Market Snapshot
briefing.com
| Dow | 33160.58 | +252.40 | (0.77%) | | Nasdaq | 13140.02 | +204.56 | (1.58%) | | SP 500 | 4233.15 | +52.05 | (1.24%) | | 10-yr Note | +25/32 | 3.61 |
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| | NYSE | Adv 2100 | Dec 821 | Vol 1.0 bln | | Nasdaq | Adv 2950 | Dec 1471 | Vol 4.6 bln |
Industry Watch
| Strong: Energy, Materials, Industrials, Information Technology, Consumer Discretionary |
| | Weak: Utilities, Consumer Staples |
Moving the Market
-- Digesting this morning's economic data, including the May ISM Manufacturing Index, which saw a drop in new orders but also a pleasant-looking deceleration in the Prices Paid Index
-- Strength from mega cap and semiconductor stocks
-- Leadership from cyclical areas of the market
-- Falling Treasury yields
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Closing Summary
01-Jun-23 16:25 ET
Dow +153.30 at 33061.48, Nasdaq +165.70 at 13101.16, S&P +41.19 at 4222.29
[BRIEFING.COM] The stock market had a strong showing today, but it didn't start out that way. Things were more mixed shortly after the open until stocks found some upside momentum. Ultimately, the major indices all closed near their best levels of the day, which had the S&P 500 above the 4,200 level. The Dow Jones Industrial Average (+0.5%) closed with the slimmest gain due in part to a sizable loss in Salesforce (CRM 212.90, -10.48, -4.7%) after its earnings report.
The indices shifted into rally-mode shortly after the release of the May ISM Manufacturing Index, which saw a drop in new orders but also a pleasant-looking deceleration in the Prices Paid Index. Market participants were also digesting weekly initial jobless claims and the ADP Employment Change for May that reflected continued strength in the labor market.
There was also some pleasing data from overseas that pushed global growth concerns to the backburner for the time being. China's Caixin manufacturing PMI for May jumped back into expansion territory with a 50.9 reading (prior 49.5) and the eurozone's CPI moderated to 6.1% year-over-year in May from 7.0% in April while core CPI dropped to 5.3% year-over-year from 5.6%.
Mega caps and semiconductor stocks paced broad based gains today. The Vanguard Mega Cap Growth ETF (MGK) rose 1.3% versus a 1.0% gain in the market-cap weighted S&P 500. The PHLX Semiconductor Index (SOX) rose 1.6%.
Gains from semiconductor-related components, along with Apple (AAPL 180.09, +2.84, +1.6%) and Microsoft (MSFT 332.58, +4.19, +1.3%), helped propel the S&P 500 information technology sector (+1.3%) to first place on the leaderboard.
Other top performing sectors included the economically-sensitive industrials (+1.3%), materials (+1.3%), and energy (+1.2%) sectors. Energy rose alongside oil prices, which settled back above $70.00/bbl today ($70.13/bbl, +2.00, +2.9%).
Only the countercyclical utilities (-0.8%) and consumer staples (-0.1%) sectors closed with losses.
Treasuries settled with gains across the curve. The 2-yr note yield fell six basis points to 4.33% and the 10-yr note yield fell three basis points to 3.61%.
Separately, the debt ceiling deal passed in the House and is expected to pass in the Senate in the coming days.
- Nasdaq Composite: +25.2% YTD
- S&P 500: +9.9% YTD
- Russell 2000: +0.4% YTD
- Dow Jones Industrial Average: -0.3% YTD
- S&P Midcap 400: -0.2% YTD
Reviewing today's economic data:
- May ADP Employment Change 278K (Briefing.com consensus 160K); Prior was revised to 291K from 296K
- The key takeaway from this report is that job growth is still strong, but that pay growth is slowing. For job stayers, the pain gain in May was 6.5% versus 6.7% in April.
- Weekly Initial Claims 232K (Briefing.com consensus 233K); Prior was revised to 230K from 229K; Weekly Continuing Claims 1.795 mln; Prior was revised to 1.789 mln from 1.794 mln
- The key takeaway from the report is that businesses overall remain reluctant to cut staff size in large numbers, leaving the level of initial jobless claims well below what is typically seen in a recession environment.
- Q1 Productivity - Rev. -2.1% (Briefing.com consensus -2.7%); Prior -2.7%; Q1 Unit Labor Costs - Rev. 4.2% (Briefing.com consensus 6.3%); Prior 6.3%
- The key takeaway from this report is that productivity was weak in the first quarter as the level of output (+0.5%) fell well shy of hours worked (+2.6%).
- May IHS Markit Manufacturing PMI - Final 48.4; Prior 48.5
- May ISM Manufacturing Index 46.9 (Briefing.com consensus 47.1); Prior 47.1
- The key takeaway from the report is that it reflected an ongoing contraction in activity with New Orders and Supplier Deliveries falling, though the Production Index climbed back into expansionary territory, which gives some hope for an improvement in the coming months.
- April Construction Spending 1.2% (Briefing.com consensus 0.2%); Prior 0.3%
- The key takeaway from the report is that continued weakness in new single family construction was overshadowed by strength in private and public nonresidential spending.
Looking ahead to Friday, market participants will receive the following economic data:
- 8:30 ET: May Nonfarm Payrolls (Briefing.com consensus 190,000; prior 253,000), Nonfarm Private Payrolls (Briefing.com consensus 177,000; prior 230,000), Average Hourly Earnings (Briefing.com consensus 0.3%; prior 0.5%), Unemployment Rate (Briefing.com consensus 3.5%; prior 3.4%), and Average Workweek (Briefing.com consensus 34.4; prior 34.4)
Treasuries settle with gains
01-Jun-23 15:40 ET
Dow +114.30 at 33022.48, Nasdaq +136.56 at 13072.02, S&P +33.90 at 4215.00
[BRIEFING.COM] The major indices are pulling back ahead of the close.
Treasuries settled with gains across the curve. The 2-yr note yield fell six basis points to 4.33% and the 10-yr note yield fell three basis points to 3.61%.
Looking ahead to Friday, market participants will receive the following economic data:
- 8:30 ET: May Nonfarm Payrolls (Briefing.com consensus 190,000; prior 253,000), Nonfarm Private Payrolls (Briefing.com consensus 177,000; prior 230,000), Average Hourly Earnings (Briefing.com consensus 0.3%; prior 0.5%), Unemployment Rate (Briefing.com consensus 3.5%; prior 3.4%), and Average Workweek (Briefing.com consensus 34.4; prior 34.4)
Energy complex settles mixed
01-Jun-23 15:05 ET
Dow +252.40 at 33160.58, Nasdaq +204.56 at 13140.02, S&P +52.05 at 4233.15
[BRIEFING.COM] The major indices continue to climb.
Energy complex futures settled the session in mixed fashion. WTI crude oil futures settled back above $70.00/bbl, up 2.9% to $70.13/bbl. Natural gas futures fell 3.9% to $2.16/mmbtu.
After the close today, Dell (DELL), Broadcom (AVGO), VMware (VMW), lululemon athletica (LULU), Five Below (FIVE), Zscaler (ZS), and MongoDB (MDB) are among the more notable companies reporting earnings.
Match Group atop S&P 500 after CEO insider buy
01-Jun-23 14:25 ET
Dow +186.31 at 33094.49, Nasdaq +178.40 at 13113.86, S&P +43.60 at 4224.70
[BRIEFING.COM] The S&P 500 (+1.04%) is in second place to this point on Thursday.
S&P 500 constituents Match Group (MTCH 37.88, +3.38, +9.80%), Baker Hughes (BKR 28.68, +1.43, +5.25%), and Hormel Foods (HRL 40.14, +1.89, +4.94%) pepper the top of today's standings. MTCH is today's top performer after an insider buy by the CEO, BKR gains ahead of tomorrow's rig data, while HRL is higher on earnings/guidance.
Meanwhile, Advance Auto (AAP 68.61, -4.28, -5.87%) is one of today's worst performers; analysts lowered tgts and the stock caught no less than four downgrades following yesterday's earnings miss and dividend cut.
Gold moves higher, but doesn't hold $2K level
01-Jun-23 14:00 ET
Dow +191.18 at 33099.36, Nasdaq +166.47 at 13101.93, S&P +41.99 at 4223.09
[BRIEFING.COM] With about two hours to go on Thursday the tech-heavy Nasdaq Composite (+1.29%) is leading the action, near HoDs in recent trading.
Gold futures settled $13.40 higher (+0.7%) to $1,995.50/oz, posting decent gains though modestly off the $2K level touched earlier in the session.
Meanwhile, the U.S. Dollar Index is down about -0.7% to $103.57.
June to start with a swirl at today's open, not a swoon
Last night, the House passed the debt ceiling deal in a 314-117 vote. That bill will now head to the Senate for a vote that is expected to take place this weekend. Some senators have expressed their disapproval of the bill, yet the bill is ultimately expected to pass in the Senate and head to the President Biden for signing before the June 5 X-date.
That's all good news certainly in that a debt default should be avoided, yet the behavior of the equity futures market is the equivalent of one hand clapping. We suspect that is because (a) last Friday's rally captured the relief of a debt ceiling deal getting done in time (b) the market's supposition all along was that a deal would get done, albeit with some eleventh-hour drama and (c) there is a narrative at work that the market could now run into a wall of liquidity constraint as the Treasury Department replenishes its general account.
Currently, the S&P 500 futures are down one point and are trading in-line with fair value, the Nasdaq 100 futures are down eight points and are trading fractionally below fair value, and the Dow Jones Industrial Average futures are down 111 points and are trading 0.3% below fair value.
Like any other day, though, there is more going on than just one thing to influence the behavior of the futures market.
Today also features some weak price action in a gaggle of growth stocks and certain retailers following their earnings reports and guidance that is acting as a headwind. Dow component Salesforce (CRM), C3.ai (AI), CrowdStrike (CRWD), Okta (OKTA), Macy's (M), Victoria's Secret (VSCO), and Dollar General (DG) are among the stocks seeing sizable declines after their earnings reports.
There is also some economic data in play that is keeping market participants guessing about the state of things and what it might mean for monetary policy decisions.
To that end, China's Caixin manufacturing PMI for May jumped back into expansion territory with a 50.9 reading (prior 49.5) and the eurozone's CPI moderated to 6.1% year-over-year in May from 7.0% in April while core CPI dropped to 5.3% year-over-year from 5.6%.
Here in the U.S., the ADP Employment Change Report for May showed an estimated 278,000 jobs were added to private-sector payrolls (Briefing.com consensus 160,000) following a downwardly revised 291,000 (from 296,00) in April. That growth featured 110,000 goods-producing jobs and 168,000 service-providing jobs with leisure/hospitality positions (+208,000) leading the way.
The key takeaway from this report is that job growth is still strong, but that pay growth is slowing. For job stayers, the pain gain in May was 6.5% versus 6.7% in April.
The weekly initial jobless and continuing claims report corroborated the ongoing strength in the labor market. Initial claims for the week ending May 27 increased just 2,000 to 232,000 (Briefing.com consensus 233,000) while continuing jobless claims increased by 6,000 to 1.795 million.
The key takeaway from the report is that businesses overall remain reluctant to cut staff size in large numbers, leaving the level of initial jobless claims well below what is typically seen in a recession environment.
The Revised Q1 Productivity and Unit Labor Cost report brought some better news than the advance report but not exactly good news. It showed productivity declining 2.1% (Briefing.com consensus -2.7%) versus -2.7% in the advance estimate. In turn, unit labor costs were up 4.2% versus the advance estimate of up 6.3%.
The key takeaway from this report is that productivity was weak in the first quarter as the level of output (+0.5%) fell well shy of hours worked (+2.6%).
The May ISM Manufacturing Index and the April Construction Spending Report will be released at 10:00 a.m. ET. The ISM number is a potential market mover.
For now, the market isn't expected to move much at the open so much as it is expected to swirl, taking in some good and bad news on this first day of June.
-- Patrick J. O'Hare, Briefing.com
CrowdStrike gets struck down despite upside results as slowing growth, rich valuation weigh (CRWD)
With shares of cybersecurity company CrowdStrike (CRWD) rallying by more than 30% since early May, it was clear that expectations were running high ahead of last night's 1Q24 earnings report. Those elevated expectations were partly a function of competitor Palo Alto Networks (PANW) issuing a solid Q3 earnings report last week that included a sizable beat on earnings and upside EPS guidance for Q4. Rewinding a bit further, Zscaler (ZS) issued upside Q3 revenue guidance and raised its FY23 revenue outlook on May 8, painting a bullish demand picture for the cybersecurity industry.
Against this upbeat backdrop, CRWD delivered strong Q1 results, comfortably exceeding top and bottom-line estimates, even as the company continued to see increased scrutiny on spending and elongated sales cycles. However, CRWD's slowing growth and its tepid inline revenue guidance for Q2 instigated a "sell the news" reaction for an expensive stock with a P/E of about 67x.
- Annual Recurring Revenue (ARR) is a key metric for CRWD that market participants home in on because it's a good predictor of future growth for a subscription-based business. In Q1, ARR growth was still solid at +42%, but that did mark a deceleration from last quarter when ARR came in at +48%.
- More concerning to investors, though, is that the company only maintained its net new ARR outlook for 1H24 and FY24. Specifically, CRWD anticipates a 10% yr/yr headwind to net new ARR in the first half of the year, with the metric flat to up modestly for the full year.
Although CRWD's growth rates are slowing from very high levels seen a year ago, it's evident that business is still quite healthy and that it's land-and-expand approach is succeeding.
- Illustrating that point, the company's dollar-based net retention rate remained above 120% in Q1, and customers with seven or more modules now represent nearly a quarter of its subscription customers.
- Enterprises aren't as freewheeling with their spending these days, but many enterprises are still prioritizing their capex around cybersecurity. Furthermore, many companies are looking to cut down on the number of vendors they use as they reduce costs and simplify their operations.
- This trend is working in CRWD's favor since it offers a wide range of cybersecurity products that meet their customers' needs.
Looking ahead, the company believes it is well-positioned to capitalize on the explosion of generative AI technology. According to CRWD, the adoption of large language models (LLMs) is creating lower barriers of entry for malicious actors to instigate sophisticated cyber-attacks. In turn, this will generate even stronger demand for AI-powered software like CRWD's Falcon cybersecurity platform.
Overall, this was another solid earnings report from CRWD, but the loftier expectations and rich valuation are keeping a lid on the stock today.
Dollar General follows Dollar Tree's lead; misses on EPS and guides down (DG)
When Dollar Tree (DLTR) sold off last week after missing on Q1 (Apr) EPS and guiding Q2 (Jul) EPS well below analyst expectations, we mentioned in our analysis that we had concerns about Dollar General's (DG -19%) report. Our concerns were well founded as DG missed on EPS and revs. It also lowered full year sales, comp, cap-ex and EPS guidance.
- Dollar General said the macroeconomic environment has been more challenging than expected, particularly for its core customer. Same store comps held up fairly well at +1.6%. It was not as strong as DLTR's +4.8% comp, but at least it was in positive territory. Comps were stronger with consumables (+4.3%), offset by a -8.5% decline in non-consumable categories. Just as we heard from DLTR, consumers continue to shift spending away from discretionary goods. DG lowered its full year comp guidance to +1-2% from +3.0-3.5%.
- Comps were also hurt by lower tax refunds and reductions in SNAP benefits as well as unfavorable weather during March and April. Regarding tax refunds, DG believes its customers were caught off guard by the reduced amounts. Its customers typically use these refunds to repay debt, purchase big ticket items, make repairs, build a safety net etc. The lower refunds added to their financial insecurity. Many are using the lower refunds to simply afford basic household essentials.
- The comp cadence was also troubling. Comps were strongest in February at +4.8% and ahead of expectations. March stayed positive at +2.2%, but pressure built up in April with comps down -2%. This pressure continued into early May. However, DG has seen an encouraging uptick with positive comps through the first three weeks of Q2.
- DG does not guide by quarter, but did say it expects the EPS decline to be the most significant in Q2 (Jul) due to continued financial strain on customers and DG is lapping its strongest quarterly gross margin performance from 2022. DG expects Q4 (Jan) to be its strongest quarter from both a comp and EPS growth perspective as DG laps significant supply chain costs and Winter Storm impact in the prior year.
Overall, this was a rough quarter for DG and it is sending the stock to a new 52-week low. After the Dollar Tree sell off last week, we would have thought investors were prepared for a weak result from DG, but it seems DG came in worse than expected. We think DG's comp being less than half what we saw from DLTR is spooking investors. Also, DG did not repurchase any shares in Q1 and said its guidance now assumes no share repurchases in 2023 vs its previous expectation of $500 mln, so that is not a great vote of confidence and may be adding to today's weakness.
Okta tumbles as persistent macroeconomic weakness shrouds its beat-and-raise in AprQ (OKTA)
Okta (OKTA -18%) tumbles despite delivering a beat-and-raise in Q1 (Apr) as management's bearish remarks regarding the macro environment cast a cloud over the stock today. The identity management software developer saw its shares steadily rise over the past month leading into its Q1 report after cybersecurity firms like Zscaler (ZS) and Palo Alto Networks (PANW) delivered upbeat AprQ guidance and results. Investors were hopeful that perhaps the depressed macroeconomy OKTA touched on last quarter was finally improving.
Unfortunately for OKTA, economic conditions only worsened in Q1. The company saw increased macro headwinds during the quarter, most notably with new business across small and medium businesses (SMBs) and enterprises. Furthermore, like Q4 (Jan), OKTA's customers requested shorter contract term lengths, with business weighted more towards upsells versus new business. As a result, OKTA experienced smaller average deal sizes.
- OKTA's current RPO, the revenue it expects to recognize over the next 12 months, was adversely affected by these headwinds, increasing just 20% yr/yr to $1.70 bln, its lowest growth rate since it began reporting the metric in 2Q20 (Jul). OKTA's RPO backlog also took a hit, climbing just 9% yr/yr in Q1.
- OKTA did add a decent number of total customers in Q1, growing its base by 14% yr/yr to over 18,000. Also, the company expanded its cohort of average contract values exceeding $1.0 mln by 40%. However, these figures still represented a deceleration from previous quarters.
- Meanwhile, management commented that customers are not expanding seats at rates seen in recent years due to the current environment, resulting in OKTA's dollar-based net retention rate for the trailing 12-month period ticking 3 pts lower sequentially to 117% in Q1. The company foresees this unfavorable trend to persist over the near term.
- On a lighter note, headline results were sound, with EPS remaining positive at $0.22, a stark improvement over the $(0.27) posted last year and easily surpassing OTKA's $0.11-0.12 forecast. The better-than-expected profitability stemmed partly from OKTA's restructuring actions implemented at the beginning of Q1, including reducing its headcount by 5%. Meanwhile, revenue growth of 24.8% yr/yr to $518 mln may have been OKTA's slowest quarter since going public in 2017, but it still topped the company's forecast of $509-511 mln.
- Additionally, despite the challenging demand backdrop, OKTA still increased its FY24 guidance, projecting adjusted EPS of $0.88-0.93, up from $0.74-0.79, and revs of $2.171-2.185 bln, up from $2.155-2.170 bln. However, the fact that OKTA tends to guide conservatively dampened this raised outlook to a degree.
The main takeaway is that the current economic environment is generating persistent problems for OKTA. Although some of OKTA's peers, like ZS and PANW, are navigating some of these issues relatively well, OKTA is not enjoying the same level of success as of late, perhaps due to it facing stiffer competition from tech giants like Microsoft (MSFT) and Oracle (ORCL). Nevertheless, OKTA's current performance is tied mainly to the broader macroeconomy, which is out of its hands. With the company controlling what it can, such as expenses, it is positioning itself to accelerate growth once economic conditions improve.
NetApp netting some nice gains as margins and profits expand amid tough business climate (NTAP)
The business climate remained challenging for data storage company NetApp (NTAP) in 4Q23 as customers continued to tighten their IT budgets and optimize their cloud spending, but the company still delivered better-than-expected results while providing a more upbeat earnings outlook. The announcement of a new share repurchase authorization for an additional $1.0 bln is providing an added boost.
- Expectations were low heading into the earnings report -- especially after Hewlett Packard Enterprises' (HPE) disappointing results and guidance from Tuesday night -- and NTAP's performance was far from spectacular. On that note, billings decreased by 15% yr/yr in constant currency to $1.67 bln as macroeconomic uncertainty impacted demand in both the Hybrid Cloud and Public Cloud segments.
- Last quarter, NTAP experienced notable weakness on the large enterprise side, including with tech companies in the Americas region, creating a stiff headwind for its Public Cloud segment. In Q4, conditions didn't improve much as Public Cloud revenue was essentially unchanged on a qtr/qtr basis at $151 mln reflecting the ongoing slowdown in cloud transitions.
- The situation wasn't much better in NTAP's Hybrid Cloud segment which saw revenue fall by 8% yr/yr to $1.4 bln. Similar to the Public Cloud segment, demand from large enterprises softened, causing revenue for NTAP's all-flash array business to decrease by 4% yr/yr.
So, why is the stock rallying if business didn't seem to improve much from last quarter? We believe there are a few reasons for the stock's strength.
- First, NTAP's margins and profits are moving in the right direction. In fact, its operating margin of 26% expanded by 3 percentage points yr/yr and marked an all-time quarterly high, while its EPS grew by 8% to $1.54, comfortably exceeding the high end of its prior guidance range of $1.30-$1.40.
- The company credited its "disciplined operational management" for the strong bottom-line results as total operating expenses declined by 3.8% yr/yr.
- More importantly, the company expects to maintain its margin gains in FY24 even though its plans for the fiscal year assume that macro conditions won't materially change. The company anticipates that product gross margins will remain at about 55% due to lower premiums and a shift to higher margin, all-flash products.
- This positive margin outlook, combined with increasing contributions from NTAP's new go-to-market strategy for the all-flash array business, supported the company's upside EPS guidance for FY24.
- Lastly, the company continues to be aggressive with buying back stock, repurchasing $850 mln worth of shares in FY23. NTAP had approximately $400 mln remaining on its share repurchase authorization, but that was bumped up to $1.4 bln with last night's announcement.
The main takeaway is that while business isn't exactly booming for NTAP, the company is pulling the right levers to drive earnings growth within a difficult environment, and that's a significant win for a stock that's treaded water over the past year.
Salesforce heads lower despite upside results; cautious comments on the call taking a toll (CRM)
Salesforce (CRM -4.5%) is trading sharply lower despite reporting solid Q1 (Apr) earnings last night. CRM beat on EPS and revenue, however, the upside was not nearly as impressive as last quarter. In fact, CRM broke its string three consecutive double-digit EPS beats. The guidance was strong with upside EPS and revs for Q2 (Jul). However, CRM only reaffirmed full year revenue guidance, maybe investors wanted to see some upside.
- CRM says its core offerings remain resilient. In Q1, 9 of its top 10 deals included sales, service, and platform. Industry clouds continue to be a tailwind to growth. Once again, eight of its industry clouds grew ARR above 50%. Data Cloud continues to be one of its fastest growing products, and CRM had great customer wins in the quarter, including Major League Soccer and Giorgio Armani.
- CRM saw strong new business growth in parts of EMEA and LatAm, but it also experienced continued pressure in the US. In Q1, the Americas revenue grew 10%, EMEA grew 17% in constant currency, and APAC grew 24% CC. Manufacturing, automotive, and energy all performed well, while high tech and financial services remained under pressure. cPRO (current Remaining Performance Obligation) grew 12% yr/yr to $24.1 bln, ahead of prior guidance of +11%. CRM guided to cPRO of +10% in Q2.
- Something that stands out are CRM's margins. The company has said that improving profitability is its highest priority and it is making good progress. CRM significantly exceeded its internal margin target for the quarter, delivering non-GAAP operating margin of 27.6%, up 1,000 basis points yr/yr. It also increased its full year guidance to 28% from 27%. CRM also remains confident it will hit 30% in 1Q25. Higher margins are being driven by short and long term restructuring at the company. CRM says it has now largely completed the restructuring announced in January.
- CRM sounded a note of caution on the call. Specifically, CRM says its customers continue to scrutinize every deal, and it's seeing elongated deal cycles and deal compression, particularly in its more transactional revenue streams like SMB, create and close, and self-serve. Also in Q1, its professional service business started to see less demand for multiyear transformations and in some cases delayed projects as customers focus on quick wins and fast time-to-value. CRM expects this last factor to persist.
So why is the stock lower? We think the smaller upside in Q1 is having an impact. Also, while its Q2 numerical guidance was pretty good, the commentary on the call was cautious. Comments like "elongated deal cycles and deal compression" are never great to hear. And a more recent problem popping up in Q1 is pressure in its professional services business and it sounds like that is going to persist. Also, the stock had run +75% from its December lows. That is a lot for a Dow component and shows that expectations were running quite high. As such, these cautious comments are prompting some profit taking today.
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