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Market Snapshot
briefing.com
| Dow | 33952.65 | +1.22 | (0.00%) | | Nasdaq | 13609.11 | +106.53 | (0.79%) | | SP 500 | 4379.43 | +12.47 | (0.29%) | | 10-yr Note | -28/32 | 3.80 |
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| | NYSE | Adv 965 | Dec 1889 | Vol 844 mln | | Nasdaq | Adv 1590 | Dec 2765 | Vol 4.5 bln |
Industry Watch
| Strong: Information Technology, Consumer Discretionary, Consumer Staples, Health Care |
| | Weak: Real Estate, Energy, Materials, Industrials, Utilities |
Moving the Market
-- Bank of England, Norges Bank, and Swiss National Bank all raised their policy rates, stoking lingering concerns about global inflation and the lag effects of rate hikes potentially impacting global growth
-- Support from some mega cap stocks
-- Rising Treasury yields
-- Digesting this morning's economic data
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Closing Summary
22-Jun-23 16:30 ET
Dow -4.81 at 33946.62, Nasdaq +128.41 at 13630.99, S&P +16.20 at 4383.16
[BRIEFING.COM] The stock market had a mixed showing today. Index level performance was supported by strong mega cap stocks, which were benefitting from some flight to safety trading as concerns about global growth rose to the fore. The broader market, though, exhibited weakness due to continued consolidation efforts and the aforementioned growth concerns.
Apple (AAPL 187.00, +3.04, +1.7%), which hit a new 52-week high today on no news, Amazon.com (AMZN 130.15, +5.32, +4.3%), which logged a sizable gain after AWS announced a $100 million investment in a new generative AI program, and Alphabet (GOOG 123.87, +2.61, +2.2%) were some of the top performers from the mega cap space. The Vanguard Mega Cap Growth ETF (MGK) rose 1.1%.
The major indices all settled near their best levels of the session, leaving the S&P 500 and Nasdaq with gains while the Dow Jones Industrial Average closed flattish.
The Invesco S&P 500 Equal Weight ETF (RSP), however, declined 0.4%. Market breadth also reflected more negative action under the surface. Decliners lead advancers by a nearly 2-to-1 margin at the NYSE and a greater than 3-to-2 margin at the Nasdaq.
The underlying weakness was in response to a slate of rate hikes by the Bank of England (+50 bps to 5.00%), Norges Bank (+50 bps to 3.75%), Swiss National Bank (+25 bps to 1.75%), and Central Bank of Turkey (+650 bps to 15.0%). Those moves stoked concerns about global inflation and the lag effects of rate hikes potentially impacting global growth.
In addition, Fed Governor Michelle Bowman (FOMC voter) said in a speech that "additional policy rate increases will be necessary to bring inflation down." This followed Fed Chair Powell's commentary yesterday indicating that there could be two more rate hikes by the Fed before the end of the year if the economy performs as expected.
This morning's economic data, though, was mostly weaker than expected. Existing home sales declined 20.4% year-over-year in May while the Leading Economic Index declined for the 14th consecutive month.
Fed Chair Powell continued his monetary policy testimony before the Senate Banking Committee today. He didn't provide any new surprises in terms of monetary policy views, yet there was consternation among committee members regarding capital requirements for banks. That understanding, coupled with the growth concerns, undercut the bank stocks. The SPDR S&P Bank ETF (KBE) fell 3.2% and the SPDR S&P Regional Banking ETF (KRE) fell 2.7%.
Weak regional bank components, along with weak energy shares, drove the Russell 2000 to underperform today, declining 0.8%.
Most of the S&P 500 sectors registered a loss. Real estate (-1.4%) and energy (-1.3%) saw the largest declines, although the cyclical financial (-0.7%), industrials (-0.7%), and materials (-0.3%) sectors underperformed. Meanwhile, strong mega cap components drove the consumer discretionary (+1.5%), communication services (+1.2%), and information technology (+0.9%) sectors to the top of the leaderboard.
Treasuries settled with losses across the curve. The 2-yr note yield rose nine basis points to 4.80% and the 10-yr note yield rose eight basis points to 3.80% in response to the aforementioned rate hikes.
- Nasdaq Composite: +30.2% YTD
- S&P 500: +14.1% YTD
- Russell 2000: +4.9% YTD
- S&P Midcap 400: +4.7% YTD
- Dow Jones Industrial Average: +2.4% YTD
Reviewing today's economic data:
- Q1 Current Account Balance -$219.3 bln; Prior was revised to -$216.2 bln from -$206.8 bln
- Initial jobless claims for the week ending June 17 were unchanged at 264,000 and the four-week moving average of 255,750 was the highest since November 13, 2021. Continuing jobless claims for the week ending June 10 decreased by 13,000 to 1.759 million.
- The key takeaway from the report is that initial jobless claims have remained elevated (third straight week above 260,000), suggesting that there is some loosening in the labor market, although the level of initial claims remains well below average levels north of 375,000 seen in all recessions since 1980.
- Existing home sales increased 0.2% month-over-month in May to a seasonally adjusted annual rate of 4.30 million (Briefing.com consensus 4.28 million) from an upwardly revised 4.29 million (from 4.28 million) in April. Sales were down 20.4% from the same period a year ago.
- The key takeaway from the report is that the inventory of existing homes for sale remains tight, which is due in part to the strength of the labor market, the ability to work remotely, and the jump in mortgage rates that is deterring existing home owners' interest in moving.
- Leading Indicators fell 0.7% in May (Briefing.com consensus -0.8%) following a prior decline of 0.6%.
- The weekly EIA Natural Gas Inventories showed a build of 95 bcf versus a build of 84 bcf last week.
- The weekly EIA Crude Oil Inventories showed a draw of 3.83 million barrels after last week's build of 7.92 million barrels.
Looking ahead to Friday, economic data is limited to the preliminary IHS Markit Manufacturing PMI (prior 48.4) and Services PMI (prior 54.9) for June at 9:45 a.m. ET.
Treasuries settle with losses
22-Jun-23 15:35 ET
Dow -59.64 at 33891.79, Nasdaq +92.21 at 13594.79, S&P +7.13 at 4374.09
[BRIEFING.COM] The S&P 500 and Nasdaq remain near their highs of the day while the Dow Jones Industrial Average turned lower recently.
Treasuries settled with losses across the curve. The 2-yr note yield rose nine basis points to 4.80% and the 10-yr note yield rose eight basis points to 3.80%.
Looking ahead to Friday, economic data is limited to the preliminary IHS Markit Manufacturing PMI (prior 48.4) and Services PMI (prior 54.9) for June at 9:45 a.m. ET.
Energy complex settles mixed; Indices remain near highs of the day
22-Jun-23 15:05 ET
Dow +1.22 at 33952.65, Nasdaq +106.53 at 13609.11, S&P +12.47 at 4379.43
[BRIEFING.COM] The major indices remain near their best levels of the day thanks to mega cap gains. The Dow is trying to hold onto a slim gain.
Energy complex futures settled mixed. WTI crude oil futures fell 2.5% to $69.45/bbl and natural gas futures rose 3.8% to $2.61/mmbtu.
On a related note, the S&P 500 energy sector fell to the bottom of the pack, down 1.4%.
NRG Energy gains following Investor Day, Etsy slips after tgt cut at Loop
22-Jun-23 14:30 ET
Dow -6.40 at 33945.03, Nasdaq +91.87 at 13594.45, S&P +9.73 at 4376.69
[BRIEFING.COM] The S&P 500 (+0.22%) is firmly in second place to this point on Thursday afternoon, holding near HoDs.
S&P 500 constituents NRG Energy (NRG 34.98, +1.10, +3.25%), Palo Alto Networks (PANW 246.31, +7.39, +3.09%), and FedEx (FDX 232.64, +6.80, +3.01%) pepper the top of the standings. NRG is outperforming after its Investor Day, PANW gains on positive sell side commentary, while FDX recoups yesterday's post-earnings losses.
Meanwhile, e-commerce app Etsy (ETSY 91.69, -2.94, -3.11%) falls a bit after Loop Capital cut their price target this morning.
Gold slips 1.1% on stronger dollar, yields
22-Jun-23 14:00 ET
Dow -30.63 at 33920.80, Nasdaq +82.51 at 13585.09, S&P +5.91 at 4372.87
[BRIEFING.COM] With about two hours to go on Thursday the tech-heavy Nasdaq Composite (+0.61%) is still atop the standings.
Gold futures settled $21.20 lower (-1.1%) to $1,923.70/oz, pressured by both and stronger dollar and treasury yields.
Meanwhile, the U.S. Dollar Index is up about +0.4% to $102.43.
Market stays on defensive
The stock market's rally effort has stalled so far this week. Some may call it a consolidation trade, others may refer to it as backing and filling, and yet others may say it is a pullback from short-term overbought conditions.
However one thinks of it, the bottom line is that the major indices are all lower than they were at the start of the week, registering losses that range from 0.7% to 1.4%.
Those are not big losses by any stretch of the imagination given the full body stretch the major indices have made, particularly since their late-May lows. The gains associated with that stretch and, frankly, the stretch from the October lows, have stirred a desire to trim some positions... secure some profits.... take some money off the table... do some rebalancing.
Again, there are many ways to describe things but they all lead to one outcome thus far: lower levels for the major indices.
It's possible that we will see more (insert your phrase here) for the major indices when trading begins. Currently, the S&P 500 futures are down 11 points and are trading 0.3% below fair value, the Nasdaq 100 futures are down 52 points and are trading 0.4% below fair value, and the Dow Jones Industrial Average futures are down 84 points and are trading 0.2% below fair value.
A battery of central bank rate hikes, a Morgan Stanley downgrade of Tesla (TSLA) to Equal Weight from Overweight, and losses in Boeing (BA), after supplier Spirit AeroSystems (SPR) said it will suspend factory operations after employees represented by the International Association of Machinists and Aerospace Workers decided to strike, have all clipped investor sentiment.
Briefly, the Bank of England voted 7-2 to raise the Bank Rate by a larger-than-expected 50 basis points to 5.00%, the Norges Bank increased its key policy rate by 50 basis points to 3.75%, and the Swiss National Bank raised its policy rate by 25 basis points to 1.75%. For good measure, the Central Bank of Turkey hiked its benchmark rate by 650 basis points to 15.0%.
The confluence of these actions stirred some angst about global growth prospects, as participants contemplated the lag effect of prior rate hikes from these banks along with those implemented by the Federal Reserve.
Fed Chair Powell suggested yesterday before the House Financial Services Committee that the Fed may not be done raising rates either, saying there could possibly be two more rate hikes before year end if the economy performs as expected.
The implication is that the economy won't be as weak as some had previously thought it might be. Mr. Powell will appear before the Senate Banking Committee at 10:00 a.m. ET today for day two of his semiannual monetary policy testimony.
Better-than-expected earnings reports from KB Home (KBH) and Darden Restaurants (DRI) for their May-ending quarters were reminders that consumers continue to weather the effects of prior rate hikes.
On a related note, initial jobless claims for the week ending June 17 were unchanged at 264,000 and the four-week moving average of 255,750 was the highest since November 13, 2021. Continuing jobless claims for the week ending June 10 decreased by 13,000 to 1.759 million.
The key takeaway from the report is that initial jobless claims have remained elevated (third straight week above 260,000), suggesting that there is some loosening in the labor market, although the level of initial claims remains well below average levels north of 375,000 seen in all recessions since 1980.
The Treasury market saw a knee-jerk reaction in response to the claims data, rallying at first before quickly unwinding its post-report gains. The 2-yr note yield is currently up four basis points to 4.75% and the 10-yr note yield is up four basis points to 3.76%.
-- Patrick J. O'Hare, Briefing.com
Hello Group's attractive fundamentals set the stage for solid upside as China recovers (MOMO)
A new addition to our Value Leader rankings in early May, Hello Group (MOMO) sits atop our most recent list, boasting a free cash flow yield of 18.4%, net cash per share of $5.86, and a long-term debt-to-equity ratio of zero. Hello Group's typically-strong financials did not mean much when shares remained in perpetual decline throughout 2021 and 2022. However, after a few encouraging quarterly earnings reports, the worst of Hello Group's woes may finally be a thing of the past, making its attractive valuation of 6x forward earnings seem like quite the bargain.
- What is Hello Group? The China-based firm is known for its social media app Momo and online dating offering Tantan. Momo represents most of Hello Group's total revs, as Tantan comprises just ~11%. With most social media applications, monthly active users (MAU) are closely monitored. Unfortunately for Hello Group, it has been bleeding MAUs for a while, explaining why shares have lost around 80% of their market value over the past five years.
- However, MAUs finally grew on a qtr/qtr basis in Q1, the first time since seeing a 0.3% sequential improvement in 2Q22, climbing 12.6% to 106.5 mln, potentially marking a bottom in 4Q22. Furthermore, Tantan delivered its first quarterly profit at the operating level in Q1.
- Helping Hello Group achieve these milestones was a long-awaited recovery from the pandemic. Although China has not entirely rebounded since COVID-19, the gradual reopening of the economy and normalization of outdoor activities bodes well for Hello Group going forward. Management remarked earlier this month that after COVID cases peaked in January, MAUs across various regions gradually grew, rebounding rapidly after Chinese New Year. CEO Yan Tang added that the extent of the recovery following the holiday was better than in previous years.
- Hello Group has implemented structural changes, shaking up its management team and outlining strategic priorities, to improve user acquisition efficiency, a critical factor in Tantan reaching profitability in Q1. Specifically, Hello Group cut down investments in low return-on-investment marketing channels. After seeing success in Q1, Hello Group is stepping on the gas, focusing on product innovation to improve average revenue per user growth.
- These moves are already generating meaningful gains; management anticipates Q2 revs of RMB 3.0-3.1 bln, representing a drop of just 3.5-0.3% yr/yr, a stark improvement from the four-straight quarters of double-digit declines.
As a Chinese-based tech company, Hello Group is not without its share of hurdles. Regulatory risks remain a concern, especially after the Chinese government cracked down significantly on tech giants in late 2020. The region is also not entirely out of the woods regarding COVID, which could lead to restrictions down the road, resulting in Hello Group's MAUs reverting to sequential declines.
Nevertheless, Hello Group boasts an attractive valuation and healthy financials, including no long-term debt, allowing it to weather potential storms ahead.
KB Home issues strong results as widely expected, but stock succumbs to sell-the-news reaction (KBH)
Following in the footsteps of Lennar (LEN) and D.R. Horton (DHI), homebuilder KB Home (KBH) crushed quarterly revenue and earnings expectations on strengthening demand and fewer cancellations. Also like those homebuilding peers, KBH raised its full-year guidance, forecasting FY24 homebuilding revenue of $5.80-$6.20 bln versus its previous guidance of $5.20-$5.90 bln. Given the strong results and outlooks from LEN and DHI, expectations were sky-high heading into KBH's report, as illustrated by the stock's 50% run higher since mid-March.
- Those lofty expectations and accompanying rally for the stock set the stage for an initial sell-the-news reaction as traders locked in profits. The results themselves were solid with the only real blemish being a 390 bps decrease in housing gross profit margin to 21.4% due to a 3% average selling price to $479,500. KBH cited higher construction costs as another headwind.
- The main storyline, though, is that after showing initial signs of a recovery in February, demand continues to improve with KBH achieving monthly sequential increases in net orders during Q2. On a sequential basis, net orders surged by 84% as buyers adjusted to higher mortgage rates.
- During the earnings call, CEO Jeffrey Mezger echoed the bullish sentiments of LEN's executives regarding the new home construction market. Mr. Mezger noted that the housing market is characterized by an under supply of existing home inventory -- a point that LEN CEO Stuart Miller highlighted last week. Availability is even more scarce at KBH's price points which skew towards the first-time and affordable first move-up segments.
- This limited supply, combined with a greater sense of urgency from buyers, is putting upward pressure on new home prices. In Q2, KBH was able to raise prices in about two-thirds of its communities, which will provide a positive impact in early 2024 when those homes are delivered.
- Another factor working in KBH's favor is its diversification strategy as it expands in the southeast region of the U.S. Total revenue in this region is now approaching the 20% level compared to just 11% five years ago. 4
- Even in its home state of California, which is plagued by a challenging regulatory environment, the outlook remains pretty bright due to a more severe shortage of homes. Homebuilders have shied away from the state, as reflected by the fact that 75% of homes there were built before 2000.
Overall, KBH delivered impressive results, as widely anticipated. The heightened expectations are working against the stock today as traders lock in profits, but KBH's fundamentals are strengthening, and the long-term view remains positive amid a favorable supply and demand dynamic.
Accenture's recent rally takes a breather following its trimmed FY23 (Aug) sales outlook (ACN)
Accenture (ACN -2%) is gapping down today despite exceeding earnings and revenue estimates in Q3 (May). The IT services and consulting firm has missed bottom-line forecasts just twice over the past five years, so the market has come to expect solid earnings upside. However, what investors were not expecting was Accenture trimming the high-end of its FY23 (Aug) revenue outlook. Accenture estimates that due to persistent FX headwinds, which are taking a 4 pt chunk out of sales growth this year, its FY23 revenue growth will be +8-9%, down from +8-10%.
Meanwhile, Accenture is enduring a similarly unfavorable dynamic as many of its peers, i.e., smaller deal sizes and heightened scrutiny. Management commented that sales would have been more robust if not for smaller deals, particularly in its Strategy & Consulting and Communications businesses. In fact, when excluding just its Communications division, total revenue growth, which was 5% yr/yr, excluding FX impacts, would have been 3 pts higher.
Nevertheless, even though Accenture's FY23 sales outlook and relatively muted Q3 sales growth were disappointing, there were multiple bright spots from the quarter, which explains why shares are still holding up relatively well, especially after they soared roughly 19% since early May lows.
- Accenture added 26 clients with quarterly bookings over $100 mln, bringing the total to 85 YTD, 15% higher than the year-ago period, underscoring relatively resilient demand characteristics compared to last year despite the macroeconomic uncertainty.
- Meanwhile, even with the rather tepid 2.5% reported sales growth yr/yr to $16.56 bln, Accenture continued to capture additional market share in the quarter, outpacing its publicly-traded peer group by 2x.
- The business optimizations Accenture outlined last quarter to lower costs in FY24 and beyond, including reducing its workforce by 2.5%, also remain on track.
- AI is also taking center stage, with Accenture diverting $3.0 bln, including doubling its data and AI workforce to 80,000, toward the technology to accelerate its clients' digital transformations. CEO Julie Sweet commented that per an Accenture-led survey, 97% of global executives said Generative AI will transform their company, with 67% of organizations planning to hike their AI spending over the next several years.
Bottom line, Accenture's Q3 results showed a few cracks as the IT spending backdrop remains gloomy. However, shares are still holding up relatively well as investors zero in on the several positives from the quarter, especially Accenture's capacity to capitalize on the current AI boom. Whether its investments in the technology will pay off meaningfully over the long term is up for debate. Still, with organizations looking to deploy AI across much of their operations, it could be more costly for Accenture to sit on its hands.
Darden Restaurants posted decent results, but guidance could have been better (DRI)
Darden Restaurants (DRI -2%) is lower despite reporting solid Q4 (May) earnings this morning. DRI operates several restaurant chains, including Olive Garden, LongHorn Steakhouse and the recently acquired Ruth's Chris Steak House. DRI reported EPS upside but it was not as large as the prior two quarters while revenue was in-line. The FY24 guidance was a bit weak with the mid-points of both EPS and revenue being below analyst expectations. However, DRI did provide a 10% dividend increase.
- DRI reported comps at +4.0% on a consolidated basis, within prior guidance of +3-5%, but a good bit below Q3's +11.7% comps. Comps were led by LH at +7.1%, followed by OG at +4.0%. Fine Dining comps were the laggard at -1.9%, but it was lapping last year's very strong bounce back comp following Omicron. The FY24 consolidated comp guidance of +2.5-3.5% is likely been seen as a disappointment following FY23's +6.8% number.
- Quickly, as a housekeeping matter. The RC deal closed after the FY ended and were not included. Also, going forward, Ruth's Chris company-owned and operated locations will be included in Fine Dining comps, while revenue and profits from the franchise locations will reside in its other segment. Also, DRI will not include RC comps until they have been owned and operated by DRI for 16 months.
- While comps were maybe a bit of a letdown, news on the cost side was a bit better. DRI said that total inflation slowed meaningfully in Q4 to 4.4%, 270 basis points less than Q3. Chicken and seafood experienced deflation this quarter, helping offset high single-digit beef inflation. Restaurant labor was 40 bps better, driven by productivity improvements.
- In terms of the macro picture, DRI said the consumer seems pretty strong overall. There appears to be only minimal switching between lower-priced occasions. DRI is not seeing anything concerning overall. One area where DRI is seeing a little bit of check management is with alcohol sales primarily at its higher end brands. Also, an analyst on the call seemed to think DRI's guidance of 50 new restaurant openings in FY24 was a bit low. DRI said it just wanted to be prudent.
Overall, we are heartened to hear the improvement on inflation. However, we think the FY24 outlook for EPS/revs and comps are the main reason the stock is lower today. In fairness, the stock is not down by that much, but investors probably wanted a more robust outlook for FY24. The Q4 results were decent but certainly not as strong as the robust Q3 results.
The stock has been trending higher recently. It had been in a narrow trading range in the $140-150 area from Nov-May, but had broken out following the Q3 report on March 23. So we think investors had been pricing in a better result/guidance. So that seems to be impacting the stock today as well. Finally, we think this report maybe lowers expectations for other sit down restaurant stocks set to report when earnings season kicks off next month, including BJRI, BLMN, CAKE, EAT, TXRH.
Spotify pulls back after hitting 52-week highs following an upgrade at Wolfe Research today (SPOT)
After briefly touching 52-week highs following an upgrade at Wolfe Research today to "Outperform" from "Peer Perform," Spotify (SPOT) is starting to encounter some buffering. Shares of the music and podcast streaming giant exploded this year, soaring nearly 90%. Although the stock still trades at half of where it was in November 2021, its recent rally is impressive, especially since it came despite two consecutive earnings misses.
However, Briefing.com is noticing a few cracks form lately, particularly on the podcasting side of Spotify's business, which may limit further upside.
- Spotify's recent Q1 results were somewhat underwhelming, missing top and bottom line estimates while guiding Q2 revs below consensus. However, shares received a jolt as monthly active user (MAU) growth of 22% exceeded the company's prior forecast. Still, although MAU growth was decent, it did not translate to exceptional revenue growth. This is due to ad-supported MAU growth of 26% yr/yr outpacing Premium subscriber (~87% of total sales) growth of 15%. Furthermore, Premium subs slowed sequentially, increasing 2.4% compared to a 5.1% bump last quarter.
- With macro pressures potentially worsening over the near term, subscriber growth could remain relatively weak, keeping a lid on future sales growth.
- Meanwhile, after spending hundreds of millions acquiring podcast groups and inking exclusive partnerships, Spotify acknowledged in April that it may have overpaid and overinvested with some of these deals. The company has already started not renewing some exclusive deals, reflecting poor performance. Although this should help Spotify's balance sheet, it could begin to face more substantial competitive pressures going forward since it would no longer be the exclusive provider of specific podcasts.
- Tech giants like Apple (AAPL) and Google (GOOG) can more easily divert capital toward enhancing their podcasting apps, potentially taking market share from Spotify. At the same time, there are few barriers to entering podcast app development, allowing for many smaller players to capture Spotify's listeners.
There are still plenty of reasons to remain bullish on Spotify, including its leadership position in music streaming and constant innovation, such as introducing a higher-end subscription tier supporting high-fidelity audio later this year. However, the economic environment is not shaping up to be favorable for Spotify over the near term, especially given that users could switch over to the ad-supported version of the app and continue listening to their playlists. Additionally, the woes Spotify has experienced related to its podcasting business may intensify, especially with the exclusive model not exhibiting the kind of strength it initially expected.
We noted in October that Spotify will likely carve out a bottom sooner rather than later. After hitting lows soon after that comment, only to more than double since, we believe now would probably be an appropriate time to take profits off the table, waiting until after Q2 results to see if Spotify's Premium subscriber growth is proving resilient to macroeconomic pressures.
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