Market Snapshot
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| Dow | 34452.43 | +44.92 | (0.13%) | | Nasdaq | 13780.78 | -7.52 | (-0.05%) | | SP 500 | 4453.24 | +1.59 | (0.04%) | | 10-yr Note | -1/32 | 3.856 |
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| | NYSE | Adv 1996 | Dec 887 | Vol 467 mln | | Nasdaq | Adv 2624 | Dec 1765 | Vol 2.8 bln |
Industry Watch
| Strong: Consumer Discretionary, Consumer Staples, Utilities, Real Estate |
| | Weak: Health Care, Information Technology |
Moving the Market
-- Light participation ahead of July 4th holiday
-- Some mega cap stocks rolled over, weighing on broader market
-- Strength from some bank stocks that announced capital return plans on Friday following the stress test results
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Closing Summary
03-Jul-23 13:25 ET
Dow +10.87 at 34418.38, Nasdaq +28.85 at 13817.15, S&P +5.21 at 4456.86
[BRIEFING.COM] The stock market closed today's abbreviated session, which marked the start of the new month, new quarter, and second half of the year, on a slightly higher note. Volume was naturally lighter due to the early close ahead of the Fourth of July holiday, but decent for a shortened day of trading. As a reminder, equity and bond markets will be closed tomorrow.
Overall, conviction was lacking today as many participants extended the holiday break into a four-day weekend. The major indices traded around their flat lines for the entire session, ultimately settling near their highs of the day with modest gains.
There were some notable pockets of strength in the market with specific catalysts. EV makers Tesla (TSLA 279.82, +18.05, +6.9%) and Rivian (RIVN 19.56, +2.90, +17.4%) were top standouts after impressing investors with their Q2 delivery numbers.
Another pocket of strength was the banking industry. The SPDR S&P Regional Banking ETF (KRE) rose 2.3% and the SPDR S&P Bank ETF (KBE) rose 1.9%. These moves followed capital return plans announced by some banks after the stress test results. Morgan Stanley (MS 86.41, +1.01, +1.2%) was among the best performers from the space, having announced a dividend increase and the reauthorization of a multi-year stock repurchase program up to $20 billion.
Aside from Tesla, mega caps were relatively weak. The Vanguard Mega Cap Growth ETF (MGK) fell 0.1% while the Invesco S&P 500 Equal Weight ETF (RSP) rose 0.3%. Apple (AAPL 192.46, -1.51, -0.8%) was an influential laggard after FT reported it's making large cuts to its Vision Pro production forecasts.
Nine of the 11 S&P 500 sectors closed with gains. The consumer discretionary (+1.1%) and real estate (+0.9%) sectors led the pack. Meanwhile, the health care (-0.8%) and information technology (-0.3%) sectors were the lone laggards to close in negative territory.
Market participants received some economic data this morning that didn't move equities much, but garnered some knee-jerk buying efforts in the Treasury market. The ISM Manufacturing Index fell further into contraction territory (i.e. sub-50% readings) in June to 46.0% from 46.9% in May.
The 2-yr note yield, which dropped to 4.85% in response to the data, is up four basis points to 4.91% now. The 10-yr note yield, which fell to 3.78%, is up four basis points to 3.85%. As a reminder, the Treasury market is open until 2:00 p.m. ET today.
- Nasdaq Composite: +32.0% YTD
- S&P 500: +16.1% YTD
- S&P Midcap 400: +8.2% YTD
- Russell 2000: +7.7% YTD
- Dow Jones Industrial Average: +3.8% YTD
Reviewing today's economic data:
- The June ISM Manufacturing Index fell to 46.0% (Briefing.com consensus 47.1%) from 46.9% in May. The dividing line between expansion and contraction is 50.0%, so the sub-50.0% reading for June reflects a general contraction in manufacturing activity for the eighth straight month.
- The key takeaway from the report is that the manufacturing sector continues to operate in a state of contraction as optimism about the second half of 2023 weakens amid recession concerns. According to the ISM, a Manufacturing PMI above 48.7%, over a period of time, generally indicates an expansion of the overall economy.
- Total construction spending increased 0.9% month-over-month in May (Briefing.com consensus 0.4%) after increasing a downwardly revised 0.4% (from 1.2%) in April. Total private construction was up 1.1% month-over-month while total public construction rose 0.1% month-over-month. On a year-over-year basis, total construction spending was up 2.4%.
- The key takeaway from the report is the renewed strength in new single family construction, which reflects the pickup in demand for housing despite the jump in mortgage rates.
S&P 500 and Dow remains near highs ahead of the close
03-Jul-23 12:25 ET
Dow +52.11 at 34459.62, Nasdaq +5.76 at 13794.06, S&P +4.11 at 4455.76
[BRIEFING.COM] With 30 minutes left of trading ahead of the July 4th holiday, the S&P 500 and Dow Jones Industrial Average sit near their best levels of the day while the Nasdaq lags.
Most of the S&P 500 sectors trade up now, leaving the health care (-0.9%), information technology (-0.6%), and communication services (-0.03%) sectors alone in the red. Consumer discretionary (+1.2%) remains atop the leaderboard thanks to a strong showing from Tesla (TSLA 277.43, +15.70, +6.0%) followed by the real estate (+1.0%) and financials (+0.8%) sectors.
As a reminder, stock market closes at 1:00 p.m. ET today ahead of the Fourth of July holiday and the Treasury market will close at 2:00 p.m. ET. Markets will be closed tomorrow.
Looking ahead to Wednesday, market participants will receive the following economic data:
- 7:00 a.m. ET: Weekly MBA Mortgage Applications Index (prior +3.0%)
- 10:00 a.m. ET: May Factory Orders (Briefing.com consensus 0.6%; prior 0.4%)
- 2:00 p.m. ET: FOMC Minutes from the June 13-14 meeting
Oil prices trend higher; some mega caps extend losses while underlying market builds strength
03-Jul-23 12:05 ET
Dow +44.92 at 34452.43, Nasdaq -7.52 at 13780.78, S&P +1.59 at 4453.24
[BRIEFING.COM] Things are little changed over the last half hour at the index level.
Oil prices have been trending higher so far today after Saudi Arabia said it will extend its output reduction another month into August and Russia said it will cut its exports by 500,000 barrels per day in August. WTI crude oil futures are up 0.5% to $70.97/bbl.
Elsewhere, some mega caps have extended their losses while the broader market builds up strength. The Vanguard Mega Cap Growth ETF (MGK) is down 0.2% while the Invesco S&P 500 Equal Weight ETF (RSP) is up 0.4%.
Bank stocks outperform on capital return plans
03-Jul-23 11:30 ET
Dow +10.92 at 34418.43, Nasdaq -4.96 at 13783.34, S&P +0.70 at 4452.35
[BRIEFING.COM] The major indices have moved mostly sideways over the last half hour.
Market breadth reflects more positive action under the surface than index performance may suggest. Advancers have a nearly 2-to-1 lead over decliners at the NYSE and a 4-to-3 lead at the Nasdaq.
Small and mid cap stocks have been outperforming so far. The Russell 2000 is up 0.4% and the S&P Mid Cap 400 is up 0.5%. The Russell 2000 has been partially boosted by outperforming regional bank shares.
On a related note, the SPDR S&P Regional Banking ETF (KRE) is up 2.1% and the SPDR S&P Bank ETF (KBE) is up 1.9%. These moves come after some bank stocks announced capital return plans on Friday following the stress test results.
Mega caps rollover as Nasdaq hits session low
03-Jul-23 11:00 ET
Dow -18.48 at 34389.03, Nasdaq -11.12 at 13777.18, S&P -1.97 at 4449.68
[BRIEFING.COM] The Nasdaq fell to a fresh session low recently as some mega cap stocks rolled over.
Meta Platforms (META 285.48, -1.53, -0.5%), which had been up 0.8%, Alphabet (GOOG 119.89, -1.10, -0.9%), which had been trading fractionally above its flat line, and Microsoft (MSFT 37.05, -3.46, -1.0%), which had been up 0.1% earlier, are all losing standouts from the mega cap space.
Apple (AAPL 192.01, -1.98, -1.0%), which has been stuck in negative territory so far today, is another notable loser from the space after reportedly making large cuts to Vision Pro production forecasts.
No fireworks ahead of the open
Tomorrow is the July 4th holiday, yet the fireworks came early for the stock market on Friday. Last week closed with a bang to put an exclamation point on a terrific second quarter and first half of the year.
How good was the first half? The answer might be considered ruefully given one's exposure, but the objective fact of the matter is that it was the best first half of a year for the Nasdaq since 1983!
Today, the equity futures market looks like a bit of a dud. There are no "oohs" and "aahs" with bomb's bursting in air, only a dose of "meh" when looking at the futures market.
Currently, the S&P 500 futures are down three points and are trading 0.1% below fair value, the Nasdaq 100 futures are up 17 points and are trading 0.1% above fair value, and the Dow Jones Industrial Average futures are down 67 points and are trading 0.2% below fair value.
Today will be an abbreviated trading session. The stock market closes at 1:00 p.m. ET and the Treasury market closes at 2:00 p.m. ET. Markets will be closed July 4.
It is fair to say that a lot of market participants are not participating today, choosing instead to stretch this holiday affair into a four-day weekend.
The thin conditions are partly why there isn't much conviction ahead of the open. Other factors include a wait-and-see stance in front of the June ISM Manufacturing PMI release at 10:00 a.m. ET, simmering valuation concerns, and another bump in market rates. The 2-yr note yield is up four basis points to 4.92% and the 10-yr note yield is up two basis points to 3.84%.
Tesla (TSLA), however, isn't being held back by any of that. It is up 5.6% in pre-market trading after announcing Q2 deliveries (466,140) that were better than expected. The pop in TSLA has been an influential source of support for the Nasdaq 100 futures.
Separately, the bank stocks are lending some support to the broader market as well. After the close on Friday, many announced capital return plans following the stress test results and have garnered some buying interest in pre-market action.
Morgan Stanley (MS) is a standout in this regard. It is up 1.2% after saying its Board agreed to increase the quarterly dividend to $0.85 per share from $0.775 and reauthorize a multi-year common equity share repurchase program of up to $20 billion.
Saudi Arabia, meanwhile, is reauthorizing its voluntary output reduction of one million barrels per day another month into August and Russia said its exports will be reduced by 500,000 barrels per day in August, according to Reuters. This news has WTI crude futures up 1.0% to $71.33 per barrel.
We'll see if this lights a match under the energy stocks, but for the most part, nothing is igniting at the moment at the index level.
-- Patrick J. O'Hare, Briefing.com
Tesla's record deliveries in Q2, helped by price cuts and healthy demand, spark a nice gap up (TSLA)
Ongoing price cuts and U.S. tax credits for electric vehicles (EVs) again offset the broader economic headwinds in Q2, including higher interest rates and sticky inflation, fueling Tesla's (TSLA +7%) record deliveries in the quarter and energizing the stock. Tesla delivered 466,140 vehicles in Q2, nicely ahead of street estimates and a 10.5% improvement from the previous quarter, which was also a record.
Tesla's delivery report may also not be the sole factor sending its shares higher today. Several other EV manufacturers, including Rivian (RIVN), XPeng (XPEV), NIO (NIO), and Li Auto (LI), each registered solid delivery figures in Q2 and June, a broader reflection of underlying health within the EV industry. The upbeat reports are also lifting other non-pure EV OEMs, such as Ford (F), General Motors (GM), and Volkswagen (VWAGY).
- Tesla divides its deliveries into Model S/X (higher-priced models) and Model 3/Y (lower-priced models). Its lower-priced Model 3/Y group exhibited notable strength, with deliveries up a whopping 87.4% yr/yr and 8.4% sequentially to 446,915. The yr/yr growth showcased the pent-up demand following a lengthy chip shortage that hindered production last year.
- Meanwhile, Model S/X deliveries were the inverse, climbing 19.0% yr/yr and 79.8% sequentially to 19,225. The massive leap from Q1 is due to January price cuts, which were most significant across the Model S and X lineup, not taking effect until March. Additional reductions in April also saw Tesla's higher-tier lineup receive larger discounts than the Model 3 and Y.
- However, even though the slashed prices helped power higher deliveries, it likely came at the further expense of margins. Last quarter, this worry partly contributed to a notable sell-off. Tesla also did see margin erosion during Q1, with total gross margins contracting by 977 bps yr/yr and 450 bps sequentially to 19.3%, well shy of analyst expectations.
- Furthermore, a disparity between production (479,700) and deliveries (466,140) remained relatively wide in Q2. When production continues to exceed deliveries, it signals rising inventories, a reflection of potential demand weakness. However, the discrepancy continued to narrow over the past three quarters on an absolute and percentage basis. Additionally, management remarked last quarter that the production/delivery difference resulted from the company moving to a more-regional balanced mix of build and deliveries.
Tesla's recent price cuts to qualify its vehicle lineup for the new U.S. tax credits have sparked a significant rally in deliveries over the past two quarters. Unlike after its Q1 report, investors applaud Tesla's numbers from Q2, a reflection of dissipating worries that China-based competitors are stealing market share and macroeconomic conditions are eroding demand.
Although margins will likely undergo another quarter of contraction in Q2 (scheduled for July 19), Tesla's actions have spurred considerable demand. They may also accelerate its long-term goal of reaching 20 mln in annual deliveries. With Tesla's charging technology quickly becoming the U.S. standard following deals with Ford and GM and its long-awaited Cybertruck slated for launch this year, the company is showing no signs of letting off the throttle despite its shares already surging over 140% YTD.
Bank stocks are moving higher following announcements on post-stress test dividend hikes (XLF)
Bank stocks were the main attraction after the close on Friday. The Fed released its stress test results for 23 large banks after the close on Wednesday, June 28. However, at that time, the Fed asked the banks to hold off on commenting on plans for dividends and share buybacks until Friday after 4:30pm ET.
- First off, we are glad the Fed asked the banks to wait a couple of days to digest the information and to let investors digest the information before making decisions on dividends and buybacks. In past years, the banks would release press releases within an hour or so and it seemed rushed.
- The general theme that we noticed was that the largest banks mostly increased their dividends while the banks on the smaller side of the spectrum stood pat on dividends/buybacks. Several banks were silent regarding dividends/buybacks, which we interpret as them not making any changes. The banks also commented on their SCB and CET1 results, but those were made public in the Fed's report last Wednesday.
- Among the notable announcements were Goldman Sachs (GS), Morgan Stanley (MS) and State Street (STT) all announcing 10% dividend increases, which were quite large. Other big dividend hikes were announced by Wells Fargo (WFC), which plans a 17% increase, and BNY Mellon (BK), which plans a 14% increase. Citigroup (C) is planning a 4% increase to its dividend.
- There were not any share buyback increases, although Morgan Stanley plans to reauthorize a share repurchase program of up to $20 bln. STT also said it remains committed to repurchasing shares under existing authorization for up to $4.5 bln in 2023.
- JPMorgan Chase (JPM) seemed to strut its stuff a bit, and deservedly so, as it discussed its stress test results. JPM said it continues to maintain a "fortress balance sheet" and plans to increase its dividend by 5%.
Overall, bank stocks are moving modestly higher today which tells us investors are pleased with their announcements on Friday after the close. The commentary on the Fed stress ratios was generally positive. We had expected to see some more action on buyback increases, but it seems the banks want to stand pat. Also, the dividend increases strike us healthy, but still prudent given the macro picture as we head into 2H23. The banks do not seem to be overextending themselves on the dividend hikes, the sizes seem about right.
Progress Software advances higher as beat-and-raise report highlights its resiliency (PRGS)
Progress Software (PRGS), a DevOps and business applications company, delivered a strong beat-and-raise Q2 earnings report driven by better-than-expected revenue across its product portfolio. While IT departments have become more judicious in their spending, PRGS continued to see healthy demand, which the company attributes to the mission-critical nature of its applications. More specifically, the digitization trend has necessitated the modernization of business applications and the development of software that boosts revenue and/or removes costs through greater operating efficiencies.
- Strength was broad based, but the OpenEdge, LoadMaster, Chef, and MarkLogic offerings were standouts in Q2. OpenEdge, an application development platform for running business-critical applications, saw an upswing in customer win-backs, while DevOps product Chef benefited from a combination of new customer wins and expansions. This is reflected in PRGS's net retention rate, which remained above 100%.
- Acquisitions are a key component of PRGS's growth strategy and in Q2, the company's active M&A approach played an important role in its upside performance. This past February, PRGS completed its acquisition of MarkLogic, adding new capabilities to its product portfolio, including NoSQL and semantic metadata management. During the earnings call last night, PRGS stated that MarkLogic provided a meaningful impact on ARR, which grew by 19% to $569 mln.
- Furthermore, the company continues to expect that it will achieve all of its MarkLogic synergy targets by the end of the fiscal year. When PRGS announced the acquisition last January, it stated that MarkLogic should add more than $100 mln in annual revenue, contribute strong cash flows, and be accretive to earnings in FY24.
- Looking ahead, PRGS believes that the M&A market will remain in its favor, providing compelling acquisition opportunities. This positive view is based on the scarce amount of capital in the private market and the difficult economic conditions that are prevailing, causing companies to look for exit strategies.
Overall, this was an impressive quarterly report for PRGS, illustrating that demand for its business application software remains resilient amid a cautious IT spending environment.
SMART Global lights up on a sizeable EPS beat and explosive AI-related revenue in MayQ (SGH)
SMART Global (SGH +9%), a semiconductor and application-optimized LED supplier, is being lit up with buy orders today after registering its widest earnings beat in six quarters in Q3 (May). Revs did fall at their quickest pace in over three years. However, it was still better than analysts anticipated. Meanwhile, SGH projected Q4 (Aug) earnings and sales figures in line with consensus.
- SGH's adjusted EPS of $0.66, albeit a 24% contraction yr/yr, was a notable bright spot in Q3. SGH expanding its non-GAAP gross margins 230 bps yr/yr to 28%, assisted by cost containment initiatives and lower bonus accruals, played a significant role in its sizeable earnings beat.
- AI was a recurring theme throughout SGH's conference call, with good reason. The company's Intelligent Platform Solutions (IPS) segment, which comprised 45% of Q3 revs, is amid secular tailwinds in AI, machine learning (ML), and data analytics. For example, SGH's Penguin Computing arm of IPS deploys high-performance computing (HPC) systems, such as managing over 50,000 NVIDIA GPUs for AI training. With the AI boom remaining alive and well, IPS sales exploded by nearly 80% yr/yr to $170.85 mln.
- On the flip side, SGH's other segments, Memory Solutions and LED Solutions, did not fare as well, with sales tumbling by 44% and 37%, respectively, dragging down overall growth by 17.1% to $383.33 mln. The considerable declines across SGH's non-AI businesses highlight the depressed macroeconomic environment. For instance, even though Micron (MU) stated earlier this week that it likely already endured a bottom regarding memory demand, it still forecasted a significant reduction in wafer fab equipment spending yr/yr in 2023.
- Nevertheless, like MU, SGH was optimistic about improving demand trends. The company commented that while customers continue working down inventory levels, it noticed improving customer design activity, which tends to be a precursor to improving demand. Additionally, within its LED Solutions segment, SGH acknowledged that although it is still in the early days of a cyclical recovery of the LED market, it is bullish that the business will enjoy a more robust FY24.
- SGH anticipates decent positive momentum to cap off FY23, projecting adjusted EPS of $0.30-0.60, a fairly wide range but common with past quarterly forecasts, and revs of $350-400 mln.
Overall, Q3 results were impressive and showcased how AI continues positively impacting organizations focused on the technology. AI will also be SGH's core focus going forward. As previously announced, SGH is exiting its SMART Modular Brazil business, which made up most of its Memory Solutions segment, agreeing to sell 81% of the division for ~$138 mln in cash, making its IPS segment represent the bulk of future revs.
AI may very well end up being a significantly disruptive technology. However, given that it is still in the early stages of growth, AI may generate turbulence for SGH over the near term. The company acknowledged AI's relative immaturity, anticipating IPS sales to be lumpy over the next several quarters. Still, SGH is confident that it will capitalize on the emerging trends within the AI industry over the long term.
NIKE scores points with inventory correction, but soft outlook takes some air out of stock (NKE)
NIKE (NKE) entered 4Q23 with a lingering high inventory situation, placing the company in a difficult position as it ramped up promotional activities to sell off stockpiles of older merchandise. Making matters worse, consumers have also been pulling back on discretionary spending, cutting into demand for athletic shoes, athleisure wear, and sports equipment. While facing this challenging backdrop, NKE's gross margin slid by 140 bps yr/yr to 43.6%, causing the company to come up just short of Q4 EPS estimates.
The good news is that one of those issues has been significantly resolved.
- Inventories were flat on a yr/yr basis and lower by about $400 mln on a sequential basis to $8.5 bln. With NKE's inventory returning to more normalized levels, the company can rein in markdowns and move towards a full price strategy.
- On that note, NKE stated that it's aiming for low-single digit price increases in FY24, supporting a 140-160 bps expansion for gross margin.
However, the macroeconomic related headwinds haven't dissipated, causing NKE to take a cautious approach with its 1Q24 revenue outlook.
- Specifically, the company guided for Q1 revenue to be flat-to-up low single-digits, missing analysts' expectations for about mid-single-digit growth.
- The soft outlook is primarily due to weakness in the wholesale channel, which experienced a 2% drop in revenue in Q4 following an 18% increase last quarter.
- CEO John Donahoe commented that the environment will remain promotional in FY24, putting pressure on NKE's wholesale partners through 1H24. Relatedly, Dick's Sporting Goods (DKS) and Foot Locker (FL) -- two of NKE's largest wholesale partners -- are trading lower today.
There are some key positives, though.
- Greater China, which has been a sore spot for NKE over the past few quarters, rebounded nicely in Q4 with revenue growing by 25% in constant currency to $1.8 bln. That represents a major improvement over last quarter's 1% increase.
- During the earnings call, Mr. Donahoe struck a very bullish tone regarding NKE's opportunity in China, stating that the company's strategy there is going very well and that an active and engaged Gen Z demographic and growing middle class are supporting its brand.
- While the sluggish wholesale channel weighed on the North America market, which saw revenue growth slow to 5% from 27% last quarter, NIKE Direct still performed well as revenue climbed by 18% in constant currency to $5.5 bln.
- This is mainly a function of the investments that NKE has made in its digital channel over the past several years. In FY23, the digital share of NKE's total business reached 26% compared to 10% in FY19.
The main takeaway is that while NKE essentially corrected its high inventory situation, it's still contending with a promotional retail climate. NKE is still a best-in-class brand and its long-term outlook is bright with momentum building for its Jordan brand (mid-30% growth in Q4), but macro headwinds seem likely to persist at least through 1H24.
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