AMBA's total revenue, principally from its CV2 platform. The company's CV SoCs (computer vision system on chips) incorporate many of AMBA's core competencies, such as perception processing for cameras, radars, sensor functions, and path planning, into a single unit. They are used for ADAS (advanced driver assistance systems) technology in the auto industry, where AMBA has had some notable wins.
- Last November, AMBA announced that Germany-based Continental Automotive will offer ADAS products based on its CV3 system-on-a-chip family of semiconductors. One of the highlights from last night's conference call was the disclosure that Continental expanded its partnership with AMBA to a Level 4 system development.
- Level 4 is a designation for autonomous driving systems that means a vehicle can fully operate in self-driving mode, but is only allowed to do so within a limited area, such as an urban environment.
Looking ahead, Mr. Wang expects that the CV2 family will account for about 60% of AMBA's total revenue in FY24, while also representing a significant portion of its operating profit dollars.
- Relatedly, ASPs for CV2 products are more than two times higher than its standard video processor chip due to the significant amount of incremental processing capability.
- Although AMBA is still building out its CV3 portfolio, that portfolio is projected to carry ASPs that are five to twenty times higher than the CV2 lineup.
For the time being, though, investors aren't feeling overly enthusiastic about AMBA's AI/CV growth opportunities as the stock remains a "prove it" story following three straight guide downs.
American Airlines climbs higher after raising Q2 EPS guidance as travel demand remains strong (AAL)
Consumers may be reining in spending on many discretionary big-ticket items like electronics, furniture, and jewelry, but travel demand has remained impressively resilient, as illustrated by American Airlines' (AAL) upwardly revised Q2 guidance. The company's improved outlook also comes on the heels of a report from the Transportation Security Administration (TSA) showing that airports had more passengers during the Memorial Day holiday weekend than before the COVID-19 pandemic.
However, it's not just the increase in passengers that's fueling this accelerating upswing in business for AAL and peers like Delta Air Lines (DAL) and United Airlines (UAL).
- Demand for premium seats is very healthy, even in the face of high inflation. In fact, following AAL's Q2 earnings report, CEO Robert Isom commented during an interview on CNBC that premium cabin loads were the highest in the company's history. That's a major positive for AAL's revenue, which has reached record levels for four consecutive quarters.
- Meanwhile, jet fuel prices have fallen sharply from the sky-high levels from a year ago. This morning, AAL also lowered its average fuel price guidance for Q2 to $2.55-$2.65 from its prior forecast of $2.65-$2.75. For context, the average aircraft fuel price for 2Q22 was $4.03, or 55% higher than the midpoint of AAL's revised guidance for 2Q23.
The drop in fuel prices comes at a good time for AAL and its competitors as the airline industry ramps up capacity to meet the strengthening demand environment. Expanding capacity means hiring more pilots and flight crew to handle a busier schedule.
- On that note, AAL anticipates a 3.5%-5.5% increase in available seat miles (ASMs) for Q2, matching a projected 3.5%-5.5% bump in CASM-ex. Both of those forecasts are unchanged from AAL's previous guidance.
Altogether, the above factors enabled AAL to lift its Q2 EPS guidance by a pretty significant amount to $1.45-$1.65 from $1.20-$1.40. On a yr/yr basis, the midpoint of this new guidance represents strong yr/yr EPS growth of 104%.
If there is one complaint, it's that the company only reaffirmed its FY23 EPS guidance of $2.50-$3.00. AAL is likely taking a conservative approach given the uncertain macroeconomic backdrop, but the bottom line is that the company essentially reduced its outlook for the back half of the year by keeping its FY23 guidance the same.
The main takeaway, though, is that travel demand is showing no signs of relenting at this point as the shift in consumer spending towards experiences remains in full swing.
Advance Auto under heavy pressure after big EPS miss and dividend cut (AAP)
Advance Auto Parts (AAP -33%) is under heavy pressure today following Q1 earnings this morning. It missed on EPS badly although revenue was surprisingly in-line. This tells us margins were much lower than expected. AAP also sharply lowered its FY23 EPS guidance to just $6.00-6.50 from $10.20-11.20 prior guidance. And perhaps even more troubling is that AAP slashed its quarterly dividend to just $0.25/sh from $1.50/sh.
- So there is a lot to unpack here. AAP said that it had expected Q1 would be challenging, but its results were below internal expectations. In particular, its operating margin of 2.6% dropped from 6.0% last year and was well below internal expectations. AAP cited higher than planned investments to narrow competitive price gaps in the professional sales channel as well as unfavorable product mix. AAP expects the competitive dynamics faced in Q1 to continue.
- AAP says it remains focused on improving inventory availability while sustaining competitive price targets to improve topline sales. We interpret this as AAP saying it needs to lower prices to remain competitive, which is a bit surprising and disappointing given the inflationary environment we are in. That probably is not a great sign for margins in the quarters ahead and that may be adding to the weakness in the share price today.
- Same store comps came in at -0.4%, which were disappointing but not too far off from peer AutoZone (AZO) which recently posted Q3 comps of +1.9%, but it was quite a bit lower than the +10.8% comps we saw from O'Reilly Auto (ORLY). As a result, AAP is lower its full year comp guidance to -1% to flat from +1-3%.
- AAP believes that lower tax refunds pressured its business in March. Also, a milder winter impacted cold weather category sales (batteries, wipers) in some northern geographies. This, coupled with an increase in motor oil, which carries a lower margin rate, had an unfavorable impact on product margin.
- Finally, on the dividend, that was a massive cut. We think the size of the decrease is spooking investors. In fairness, AAP's share price had declined from $212 last August to $112.20 yesterday which means its dividend yield, as of yesterday, had climbed to a lofty 5.3%. So it probably made sense to right-size the dividend, which now sports a more reasonable yield of 1.3%. Peers AZO and ORLY do not pay any dividend, so AAP saving some money here makes sense even though it's hitting the stock today.
Overall, this was a disappointing quarter from AAP and it is dragging down peers AZO -4% and ORLY -3%. There is definitely a divergence in the big 3 automotive part retailers. AZO and ORLY have performed well and their stock prices have been marching higher over the past year. AAP is the clear laggard in the space and needs to do better. CEO Tom Greco recently announced plans to retire and a search for the new CEO is ongoing. Hopefully, the new person can get the stock moving again.
Kenvue sinks below IPO opening price following mixed set of initiations (KVUE)
Today, the 25-day IPO quiet period expired for Kenvue (KVUE), enabling analysts to publish research and estimates on the stock for the first time. Overall, sentiment was mixed with about an equal number of analysts taking a bullish position on the stock as a more cautious one. With shares higher by nearly 20% versus its $22 IPO price, this mixed set of initiations offered a good enough excuse for some investors to sell the stock and lock in some profits. In fact, the sell-off has sent shares below their opening price of $25.53 on the day they debuted on the NYSE.
- Naturally, tier one firms such as Goldman Sachs (GS) tend to have more sway when it comes to moving a stock through an analyst action. On that note, GS is one of the firms that took a cautious stance on KVUE, initiating the stock with a Neutral rating and $29 price target.
- Although the firm likes KVUE's long-term growth potential, it's not yet convinced that KVUE has improved its ailing market share position.
- Deutsche Bank took an even more bearish position on the stock, initiating it with a Hold and a $27 price target -- just 6% above current price levels. Similarly, Citigroup (C) initiated KVUE with a Neutral and $28 price target.
- We surmise that the risk/reward profile just doesn't look overly compelling to some analysts given the stock's fast start and higher multiple. At the current price, KVUE is trading with a P/E of roughly 18.5x, which is somewhat elevated for a slower growth consumer staples company.
- In FY23 (ending January), KVUE's revenue actually decreased by about 1% yr/yr to $14.95 bln.
- While competitor Proctor & Gamble (PG) is trading with an even higher P/E of 27x, its revenue grew by 5.4% in its most recent fiscal year (ending June), justifying its premium valuation over KVUE.
- Another issue is that Johnson & Johnson (JNJ) still holds an 89.6% stake in KVUE and the pharmaceutical giant could look to sell more shares down the road. That possibility creates an overhang on the stock, putting a lid on its upside potential.
On the positive side, JP Morgan (JPM) initiated KVUE with an Overweight and price target of $29, while BofA Securities (BAC) assigned a Buy rating and $30 price target.
- Indeed, there are good reasons to feel positive about KVUE, including its portfolio of household brand names such as Tylenol, Band-Aid, Listerine, Aveeno, and Neutrogena.
- The defensive nature of KVUE's business is also appealing given the uncertain macroeconomic environment. The company is comfortably profitable, forecasting adjusted net income of $610-$650 mln for the three months ended April 2, 2023 in its IPO prospectus.
- Looking ahead, a few key trends should also support the company's business in the coming years, including an aging population, increasing awareness and prioritization of personal health, and growing shelf space for health and wellness products at traditional retailers.
The main takeaway is that KVUE's strong start prompted a more cautious stance from analysts who are now less enthusiastic about the stock's upside potential given its loftier valuation.
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