Market Snapshot
briefing.com
| Dow | 33590.42 | -172.25 | (-0.51%) | | Nasdaq | 13197.41 | -43.53 | (-0.33%) | | SP 500 | 4270.13 | -13.51 | (-0.32%) | | 10-yr Note | +1/32 | 3.69 |
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| | NYSE | Adv 1004 | Dec 1837 | Vol 847 mln | | Nasdaq | Adv 1691 | Dec 2773 | Vol 4.3 bln |
Industry Watch
| Strong: Utilities, Consumer Discretionary, Health Care |
| | Weak: Financials, Industrials, Real Estate, Energy |
Moving the Market
-- Apple (AAPL) reversing early strength, dragging down the broader market
-- Rising oil prices after Saudi Arabia said it will voluntarily cut its own production by one million barrels per day
-- Growth concerns after the weaker-than-expected May ISM Non-Manufacturing Index
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Closing Summary
05-Jun-23 16:30 ET
Dow -199.90 at 33562.77, Nasdaq -11.34 at 13229.60, S&P -8.58 at 4275.06
[BRIEFING.COM] The stock market closed on a softer note today after Friday's broad-based rally. Things were more mixed in the early going, though, with relative strength from mega cap stocks supporting the broader market. The major indices ultimately settled near their worst levels of the day. Still, there wasn't any concerted selling interest and index losses were relatively modest.
The market started to fade around 1:00 p.m. ET after Apple (AAPL 179.58, -1.37, -0.8%), which held its Worldwide Developers Conference today, introducing its Vision Pro mixed reality headset, also started to fade along with other mega cap stocks. Apple had been up as much as 2.2% earlier in the session. The Vanguard Mega Cap Growth ETF (MGK), up as much as 0.8%, fell 0.1% today while the Invesco S&P 500 Equal Weight ETF (RSP) declined 0.3%.
Also, the S&P 500 being unable to breach 4,300 today contributed to the afternoon pullback.
Growth concerns were part of the market narrative. Those concerns were piqued by the May ISM Non-Manufacturing Index, which fell to 50.3% from 51.9% in April. The dividing line between expansion and contraction is 50.0%.
Notably, weakness in bank stocks was another factor holding the broader market in check today. This occurred after The Wall Street Journal reported that large banks could face a 20% increase in capital requirements. The SPDR S&P Regional Banking ETF (KRE) fell 2.6% and the SPDR S&P Bank ETF (KRE) fell 2.2%. The S&P 500 financials sector was among the worst performers, down 0.6%.
The industrials (-0.7%) and energy (-0.6%) sectors were also among the worst performers today. The latter declined despite rising oil prices ($71.98/bbl, +0.33, +0.5%) in response to Saudi Arabia saying it will implement an additional voluntary cut in its production of crude oil, amounting to one million barrels per day starting in July.
The communication services (+0.6%), utilities (+0.5%), and health care (+0.4%) sectors led the outperformers.
The health care sector was supported by outperforming biotech, which maintained some strength as the broader market declined. This came as the American Society of Clinical Oncology ASCO Annual Meeting 2023 continued in Chicago.
The SPDR S&P Biotech ETF (XBI) rose 0.3% and the iShares Biotechnology ETF (IBB) rose 0.4%. Amgen (AMGN 221.88, +3.81, +1.8%), Regeneron (REGN 750.27, +10.32, +1.4%), and Biogen (BIIB 302.13, +1.93, +0.6%) were among the top performers from that space.
Treasuries settled the session flattish. The 2-yr note yield fell three basis points to 4.48% and the 10-yr note yield was unchanged at 3.69%.
- Nasdaq Composite: +26.4% YTD
- S&P 500: +11.3% YTD
- Russell 2000: +2.6% YTD
- Dow Jones Industrial Average: +1.3% YTD
- S&P Midcap 400: +2.0% YTD
Reviewing today's economic data:
- The IHS Markit Services PMI rose to 54.9 in the final reading for May from 53.6.
- The ISM Non-Manufacturing Index for May decreased to 50.3% (Briefing.com consensus 52.3%) from 51.9% in April. The dividing line between expansion and contraction is 50.0%, so the May reading reflects continued growth in the services sector, but at a slower pace than the prior month.
- The key takeaway from the report is that the majority of respondents indicate business conditions are currently stable, yet concerns relative to the slowing economy have been noted, evidenced in part by the downturn in the employment index into contraction territory after three months of growth.
- Factory orders increased 0.4% month-over-month in April (Briefing.com consensus 0.8%) following a downwardly revised 0.6% increase (from 0.9%) in March. Shipments of manufactured goods decreased 0.4% month-over-month after declining 0.6% in March.
- The key takeaway from the report is that business spending picked up nicely from March.
There is no U.S. economic data of note tomorrow.
Treasuries settle mostly flat
05-Jun-23 15:35 ET
Dow -176.56 at 33586.11, Nasdaq -14.96 at 13225.98, S&P -8.54 at 4275.10
[BRIEFING.COM] The major indices remain near their lows of the day heading into the close.
Treasuries settled the session flattish. The 2-yr note yield fell three basis points to 4.48% and the 10-yr note yield was unchanged at 3.69%.
There is no U.S. economic data of note tomorrow.
AAPL weighs down market
05-Jun-23 15:10 ET
Dow -172.25 at 33590.42, Nasdaq -43.53 at 13197.41, S&P -13.51 at 4270.13
[BRIEFING.COM] The major indices have been climbing off session lows.
The downside moves coincided with Apple (AAPL 178.84, -2.12, -1.1%) retreating to its lows of the day. The Vanguard Mega Cap Growth ETF (MGK) is down 0.3% versus a 0.4% loss in the Invesco S&P 500 Equal Weight ETF (RSP).
Energy complex futures settled with gains. WTI crude oil futures rose 0.5% to $71.98/bbl and natural gas futures rose 2.8% to $2.23/mmbtu.
S&P 500 in second place on Monday afternoon
05-Jun-23 14:25 ET
Dow -130.22 at 33632.45, Nasdaq +28.15 at 13269.09, S&P +1.00 at 4284.64
[BRIEFING.COM] The S&P 500 (+0.02%) is firmly in second place to this point on Monday, having moved mostly sideways over the previous half hour.
S&P 500 constituents Bath & Body Works (BBWI 39.71, +2.00, +5.30%), Fortinet (FTNT 70.96, +2.83, +4.15%), and Paycom (PAYC 305.37, +12.05, +4.11%) pepper the top of today's standings despite a dearth of corporate news.
Meanwhile, freight and logistics firm C.H. Robinson (CHRW 91.83, -5.84, -5.98%) is among today's top laggards amid evidently unwelcomed news that the company plans to name former Ford (F 12.66, +0.27, +2.18%) executive, David Bozeman, as its new CEO.
Gold climbs off overnight lows to finish about $5 higher on Monday
05-Jun-23 14:00 ET
Dow -103.52 at 33659.15, Nasdaq +30.93 at 13271.87, S&P +4.94 at 4288.58
[BRIEFING.COM] With about two hours to go on Monday the tech-heavy Nasdaq Composite (+0.23%) is still atop the major averages, albeit having fallen decently off session highs from the previous half hour.
Gold futures settled $4.70 higher (+0.2%) to $1,974.30/oz, climbing hard off overnight losses after this morning's May ISM Non-Manufacturing Index reading.
Meanwhile, the U.S. Dollar Index is up less than +0.1% to $104.03.
Lots of news, little movement
There was no question that the stock market liked what it saw in the May employment report on Friday, both in terms of the economic messaging and the policy messaging. In brief, the takeaway from the market's vantage point was that the economy may not be destined for a hard landing and that the Fed may not be destined to raise rates again in June.
Consequently, the stock market fulfilled its destiny of having a big day. The Russell 2000 soared 3.6% and the Invesco S&P 500 Equal-Weight ETF (RSP) had a better showing (+2.2%) than the market-cap weighted S&P 500 (+1.5%).
As we start the new week, the question today is: what now?
The S&P 500, which was flirting with 4,100 about a week-and-a-half ago, is now testing resistance at 4,300 or the high seen last August. In turn, CNBC is teasing the point that a close above 4,292.438 would signify the end of the bear market. That's a little over 10 points from where we closed Friday.
Thus far, there hasn't been much carryover buying interest. To be fair, there hasn't been any concerted selling interest either.
Currently, the S&P 500 futures are up one point and are trading in-line with fair value, the Nasdaq 100 futures are down 15 points and are trading 0.1% below fair value, and the Dow Jones Industrial Average futures are down 17 points and are trading fractionally below fair value.
There is a good bit of news in the mix (or soon to be):
- President Biden signed the debt ceiling bill into law on Saturday
- OPEC+ did not change its production targets, but Saudi Arabia said it will voluntarily cut its own production by one million barrels per day starting in July
- Apple (AAPL) is holding its Worldwide Developers Conference today, where it is expected to unveil a mixed reality headset
- Newswires are buzzing with press releases from the American Society of Clinical Oncology ASCO Annual Meeting taking place in Chicago
- The Port of Long Beach reportedly won't be operating today due to labor issues
- The Wall Street Journal reports that large banks could face a 20% increase in capital requirements
- The May ISM Non-Manufacturing Index (Briefing.com consensus 52.3%; prior 51.9%) is slated for release at 10:00 a.m. ET
In some more specific company news, Palo Alto Networks (PANW) will be added to the S&P 500 prior to the open on June 20, replacing DISH Network (DISH), which is moving to the S&P 600; Circor (CIR) is being acquired by KKR (KKR) for $1.6 billion or $49.00 per share in cash; lawyers are attempting to work out a settlement in the 3M (MMM) "Forever Chemicals" trial, according to The Wall Street Journal; and Allstate (ALL) is going to stop offering home insurance policies in California due to climate conditions and building costs, according to The New York Times.
Looking elsewhere across markets, the 2-yr note yield is up four basis points to 4.55%, the 10-yr note yield is up five basis points to 3.75%, WTI crude futures are up 2.0% to $73.18/bbl, the U.S. Dollar Index is up 0.3% to 104.38, and the CBOE Volatility Index is up 3.6% to 15.12.
There are a lot of moving parts across the markets, and within the stock market, per usual. None of it, however, is registering as a meaningful broad market mover at this point. That may change, but the open, according to the equity futures market, will keep relatively close to Friday's much higher closing levels.
-- Patrick J. O'Hare, Briefing.com
Estee Lauder continues facing intense selling pressure after a downgrade at Oppenheimer today (EL)
Estee Lauder (EL -3%) drops to multi-year lows today following a downgrade to "Perform" from "Outperform" at Oppenheimer. Shares of the skincare, makeup, fragrance, and hair care product manufacturer have continued to slide since gapping significantly lower on its dismal Q3 (Mar) earnings report last month. The stock trades over 25% lower on the year, a stark difference from peer Coty (COTY), which is currently up around +20%.
Briefing.com notes that geographic exposure is a meaningful difference between EL and COTY. EL's largest customer in FY22 (Jun), accounting for 13% of total sales, sold products primarily in China travel retail, whereas COTY's largest customer is Walmart (WMT), which is predominately located in the U.S. EL's travel retail exposure, particularly in Asia, was a major cause of its underwhelming MarQ report and why the stock continues to struggle.
- The woes Asia is giving EL come as a slight surprise, especially given travel firms' recent comments. For example, Airbnb (ABNB) was encouraged by the continued recovery of Asia Pacific in Q1, as nights booked increased over 40% yr/yr, while international travel to Asia Pacific increased 160%. Expedia Group (EXPE) offered similar upbeat remarks.
- Unfortunately for EL, the problem is not a significant lack of travelers but difficulty converting travelers to consumers, which lagged historical trends in MarQ. As a result, its travel retail business remained pressured by a slower-than-anticipated recovery from the pandemic during MarQ, which management expects to continue to weigh on financial results to close out its fiscal year. EL also noted that the resumption of international flights was subdued in MarQ in China and Korea, where limited visas were granted, and group tours were slow to pick back up.
- However, some signs point to a potential bottom forming within EL's primary travel retail business. Major travel regions, like Hong Kong, Macau, Europe, and the Americas, were notable bright spots in MarQ. EL also boasted share gains within its prestige beauty category in many global markets, which it expects to continue into Q4 (Jun).
Overall, given the relative strength of the cosmetic industry lately, investors severely punished EL for its disappointing MarQ results and slashed FY23 (Jun) guidance. Meanwhile, today's downgrade is only keeping the selling pressure active. However, despite a resumption of international travel in China evolving slower than expected, other markets are cushioning the blow, underscoring the resilient beauty industry. Although it is unclear when Asia travel will begin resulting in material benefits for EL, the company is well positioned for longer-term success given its global travel retail market presence.
Science Applications has the right formula for another upside earnings report (SAIC)
Science Applications (SAIC), a government and defense contractor that provides engineering, technical, and IT services, issued a solid beat-and-raise Q1 earnings report as it continues to win significant projects to modernize and upgrade agencies' IT systems.
- This earnings report was also one of last for Nazzic Keene who announced her intention to retire as CEO and from SAIC's board of directors on May 18, although she will remain with the company until October 2, 2023 to assist in the leadership transition.
- Ms. Keene will pass the torch to Toni Townes-Whitley who will join SAIC on June 12 after serving as Microsoft's (MSFT) President of U.S. Regulated Industries.
Ms. Townes-Whitley will inherit a business that's performing at a high level, as illustrated by SAIC's twelve consecutive EPS beats.
- Similar to last quarter, the company blew out top and bottom-line estimates in Q1 while its margins expand despite the inflationary environment. Specifically, adjusted operating margin increased by 80 bps yr/yr to 7.5% due to lower indirect costs and lower acquisition and integration costs.
- SAIC's Q1 revenue growth of 1.6% isn't going to excite anyone, but demand for its services is healthy and appears to be gaining momentum. In particular, the company is seeing strong booking activity from various branches of the military in order to enhance the country's technological and intelligence capabilities.
- For example, during Q1 SAIC secured an $889 mln contract from the Federal Systems Integration and Management Center (FEDSIM) in support of Defense Counterintelligence and Security Agency (DCSA) to modernize DCSA's IT systems. Among several other tasks, this work will include cybersecurity application development and cloud management services.
The healthy business climate is also reflected in SAIC's robust backlog, which stood at nearly $24 bln at the end of the quarter.
- As the company continues to win new awards and work through its backlog, it has the confidence to raise its guidance. After issuing downside FY24 EPS and revenue guidance of $6.80-$7.00 and $7.05-$7.20 bln, respectively, in its Q4 report, SAIC increased its outlook to $7.00-$7.20 and $7.125-$7.225 bln.
- Additionally, Ms. Keene stated that the company remains in good position to deliver upon the multi-year targets that were provided at its 2023 Investor Day in April, including its expectation of delivering revenue growth of 2-4% on a CAGR basis in FY24-FY26.
Overall, SAIC's earnings report was solid and while the company's revenue growth is mediocre, its earnings growth of 14%, free cash flow generation of $76 mln, and massive backlog make the stock an attractive option in a volatile market.
EPAM Systems hits 52-week lows on reduced FY23 guidance for the second time since February (EPAM)
EPAM Systems (EPAM -17%), a digital transformation services provider that assists businesses transitioning to the cloud and utilizing digital technology, sinks to one-year lows after reducing its FY23 (Dec) guidance for the second time this year, underpinning a challenging demand landscape that is refusing to improve.
When initially issuing its downbeat FY23 guidance in mid-February, EPAM baked in heightened consumer caution after demand moderation that started during 3Q22 worsened in 4Q22. Then, in Q1, management touched on stubborn unfavorable themes we have seen trickle into AprQ for many IT service providers, such as additional deal scrutiny, tighter program budgets, and smaller deal sizes, as factors that forced it to reduce its FY23 outlook.
Unfortunately for EPAM, the situation remains bearish. In the month since its Q1 report, EPAM witnessed already-cautious clients tighten their belts even further. Pipeline conversions are happening at reduced rates than the company previously predicted, while its total pipeline is declining. As a result, EPAM trimmed its FY23 outlook yet again, expecting EPS of $9.80-10.20, down from its initial forecast of $11.15-11.35, and revs of $4.65-4.80 bln, down from its original guidance of at least $5.25 bln.
- EPAM already found itself in a difficult position over a year ago at the start of the Ukraine war. Historically, the company's most prominent delivery locations were Ukraine, Belarus, and Russia. However, in February 2022, EPAM began shifting how it operated in those locations, initializing its exit from Russia in April 2022. Coinciding with the turbulence were many of EPAM's clients reducing their risk associated with EPAM's situation, hunting for alternative firms.
- Even though EPAM has done a decent job mitigating disaster over the past year, it now faces a significantly softer demand environment. Many of EPAM's peers, including Cognizant Tech (CTSH) and Akamai Tech (AKAM), are experiencing weak discretionary spending and decision delays domestically and abroad.
- EPAM is targeting where it can help clients in the short term, actively changing models and focusing on maintaining client relationships. The company is also reducing expenditures where it can, anticipating its headcount to continue declining through Q2.
The global economy is generating an unfavorable pricing environment for EPAM, resulting in the firm slashing its FY23 outlook for the second time since initially providing a bearish forecast in mid-February. Although some IT software and service providers have successfully circumvented challenging conditions, such as Palo Alto Networks (PANW) and MongoDB (MDB), others, like EPAM, have not been as fruitful. Mission-critical software and services, such as cybersecurity and custom database management, are demonstrating the most resilience to the current economy. In contrast, EPAM's services can be placed on hold as companies pad their balance sheets to better navigate a potential worsening of the economy.
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.
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