Market Snapshot
briefing.com
| Dow | 33791.11 | +729.63 | (2.21%) | | Nasdaq | 13251.32 | +150.16 | (1.15%) | | SP 500 | 4290.41 | +68.12 | (1.61%) | | 10-yr Note | -29/32 | 3.69 |
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| | NYSE | Adv 2415 | Dec 452 | Vol 988 mln | | Nasdaq | Adv 3281 | Dec 1141 | Vol 4.4 bln |
Industry Watch
| Strong: Materials, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care |
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Moving the Market
-- Digesting the Employment Report for May that featured an uptick in the unemployment rate and a dip in average hourly earnings growth while nonfarm payrolls continued to grow
-- Rising Treasury yields in response to the data
-- Money rotating into areas of the market that had been left out of recent gains, leading to a more broad based rally
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Closing Summary
02-Jun-23 16:25 ET
Dow +701.19 at 33762.67, Nasdaq +139.78 at 13240.94, S&P +61.35 at 4283.64
[BRIEFING.COM] The stock market closed out this holiday-shortened week on a strong note. Technical momentum after the S&P 500 closed above 4,200 yesterday was a contributing factor, along with positive reactions to the Senate fast-tracking passage of the debt ceiling bill in a 63-36 vote.
The biggest driving factor, though, was the Employment Situation Report for May, as it helped push recession and rate hike fears to the backburner for the time being. The employment report featured a 339,000 increase in nonfarm payrolls, a moderation in year-over-year average hourly earnings growth to 4.3% from 4.4%, and a bump in the unemployment rate to 3.7% from 3.4%.
Mega cap stocks had a decent showing, but the rest of the market had an even better performance. The Vanguard Mega Cap Growth ETF (MGK) rose 1.0% while the Invesco S&P 500 Equal Weight ETF (RSP) rose 2.2%. The market-cap weighted S&P 500, which flirted with 4,100 last week, reached 4,290 at its high of the day and closed with a 1.5% gain.
All the major indices closed with sizable gains near their best levels of the session. 29 of the 30 Dow Jones Industrial Average components closed with a gain and all 11 S&P 500 sectors settled higher also.
The economically-sensitive S&P 500 materials (+3.4%), energy (+3.0%), and industrials (+3.0%) sectors were the top performers today, reflecting the sentiment shift after the employment report. In the same vein, the small-cap Russell 2000 was the biggest winner among the major indices today, rallying 3.6% with the help of its bank and energy components.
The communication services (+0.1%) and information technology (+0.5%) sectors closed with the slimmest gains among the S&P 500 sectors.
Some outsized gains from companies that reported earnings also offered support the broader market. MongoDB (MDB 376.30, +82.34, +28.0%), lululemon (LULU 365.44, +37.08, +11.3%), and Five Below (FIVE 182.55, +13.20, +7.8%) were among the biggest winners in that regard.
Treasuries settled the day on a lower note with shorter tenors experiencing more selling pressure. The 2-yr note yield rose 18 basis points to 4.51% and the 10-yr note yield rose eight basis points to 3.69%. The U.S. Dollar Index rose 0.4% to 104.02.
- Nasdaq Composite: +26.5% YTD
- S&P 500: +11.5% YTD
- Russell 2000: +4.0% YTD
- Dow Jones Industrial Average: +1.9% YTD
- S&P Midcap 400: +3.1% YTD
Reviewing today's economic data:
- Nonfarm payrolls rose by 339,000 in May (Briefing.com consensus 190,000) from a revised increase of 294,000 in April (from 253,000)
- Nonfarm private payrolls rose by 283,000 (Briefing.com consensus 177,000) from a revised 253,000 in April (from 230,000)
- Average hourly earnings rose by 0.3% in May (Briefing.com consensus 0.3%) following a revised 0.4% incline in April (from 0.5%)
- The unemployment rate rose to 3.7% (Briefing.com consensus 3.5%) from 3.4% in April
- The average workweek fell to 34.3 hours (Briefing.com consensus 34.4) from 34.4 hours
- The key takeaway from the report is that it featured strength in nonfarm payrolls that will help assuage concerns at this point about the economy suffering a hard landing, as well as a jump in the unemployment rate and dip in average hourly earnings growth on a year-over-year basis that should assuage some (certainly not all) of the Fed's concerns about the tightness of the labor market and wage-push inflation going into its June FOMC meeting.
Looking ahead to Monday, market participants will receive the following economic data:
- 9:45 ET: May IHS Markit Services PMI - Final (prior 53.6)
- 10:00 ET: April Factory Orders (prior 0.9%); May ISM Non-Manufacturing Index (prior 51.9%)
Treasuries settle with losses
02-Jun-23 15:40 ET
Dow +707.56 at 33769.04, Nasdaq +140.12 at 13241.28, S&P +64.11 at 4286.40
[BRIEFING.COM] The S&P 500 pulled back somewhat recently after hitting 4,290.
Treasuries settled the day on a lower note with shorter tenors experiencing more selling pressure. The 2-yr note yield rose 18 basis points to 4.51% and the 10-yr note yield rose eight basis points to 3.69%. The U.S. Dollar Index rose 0.4% to 104.02.
Looking ahead to Monday, market participants will receive the following economic data:
- 9:45 ET: May IHS Markit Services PMI - Final (prior 53.6)
- 10:00 ET: April Factory Orders (prior 0.9%); May ISM Non-Manufacturing Index (prior 51.9%)
Energy complex settles higher
02-Jun-23 15:05 ET
Dow +729.63 at 33791.11, Nasdaq +150.16 at 13251.32, S&P +68.12 at 4290.41
[BRIEFING.COM] The S&P 500 is trying to move a bit higher.
Despite the rally building up strength, semiconductors are still somewhat weak. The PHLX Semiconductor Index fell 0.3%.
Energy complex futures settled higher. WTI crude oil futures rose 2.2% to $71.65/bbl and natural gas futures rose 0.6% to $2.17/mmbtu.
Value stocks have a slim lead over growth stocks
02-Jun-23 14:35 ET
Dow +702.55 at 33764.03, Nasdaq +140.32 at 13241.48, S&P +63.45 at 4285.74
[BRIEFING.COM] Things are little changed at the index level.
Value stocks are having a slightly better showing than growth stocks. The Russell 3000 Growth Index is up 1.2% while the Russell 3000 Value Index trades up 2.0%.
Gold futures fell 1.2% today to $1,969.80/oz and copper futures settled flat at $3.72/lb.
PD and S are losing standouts after reporting earnings
02-Jun-23 14:00 ET
Dow +686.56 at 33748.04, Nasdaq +138.70 at 13239.86, S&P +62.76 at 4285.05
[BRIEFING.COM] With about two hours to go this week, the Nasdaq (+1.1%) sports the "slimmest" gain among the three main indices. The Nasdaq 100 is up 0.7%.
SentinelOne (S 13.12, -7.59, -36.7%) and PagerDuty (PD 23.29, -4.46, -16.1%) are some of the worst performers today after both companies beat earnings estimates, but issued disappointing guidance.
Small and mid cap stocks continue to outperform. The Russell 2000 is up 3.0% and the S&P Mid Cap 400 is up 3.1%.
May employment report was best of both worlds
Today is an employment report day, and on any employment report today it is a professional hazard to start writing this comment before the report is released at 8:30 a.m. ET. That's because the Employment Situation Report is almost always a market-moving report, so what you see in the equity futures market before 8:30 a.m. ET may not be what you see at all in the equity futures market after 8:30 a.m. ET.
What was seen in the equity futures market before today's report was strength. The S&P 500 futures were up more than 20 points and trading 0.5% above fair value.
The positive bias was an offshoot of the Senate's rapid passage of the debt ceiling bill by a 63-36 vote, continued strength in the mega-cap stocks, favorable -- and outsized -- responses to earnings reports from lululemon athletica (LULU) and MongoDB (MDB), optimism that the economy can avoid a recession because of persistent strength in the labor market, and technical momentum after the S&P 500 quickly reclaimed a posture above 4,200 on a closing basis.
Alas, the positive bias held intact after the release of the May employment report, which featured a 339,000 increase in nonfarm payrolls, according to the establishment survey, upward revisions to nonfarm payrolls for April and March, and a moderation in average hourly earnings growth.
A peculiar aspect of this report, however, is that the number of unemployed, which is determined by the household survey, increased by 440,000. The labor force participation rate, meanwhile, held steady at 62.6% and the the unemployment rate jumped to 3.7% from 3.4% in April.
The key takeaway from the report is that it featured strength in nonfarm payrolls that will help assuage concerns at this point about the economy suffering a hard landing, as well as a jump in the unemployment rate and dip in average hourly earnings growth on a year-over-year basis that should assuage some (certainly not all) of the Fed's concerns about the tightness of the labor market and wage-push inflation going into its June FOMC meeting.
In brief, it was a report that was the best of both worlds revolving around the two suns of the economic outlook and monetary policy.
Currently, the S&P 500 futures are up 22 points and are trading 0.5% above fair value, the Nasdaq 100 futures are up 42 points and are trading 0.3% above fair value, and the Dow Jones Industrial Average futures are up 200 points and are trading 0.6% above fair value.
The 2-yr note yield is up 11 basis points to 4.44% and the 10-yr note yield is up three basis points to 3.64%. The CME FedWatch Tool, which was showing a 28.5% probability of a 25-basis points rate hike at the June FOMC meeting shortly before the release, is now showing a 34.4% probability of a 25-basis points rate hike.
Notable headlines from the May Employment Situation Report:
- May nonfarm payrolls increased by 339,000 (Briefing.com consensus 190,000). The 3-month average for total nonfarm payrolls increased to 283,000 from 253,000. April nonfarm payrolls revised to 294,000 from 253,000. March nonfarm payrolls revised to 217,000 from 165,000.
- May private sector payrolls increased by 283,000 (Briefing.com consensus 177,000). April private sector payrolls revised to 253,000 from 230,000. March private sector payrolls revised to 157,000 from 123,000.
- May unemployment rate was 3.7% (Briefing.com consensus 3.5%), versus 3.4% in April. Persons unemployed for 27 weeks or more accounted for 19.8% of the unemployed versus 20.6% in April. The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 6.7% versus 6.6% in April.
- May average hourly earnings were up 0.3% (Briefing.com consensus 0.3%) versus a downwardly revised 0.4% (from 0.5%) in April. Over the last 12 months, average hourly earnings have risen 4.3%, versus 4.4% for the 12 months ending in April.
- The average workweek in May was 34.3 hours (Briefing.com consensus 34.4), versus 34.4 hours in April. Manufacturing workweek was unchanged at 40.1 hours. Factory overtime was up 0.1 hour to 3.0 hours.
- The labor force participation rate held steady at 62.6%.
- The employment-population ratio was 60.3% versus 60.4% in April.
-- Patrick J. O'Hare, Briefing.com
(Correction: Average hourly earnings growth for April was revised to 0.4% from 0.5%. The original post indicated it had been revised to 0.3%.)
Dell computing some nice gains; demand remains challenged but quarter was better than feared (DELL)
Dell (DELL +4%) is trading nicely higher following a huge EPS beat with its Q1 (Apr) earnings report last night. This was Dell's third consecutive large EPS beat. Dell also reported revenue upside, but it was more modest. It also guided in-line for Q2 (Jul) and raised full year EPS guidance to $5.25-5.75 from $5.00-5.60.
- Infrastructure Solutions Group (ISG) saw revenue decline 18% yr/yr to $7.6 bln while Client Solutions Group (CSG) revenue fell 23% yr/yr to $12 bln. As has been the case in recent quarters, Dell says the demand environment remains challenged, and customers are staying cautious and deliberate in their IT spending. Dell continued to see demand softness across its major lines of business, all regions, all customer sizes, and most verticals.
- However, there were some glimmers of hope as Dell is seeing some pockets of stronger demand. The CSG business performed sequentially better than expectations laid out during its Q4 call and it has seen some early signs of demand stabilization in commercial PCs in its small and medium business segments and across its transactional business. In Storage, Dell saw continued demand growth in PowerStore, its marquee midrange offering, and in PowerFlex.
- Dell noted that it maintained pricing discipline even as competitors continued to reduce excess channel inventory. Its average selling prices increased, and that helped it deliver strong sequential and yr/yr gross margin performance. Dell also maintained strong cost controls, reducing operating expenses by 6%. Its supply chain also performed well and Dell reduced inventory by $800 mln in Q1 and by $2.3 bln over the last year. Lead times and backlog have normalized post-pandemic and ahead of competitors. It seems this solid performance on the operations side helped spur the EPS upside.
- Looking ahead, Dell expects the cautious IT spending environment to continue in Q2 (Jul). It expects CSG to perform closer to historical sequentials given pockets of commercial PC demand seen in Q1 and the duration of the PC downcycle relative to prior cycles. Dell expects Q2 ISG spending to remain muted as customers scrutinize and prioritize spend.
Overall, Dell posted a better than feared Q1 result despite multiple headwinds, posting a huge EPS beat. The performance was pretty similar to HPQ's report last week, although Dell's EPS upside was much larger. Based on the stock reaction, investors appear to be quite happy with this report. Macro headwinds remain and customers remain cautious, but Dell seems to be managing pretty well.
Zscaler climbs higher as beat-and-raise report highlights strong demand for Zero-Trust Exchange (ZS)
Zscaler (ZS), a cybersecurity company that specializes in zero trust and private access applications, delivered a strong beat-and-raise 3Q23 earnings report even as customers continue to scrutinize IT spending, especially for larger projects.
Some may recall that on May 8, ZS raised its Q3 revenue guidance to $415-$419 mln from $396-$398 mln, while forecasting an acceleration in billings growth to 38-39% from 34% in Q2. Revenue came in at the high end of that upwardly revised range at $418.8 mln, while billings growth of 40% actually surpassed its updated view.
- The company's upside results and outlook comes on the heels of a disappointing performance from competitor CrowdStrike (CRWD) which issued quarterly results on Wednesday night.
- While CRWD also exceeded top and bottom-line expectations, market participants homed in on the company's slowing ARR growth and a tepid revenue outlook for Q2 and FY24 that was essentially only in line with estimates.
- Overall, the report didn't live up to investors' lofty expectations, creating some uneasiness about a business climate that's characterized by elongated sales cycles and tighter capex budgets.
Those same concerns, though, didn't materialize following ZS's earnings report.
- In fact, during the earnings call, CEO Jay Chaudhry struck a positive tone about the business climate, stating that cybersecurity continues to be the top priority among IT executives and that enterprises are increasingly phasing out legacy security systems in favor of zero trust architecture.
- Although Mr. Chaudhry did acknowledge that customers are still scrutinizing large deals, he also noted that many customers are ultimately expanding their commitments as they consolidate their security systems around ZS's Zero Trust Exchange platform.
- This assertion is illustrated by the fact that ZS ended the quarter with 400 customers that have ARR north of $1.0 mln. In the year-earlier quarter, ZS had 288 customers exceeding $1.0 mln in ARR.
- A primary driver for the increase is that more customers are bundling the ZIA (Zscaler Internet Access), ZPA (Zscaler Private Access), and ZDX (Zscaler Digial Experience Monitoring) offerings together, enabling ZS's net retention rate to exceed 125%.
The good news doesn't end there.
- Due to ZS's optimization efforts last quarter, including the streamlining of operations and a workforce reduction of approximately 3%, the company's Q3 operating margin expanded by about 600 bps yr/yr to 15.3%.
- When combined with the 46% revenue growth, this margin expansion led to a 182% yr/yr surge in EPS to $0.48. Looking ahead, the company's upside Q4 EPS guidance of $0.49 equates to a yr/yr increase of 250%.
Overall, ZS's beat-and-raise report now only shows that enterprises are still prioritizing their investments around cybersecurity, but they're also gravitating towards the company's zero-trust platform as hybrid work and public cloud adoption accelerates.
MongoDB showcases its ability to capitalize on AI trends; posts solid beat-and-raise in AprQ (MDB)
With AI remaining atop businesses' minds, MongoDB (MDB +26%) is seeing an increasing number of customers choosing its Atlas platform as one to build and run new AI applications. This dynamic helped boost the database management software developer's excellent Q1 (Apr) results and led to its raised FY24 (Jan) outlook.
- Overall Q1 results were robust, with revs spiking by 29% yr/yr to $368.28 mln, helping drive bottom-line growth of 180% to $0.56 per share; both metrics topped estimated handily. MDB boasted a healthy quarter of new business acquisition, adding around 2,300 customers, a 22% jump yr/yr, and the company's highest number in over two years. MDB also acquired a record number of new workloads from existing customers in the quarter.
- MDB's cloud-based Atlas platform remained the star of the show, with consumption trends ahead of expectations. However, consumption does remain below levels seen before the macro slowdown that started last year as customers continue scrutinizing their IT spending. Nevertheless, Atlas revs still outpaced total sales growth, leaping 40% yr/yr and comprising 65% of overall revs, 5 pts higher than in the year-ago period.
- AI is powering a meaningful chunk of Atlas's sales growth in Q1. For example, over 200 new Atlas customers were AI or ML (machine learning) organizations. Management was also optimistic that many existing applications will eventually be re-platformed to be AI-enabled, a compelling reason for customers to migrate to Atlas.
- Unsurprisingly, a weak spot in Q1 stemmed from MDB's Enterprise Advanced (EA) segment. EA is up against challenging yr/yr comparisons throughout FY24, and Q1 was no exception, with EA revs decelerating yr/yr. On the plus side, EA saw positive growth sequentially, better than MDB anticipated in its Q1 guidance. Still, the company expects EA to remain adversely impacted by the unfavorable yr/yr comparisons for the rest of the year.
- MDB's upbeat Q2 (Jul) and FY24 projections more than compensated for the company's slowing EA growth. MDB expects adjusted EPS of $0.43-0.46 in Q2 on top-line growth of +28-29% yr/yr. Meanwhile, MDB upped its FY24 targets, predicting earnings of $1.42-1.56, up from $0.96-1.10, and revs of $1.522-1.542 bln, up from $1.48-1.51 bln.
MDB delivered a tremendous quarter, showcasing its significant role in the AI boom. Management did caution that the macroeconomic environment remains volatile and will remain mindful of current conditions. Nevertheless, as we mentioned last quarter, MDB is positioning itself for long-term success, especially if AI offers the next frontier of developer productivity, as MDB can capitalize on a backlog of projects organizations would like to take on but do not currently have the capacity to pursue.
Five Below is getting a high-five from investors as earnings/guidance was better than feared (FIVE)
Five Below (FIVE +6%) is getting a high-five from investors after reporting Q1 (Apr) results last night. As we said in our preview, we were pretty nervous heading into this report given the weak quarters, and especially the weak guidance, we saw from dollar store peers, Dollar Tree (DLTR) and Dollar General (DG). Both stocks sold off on earnings/guidance.
- The clear message from DLTR and DG was that consumers are being impacted by inflation, lower tax refunds, and pandemic-era increases to benefits (SNAP benefits, stimulus payments) are now expiring. Consumers have been shifting spend to necessities and away from discretionary purchases. FIVE is a value retailer with heavy exposure to discretionary items, so we were bracing for a rough quarter.
- FIVE actually beat on EPS and revenue was within prior guidance. FIVE did provide downside guidance for Q2 (Jul) as we suspected it might, but it was not nearly as severe as we saw from DLTR and DG. We think investors are taking that as a win. Operating margin decreased approximately 80 bps to 5.8%. That was at the low end of prior guidance of 5.7-6.2%. However, FIVE is guiding to a good size sequential increase at 7.5-7.9% in Q2.
- Same store comps of +2.7% were in-line with +2.5-4.0% prior guidance, albeit at the lower end. FIVE saw continued popularity in a broad variety of trends across Squish, Hello Kitty, anime, collectibles and consumables (candy, snacks, beverages). The new Super Mario movie released in April was a hit, which led to sales of tees, posters and other items. FIVE guided to Q2 comps of +2-3% and full year comps of +1-3%.
- Similar to DLTR and DG, Five Below concedes it's a challenging time for consumers with persistent inflation, lower tax refunds, and fewer government-sponsored benefits compared to the stimulus-fueled periods of the pandemic. However, being an extreme value trend-right retailer, FIVE says it continues to attract and retain more customers. Specifically, its transaction increase of 3.9% was its highest since 2017, excluding the stimulus-fueled period.
So, why is the stock higher? We think it's a combination of things. The stock had already fallen sharply in recent weeks (-16% from its May 18 highs), so a good deal of negativity was priced in already. And the results were better than feared. Q1 results were a bit better than expected and we think some Q2 downside guidance was widely expected. However, FIVE's downside Q2 guidance was not nearly as severe as DLTR/DG and investors are responding positively to that. Another positive is that FIVE is guiding to a good size sequential increase in margins in Q2. The main takeaway here is that FIVE's earnings were better than feared.
lululemon athletica breaks out of struggling retail space with stellar beat-and-raise report (LULU)
With shares sinking by about 12% during the past two weeks, it was evident that expectations for lululemon athletica's (LULU) 1Q24 earnings report were crumbling as the retail sector continues to reel from a pullback in consumer spending. However, the maker of yoga pants and athletic wear stunned market participants with an impressive beat-and-raise performance that put the strength of its brand under the spotlight.
- In contrast to many other retailers, including Foot Locker (FL), which stated that its sales trends have slowed significantly during its Q1 earnings call, LULU CEO Calvin McDonald commented that the company has seen no change in customer behavior.
- That statement is backed by LULU's strong comparable store sales growth of 17% in constant currency and a 30% jump in traffic for both the store and digital channels.
- Customers aren't just flocking to LULU to find a good deal in a highly promotional environment -- they're completely willing to pay full price for its products. Gross margin expanded by 360 bps yr/yr to 57.5%, exceeding the company's guidance for an increase of 290-320 bps.
- Markdowns were in line with last year and LULU's inventory levels were better than the company anticipated, increasing by 24% compared to its expectation for 30-35% growth.
A more affluent customer base is certainly helping LULU's cause, but that doesn't fully explain the company's remarkable results.
- Department store owner Macy's (M) also caters to a wealthier customer, but that company issued downside FY24 guidance yesterday, sending shares sharply lower.
- Therefore, LULU's success is also a function of its strong brand name and on-trend product assortments that are resonating well in a favorable business climate for athleisure wear.
As reflected in LULU's upwardly revised guidance for FY24, its momentum is gaining steam across the company's core markets.
- In North America, sales jumped by 17%, while China experienced a 79% surge in sales due to the rollback of COVID-related restrictions.
- China figures to play a key role in LULU's plan to quadruple its business outside of North America between 2021 and 2026. For some context, international sales only accounted for 22% of the total in 2023.
From an earnings perspective, LULU's expanding gross margin and improving SG&A leverage due to higher-than-expected sales growth should continue to drive solid profit growth. The midpoint of LULU's FY24 EPS guidance equates to yr/yr growth of about 18%.
The main takeaway is that LULU has separated itself from the pack in the retail sector as the company is seemingly immune to the softening consumer spending trend. While the stock isn't cheap with a forward P/E of about 33x, a premium valuation is warranted given its superior growth rates and growth potential.
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