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Market Snapshot
briefing.com
| Dow | 34369.25 | -38.72 | (-0.11%) | | Nasdaq | 13715.19 | -68.01 | (-0.49%) | | SP 500 | 4419.40 | -7.71 | (-0.17%) | | 10-yr Note | -26/32 | 3.77 |
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| | NYSE | Adv 1085 | Dec 1778 | Vol 3.0 bln | | Nasdaq | Adv 1757 | Dec 2663 | Vol 8.1 bln |
Industry Watch
| Strong: Utilities, Consumer Staples |
| | Weak: Communication Services, Information Technology, Real Estate, Financials, Consumer Discretionary |
Moving the Market
-- Weakness in mega cap stocks, pressured by rising market rates
-- Broader market showing some strength
-- Treasury yields rising despite the University of Michigan Consumer Sentiment Survey reflecting a sharp drop in year-ahead inflation expectations to 3.3% from 4.2%
-- Small caps lagging larger peers
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Closing Summary
16-Jun-23 16:25 ET
Dow -108.94 at 34299.03, Nasdaq -93.25 at 13689.95, S&P -16.25 at 4410.86
[BRIEFING.COM] The stock market closed out this quarterly options expiration day on a downbeat note, but losses were still relatively slim when considering the big move up recently. The major indices spent most of the session oscillating around their flat lines before finding some downside momentum in the afternoon trade. Ultimately, they settled near their lows of the day. The S&P 500 for its part was able to maintain a posture above 4,400 on a closing basis.
Treasuries also settled with losses despite the preliminary University of Michigan Consumer Sentiment Index for June revealing a sharp drop in year-ahead inflation expectations to 3.3% from 4.2% -- the lowest since March 2021. The 2-yr note yield rose seven basis points to 4.71%. The 10-yr note yield rose four basis points to 3.77%. The move up in yields acted as a headwind for mega caps and other growth stocks.
Mega caps had an outsized influence on index losses, but many other stocks also contributed. The Vanguard Mega Cap Growth ETF (MGK) fell 0.6% and the market-cap weighted S&P 500 fell 0.4%.
Decliners led advancers by a roughly 5-to-3 margin at both the NYSE and at the Nasdaq.
Pleasing earnings and guidance from Adobe (ADBE 495.18, +4.27, +0.9%), along with Morgan Stanley naming NVIDIA (NVDA 426.92, +0.39, +0.1%) its top pick in AI and raising its price target to $500 from $450, continued to drive an AI buzz. That buzz, however, was not enough to offset underlying weakness in the market, which still managed to record its fifth straight winning week.
Only three of the 11 S&P 500 sectors logged gains. Utilities (+0.5%), materials (+0.1%), and consumer staples (+0.1%) led the pack. Meanwhile, lagging mega cap components drove the communication services (-1.0%) and information technology (-0.8%) sectors to the bottom of the pack.
Small cap stocks lagged their larger peers today after outperforming so far this month. The Russell 2000 fell 0.7% today, but it's still up 7.2% for the month.
Trading volume today was extremely heavy due to the options expiration and the S&P quarterly rebalancing.
As a reminder, bond and equity markets are closed on Monday in observance of Juneteenth.
- Nasdaq Composite: +30.8% YTD
- S&P 500: +14.9% YTD
- Russell 2000: +6.5% YTD
- S&P Midcap 400: +6.2% YTD
- Dow Jones Industrial Average: +3.5% YTD
Today's economic data was limited to the preliminary University of Michigan Consumer Sentiment Index for June, which checked in at 63.9 (Briefing.com consensus 60.2) versus the final reading of 59.2 for May. In the same period a year ago, the index stood at 50.0.
- The key takeaway from the report is that an easing in year-ahead inflation expectations underpinned a pickup in consumer sentiment; however, the report notes that a majority of consumers still expect difficult times for the economy over the next year.
Looking ahead to Tuesday, economic data is limited to May Housing Starts (prior 1.401 million) and Building Permits (prior 1.416 million) at 8:30 a.m. ET.
Market remains near lows; Treasuries settle lower
16-Jun-23 15:30 ET
Dow -57.68 at 34350.29, Nasdaq -68.56 at 13714.64, S&P -8.54 at 4418.57
[BRIEFING.COM] The major indices remain near their lows of the day heading into the close.
Treasuries settled with losses across the curve. The 2-yr note yield rose seven basis points to 4.71%. The 10-yr note yield rose four basis points to 3.77%.
As a reminder, bond and equity markets are closed on Monday in observance of Juneteenth.
Looking ahead to Tuesday, economic data is limited to May Housing Starts (prior 1.401 million) and Building Permits (prior 1.416 million) at 8:30 a.m. ET.
Mega caps extend losses
16-Jun-23 15:05 ET
Dow -38.72 at 34369.25, Nasdaq -68.01 at 13715.19, S&P -7.71 at 4419.40
[BRIEFING.COM] The major indices took a turn lower recently. The S&P 500 is backtracking toward the 4,400 level.
The lagging mega caps are building on their losses as evidenced by a 0.5% decline in the Vanguard Mega Cap Growth ETF (MGK) is 0.5%. The Invesco S&P 500 Equal Weight ETF (RSP), meanwhile, is down 0.1%.
Energy complex futures settled higher. WTI crude oil futures rose 1.7% to $71.92/bbl and natural gas futures rose 3.3% to $2.63/mmbtu.
Corning, Henry Schein outperforming in S&P 500 on Friday
16-Jun-23 14:25 ET
Dow -11.36 at 34396.61, Nasdaq -40.26 at 13742.94, S&P -0.13 at 4426.98
[BRIEFING.COM] The S&P 500 (flat) is lower by less than a point, having faded off afternoon highs which saw the index about +0.33% higher off yesterday's close.
S&P 500 constituents Corning (GLW 35.21, +1.37, +4.05%), Henry Schein (HSIC 78.31, +2.52, +3.32%), and Viatris (VTRS 10.22, +0.28, +2.82%) dot the top of today's standings. GLW continues to rise, piggy-backing off yesterday's strength related to a Citigroup upgrade.
Meanwhile, Los Angeles-based REIT Alexandria RE (ARE 114.79, -6.36, -5.25%) is the worst-performing constituent after shareholder Land & Buildings issued a white paper detailing impact of work from home trend on life science office market.
Gold's weekly declines flips monthly gains to losses
16-Jun-23 14:00 ET
Dow +31.11 at 34439.08, Nasdaq -21.13 at 13762.07, S&P +4.93 at 4432.04
[BRIEFING.COM] With about two hours to go on Friday the tech-heavy Nasdaq Composite (-0.15%) is the sole declining major average, down now about 21 points.
Gold futures settled higher by less than $1 to $1,971.20/oz, down about -0.3% this week to push the yellow metal into losses on the month (month-to-date -0.25%).
Meanwhile, the U.S. Dollar Index is up about +0.2% to $102.28.
Indices supported by a "flat squeeze"
The S&P 500 is up nearly 3.0% for the week and the Nasdaq Composite is up nearly 4.0% for the week. We're going to go out on a sequoia tree limb, then, and say right now that the S&P 500 will log its fifth straight, winning week and that the Nasdaq will log its eight straight, winning week when it is all said and done today.
Today, by the way, is a quarterly options expiration day, so one should expect to see heavier-than-average trading volume. Yesterday saw a pickup in trading volume, perhaps not as much as one might have thought given the scope of the gains across the market, but a pickup nonetheless that was heavier than usual.
It is hard to say if that had anything to do specifically with today's quarterly expiration, but it isn't hard to say that it most likely had to do with a fear of missing out on further gains.
We could see in market breadth figures, which favored advancers by a roughly 3-to-1 margin at the NYSE and a slightly less than 2-to-1 margin at the Nasdaq, that "everything" didn't participate in yesterday's rally but it kind of felt like that was the case.
Nonetheless, ongoing leadership from the mega-cap stocks, a gainful effort by the value indices, wins for all 11 S&P 500 sectors, and a 1.2% gain in the Invesco S&P 500 Equal-Weight ETF (RSP) created an aura of bull market activity that was pulling sidelined cash into the action.
The popular narrative is that the move by the broader market on Thursday -- and the one seen throughout June -- was fueled by a prevailing sense that the Fed is done, or close to being done, raising rates. For what it's worth, that move left the market-cap weighted S&P 500 trading at 19.1x forward twelve-month earnings, which is a 10% premium to the 10-year historical average of 17.3%, according to FactSet.
There is some residual consternation about the multiple expansion in the face of a slowing economic environment, yet money flows have been the stock market's friend as visions of a soft landing for the economy and a subsequent acceleration in earnings growth six months from now have seemingly overshadowed valuation concerns for the time being.
If there is an immediate source of angst, it might be the contention that stocks are overbought on a short-term basis and due for a pullback. Ironically, that same consideration is why the major indices have continued to press higher. The notion that they should experience a pullback is in the mainstream, but because they haven't lived up to that notion is exactly why they have continued to press higher, as portfolio managers and investors missing the rally are finding it tough now not to participate.
It is the essence of a "flat squeeze."
In any case, few participants would be surprised to see some consolidation activity given the parabolic move this month, yet the equity futures market suggests that move may still have to wait.
Currently, the S&P 500 futures are up 12 points and are trading 0.2% above fair value, the Nasdaq 100 futures are up 58 points and are trading 0.4% above fair value, and the Dow Jones Industrial Average futures are up 57 points and are trading 0.2% above fair value.
Better-than-expected earnings and guidance from Adobe (ADBE), which is keeping the AI buzz going, and word from the Bank of Japan that it is going to keep its ultra-loose monetary policy in place have kept market bulls engaged and will presumably keep the indices on their winning path when trading begins.
-- Patrick J. O'Hare, Briefing.com
Humana the next health insurer to warn about rising medical claims costs, sending shares lower (HUM)
On Wednesday, health insurance giant UnitedHealth (UNH) warned at a Goldman Sachs conference that its medical care ratio is trending towards the high-end or slightly above its full year guidance range of 82.1-83.1%. That update not only sent shares of UNH spiraling lower, but it also reverberated across the health insurance space, hitting stocks such as Molina Healthcare (MOH), Cigna (CI), and Humana (HUM). The fear was that if UNH is experiencing an uptick in medical cost coverage, then it's likely that its peers are as well. This morning, HUM confirmed those concerns by announcing that it too expects its benefit expense ratio to be at the top end of its full year guidance range of 86.3-87.3%.
- Benefit ratio measures the amount of claims that are paid out compared to the amount of revenue taken in by insurance premiums. When an insurer's claims rise, its benefit ratio also increases, which is a negative sign for earnings.
- On that note, HUM did reaffirm its FY23 EPS guidance of at least $28.25, but that was not enough to stave off another sell-off for the stock. We believe the issue may be that market participants are anticipating a more prolonged upswing in HUM's claims trend.
- During the height of the pandemic and in its aftermath, many people -- especially those in retirement age -- postponed elective surgeries such as hip and knee replacements. This created a backlog of procedures with a lot of pent-up demand, which is now beginning to unwind as health and government officials have deemed the health crisis to be officially over.
- Furthermore, in the wake of the pandemic, many people are seeking help for mental and emotional health issues, adding to health insurers' claims expenses.
- More specific to HUM, the company is also seeing strong growth for its individual Medicare Advantage program. While that's a positive for the top-line, the mix of new members is skewing towards a higher-than-expected proportion of age-ins, which tends to have a higher benefit ratio that the average new member.
- It is worth pointing out that during HUM's Q1 earnings call in late April, the company did state that it expects its full year benefit ratio to be biased towards the upper half of the range. Therefore, today's update shouldn't come as a huge surprise. The slightly worse outlook is primarily due to higher-than-anticipated non-impatient utilization trends, such as dental services, outpatient surgeries, and emergency room visits.
The main takeaway is that the unwinding of pent-up demand for elective surgeries and other procedures may only be in the early innings, creating a headwind to earnings growth for the industry.
Installed Building Products is among several housing materials stocks making new highs (IBP)
Homebuilding stocks have been quite strong lately. The Fed pausing rates is obviously good news for the housing market. It is also good news for the companies that supply materials for homebuilders. Several have made new 52-week highs this week, including BECN, BLD, BLDR, BXC. Today, we wanted to quickly profile another related name making a new high today: Installed Building Products (IBP).
- Installed Building Products is one of the nation's largest new residential insulation installers. It also installs other building products, including waterproofing, fire-stopping, fireproofing, garage doors, rain gutters, window blinds, shower doors, closet shelving and mirrors. It manages all aspects of the installation process for new and existing single-family and multi-family residential and commercial building projects. It operates a national network of over 240 branch locations.
- IBP has been very active on the M&A front for a long time. It uses what is known as a "roll-up" strategy. The installation business is highly fragmented. It's mostly small, local businesses -- a lot of mom-and-pop shops and small family businesses. IBP saw an opportunity where it could come in and acquire smaller installers all around the US.
- This roll-up strategy has been quite effective. Probably the biggest benefit is that this greater scale also has allowed IBP to negotiate better prices from insulation vendors (IBP goes direct to national manufacturers, skipping middlemen) which improves margins. Through early May, IBP had already acquired approximately $46 mln of annual revenue and expects to acquire at least $100 mln of revenue for the full year.
- IBP is benefitting from strength in multifamily, which helped drive Q1 residential sales growth of 7.4%, more than offsetting deceleration in its single-family revenue growth. IBP sees the top line growth as especially encouraging considering that the company continued to prioritize installation job profitability over volume. This led to a nice boost in Q1 adjusted gross margin at 31.9% vs 29.4% a year ago.
- Looking ahead, IBP believes the residential housing market will remain resilient through the remainder of 2023 due to strong employment trends and relatively low existing home inventory. Regardless, IBP feels well positioned to navigate the cyclicality of the US housing market.
Overall, we think IBP is a name to watch on two fronts: 1) it's using an M&A roll-up strategy to consolidate a very fragmented industry made up of mostly small family businesses. There are some real benefits here in terms of cutting out middle men and leveraging its scale to negotiate better prices with insulation manufacturers. And 2) the Fed cooling its jets on rate hikes is good for the new home construction market. TopBuild (BLD) is another name in this sector, it's also active in terms of M&A. Both stocks have been making nice moves of late.
Walt Disney not looking like the happiest place on earth as long-time CFO surprisingly departs (DIS)
Walt Disney (DIS), which endured a dramatic CEO transition last November when former CEO Bob Chapek was replaced with Bob Iger, is now facing another significant leadership change as long-standing CFO Christine McCarthy is stepping down. She is taking a medical leave of absence with both Reuters and the Wall Street Journal noting that her husband has been ill for some time. The past year at DIS has also been a pretty tumultuous and stressful time that has included a major restructuring initiative, the streamlining of operations that included 7,000 layoffs, and an ongoing legal battle with Florida Govenor Ron DeSantis.
- McCarthy, who has served as DIS's CFO since 2015, has been integral in the company's effort to improve the profitability of the Direct-to-Consumer (DTC) business, most notably including Disney+. In fact, it was widely reported that she played a major role in the ouster of Mr. Chapek as the losses for the streaming business piled up under his stewardship.
- Rewinding to 4Q22, Mr. Chapek's last quarter as CEO, the DTC business saw its operating loss balloon to ($1.5) bln from ($700) mln in the year-earlier period.
- Since then, the tandem of Iger and McCarthy has substantially trimmed the losses. In DIS's latest quarter, DTC's operating loss decreased by $200 mln to ($700) mln, driven by lower programming and production costs and a Disney+ price hike from last December.
That's the good news. The bad news is that Disney+ shed about 4 mln global subscribers from the prior quarter with McCarthy warning during the earnings call that subscriber growth may show further weakness in Q3 due to the price increase.
- Although investors weren't pleased with the mounting losses for Disney+, the prospects of stalling subscriber growth -- or worse -- also isn't sitting well. This is reflected in the stock's 9% drop since that Q2 earnings report on May 10.
- Finding the right balance between growth and profitability for streaming has proven to be a huge challenge in a highly competitive market. For the time being, solving that puzzle now rests on the shoulders of interim CFO Kevin Lansberry, who has served as CFO of Disney Parks, Experiences and Products since 2017.
- He has effectively led an impressive recovery for the theme park business out of the pandemic with attendance numbers at Walt Disney World increasing by about 33% over 2021 figures, according to an AP article from yesterday.
- Strong attendance and rising per capita spending underpin the segment's solid performance with Q2 revenue increasing by 17% to $7.8 bln and operating income growing by 23% to $2.2 bln.
- However, whether that success translates into better results on the entertainment side of the business remains to be seen. Unlike the theme park business, which is benefitting from a major tailwind with the shift in consumer spending towards travel, Disney Entertainment is contending with fierce headwinds in the form of slowing ad spending and intense competition from the likes of Netflix (NFLX), Paramount Global (PARA), and Warner Brothers Discovery (WBD).
The main takeaway is that the departure of Ms. McCarthy, a steadfast and influential executive who helped transform DIS into a streaming powerhouse, creates additional uncertainty at a crucial time for the company. Given the stock's poor performance with shares down by about 40% since the beginning of 2022, perhaps there's been some pressure to shake things up again. In the near-term, though, it's hard to imagine the stock staging a big comeback as the company tries to find the right balance between growth and profitability for the streaming business without a permanant CFO in place.
Adobe rejoins the $500 club following a strong Q2 report; Firefly off to a strong start (ADBE)
Adobe (ADBE +3%) is higher today and is trading above $500 for the first time since February 2022. The catalyst is a strong Q2 (May) earnings report last night. We had concerns about a possible sell-the-news reaction given the +40% move in the stock over the past month. However, investors are pushing the stock even higher today. Mega cap tech names like Adobe have been very strong recently.
- This digital document giant has now posted three consecutive double digit EPS beats following four small beats, so that is a good trend. Adobe also posted nice revenue upside and guided EPS above analyst expectations for both Q3 (Aug) and FY23.
- Its Digital Media segment performed well with revenue rising 10% yr/yr (+13% constant currency) to $3.51 bln. This was nicely above prior guidance of $3.45-3.47 bln. DM is by far Adobe's larger segment, so people watch it closely. Adobe's other major segment is Digital Experience, which allows businesses to manage/track customer experiences using analytics. DE segment revenue grew 12% yr/yr (+14% CC) to $1.22 bln, which was in-line with $1.21-1.23 bln prior guidance.
- Adobe is particularly excited about Firefly, its family of creative generative AI models. It was recently released in beta version and has been attracting tremendous customer interest as it's highly differentiated in the market. It's being directly integrated into product workflows. Firefly's first model is trained on Adobe Stock images and licensed content designed to generate commercially viable, professional quality content. Adobe said customer generations from Photoshop were 80x higher than Adobe had originally projected going into the beta. In terms of top of funnel, Adobe thinks Firefly will help it reach billions of new users because it makes the act of creating more accessible.
- In terms of its macro view, Adobe says overall demand is strong and win rates remain healthy. However, as it enters the second half of the fiscal year, it is seeing some projects being pushed out in the current enterprise spend environment. The company has reflected this in its updated annual targets. Investors do not seem too concerned about this as we think they sort of expected some cautionary language. This language strikes us a bit less severe than we are hearing from others.
- Adobe also gave an update on its pending acquisition of Figma. Adobe continues to engage with the CMA in the UK, the EC and DOJ as they conduct their regulatory reviews. Adobe continues to believe the transaction should close by the end of 2023.
Overall, this was a very good quarter for Adobe. We had some trepidation going in following the big run in the stock. However, a strong report from DocuSign (DOCU) last week made us feel a bit more confident. Also, it was good to see Adobe raise FY23 EPS guidance by more than the Q2 upside. That overshadowed any stated concerns about the macro picture. A lot of tech names have warned about longer sales cycles and deals getting harder to close with more layers of scrutiny. Adobe seems to be humming right along.
Domino's Pizza rolling in dough today as shares gap up nicely on an upgrade at Stifel (DPZ)
Domino's Pizza (DPZ +6%) is slicing out a nice piece of the broader market rally today, gapping well above its 50-day moving average (312.96) following an upgrade at Stifel to "Buy" from "Hold." Today's upgrade is the second one this month from the firms we track, possibly illuminating that the most intense of the global pizza chain's headwinds may already be behind it.
Briefing.com notes that today's jump breaks DPZ's downward trend, sliding roughly 14% as of yesterday's close since hitting resistance at its 200-day moving average (334.54) immediately following its Q1 earnings report in late April. Investors ultimately sold DPZ's Q1 results despite initially charging higher as the company's delivery business remained pressured. However, DPZ is amid some favorable tailwinds, which could help the company achieve its long-term annualized growth forecast of +5-7%, resulting in a more significant rebound going forward.
- DPZ conceded earlier this week that it lost a lot of traction on the delivery side of its business, which comprises a little over half its total sales each year. However, given the company's astounding 60-year delivery history, we are not worried about DPZ returning to growth over the long term. DPZ continuously prioritizes value during the inflationary environment, keeping prices below many of its competitors and the overall quick-service restaurant industry. This should resonate with customers, bolstering DPZ's customer loyalty over the long haul.
- Speaking of which, DPZ commands the most prominent loyalty program amongst pizza firms nationwide, boasting 77 mln members, 30 mln of which are active customers. DPZ is gearing up to upgrade its loyalty program this fall, adding new features to allure more members. Enhancing its loyalty program can be a surefire way for DPZ to sustain and expand its massive customer base, which will only add further kindling to ignite a return to accelerated sales growth once macroeconomic pressures ease more meaningfully.
- International expansion will be another crucial factor in expanding its customer base. DPZ has penetrated underserved markets like China and India to bolster its global footprint. Management remains thrilled about the potential growth in these markets, noting this week during an Oppenheimer conference that the economics in China are very compelling given it is a highly developed quick-service restaurant market. DPZ added that India is another market with similar potential. DPZ expects these two regions to be material drivers of its international business.
While DPZ has cooled off since being a darling during the pandemic due to its foothold on the delivery pizza business, it is taking the proper actions to strengthen its positioning as a dominant global pizza chain during a less favorable period. It may take time until its core delivery business gains traction, especially if consumers' tastes shift from emphasizing convenience over value, i.e., delivery over carryout. However, DPZ is focusing on what it can in the interim, which should help trigger a swift volume bump once macroeconomic conditions turn more favorable.
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