Market Snapshot
briefing.com
| Dow | 33915.34 | -6.83 | (-0.02%) | | Nasdaq | 13754.35 | +74.93 | (0.55%) | | SP 500 | 4427.10 | +14.24 | (0.32%) | | 10-yr Note | -1/32 | 4.05 |
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| | NYSE | Adv 2041 | Dec 817 | Vol 941 mln | | Nasdaq | Adv 2836 | Dec 1543 | Vol 5.1 bln |
Industry Watch
| Strong: Energy, Materials, Consumer Discretionary, Industrials, Financials |
| | Weak: Health Care, Consumer Staples, Real Estate, Utilities |
Moving the Market
-- Digesting the mixed June employment report that played into the soft landing narrative
-- Losses in a few mega caps weighing on the broader market
-- Keeping a close eye on Treasuries due to rising rates creating increased competition for stocks
-- Pro-growth vibe driving the outperformance of small cap and value stocks
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Closing Summary
07-Jul-23 16:30 ET
Dow -187.38 at 33734.79, Nasdaq -18.33 at 13661.09, S&P -12.64 at 4400.22
[BRIEFING.COM] The major indices traded in better form for most of the session today; however, things deteriorated in the afternoon trade when some mega cap stocks rolled over into negative territory. That roll, in turn, weighed heavily on index performance. Still, there was more positive action under the surface despite the major indices closing near their worst levels of the day.
Advancers led decliners by a 5-to-2 margin at the NYSE and a nearly 2-to-1 margin at the Nasdaq. The Invesco S&P 500 Equal Weight ETF (RSP) rose 0.3% while the Vanguard Mega Cap Growth ETF (MGK) fell 0.5%. Microsoft (MSFT 337.22, -4.05, -1.2%) and Apple (AAPL 190.68, -1.13, -0.6%) were among the more influential laggards, contributing to the underperformance of the Dow Jones Industrial Average (-0.6%) and the information technology sector (-0.4%).
Small caps and value stocks, meanwhile, exhibited relative strength throughout the session, reflecting the pro-growth mentality driving today's tape. The Russell 2000 rose 1.2% while the Russell Value Indices all outperformed their growth counterparts.
The Employment Situation Report for June served as the primary catalyst for today's action.
Nonfarm payrolls increased by 209,000 (Briefing.com consensus 220,000) while nonfarm private payrolls rose by just 149,000 (Briefing.com consensus 210,000). The ADP Report on Thursday estimated that 497,000 jobs were added to private sector payrolls in June, so today's official employment report mitigated the strength of that reading.
An increase in the average workweek and a 0.4% increase in average hourly earnings bodes well for continued spending growth that will support continued growth in the economy. Overall, the employment report supported the soft landing narrative.
The economically-sensitive S&P 500 energy (+2.1%), materials (+0.9%), and industrials (+0.2%) sectors were the top performers while the defensive-oriented consumer staples (-1.3%), health care (-1.2%), and utilities (-0.7%) sectors closed at the bottom of the pack.
Treasuries saw some knee-jerk volatility immediately following this morning's data, but the market settled down as the session progressed. The 2-yr note yield fell seven basis points to 4.94% and the 10-yr note yield rose one basis point to 4.05%.
- Nasdaq Composite: +30.5% YTD
- S&P 500: +14.6% YTD
- S&P Midcap 400: +7.1% YTD
- Russell 2000: +5.9% YTD
- Dow Jones Industrial Average: +1.8% YTD
Reviewing today's economic data:
- Nonfarm payrolls increased by 209,000 in June (Briefing.com consensus 220,000) and there were downward revisions to April and May that, combined, showed 110,000 fewer jobs than originally thought. Average hourly earnings, though, increased a stronger than expected 0.4% (Briefing.com consensus 0.3%) and May was revised up to 0.4% (from 0.3%), so the year-over-year change in June was unchanged at 4.4%.
- The key takeaway from the report is that it continued to fit in the soft landing zone, as payroll growth slowed but remained positive; meanwhile, an increase in the average workweek and the 0.4% increase in average hourly earnings are a boon for aggregate earnings that will continue to support both discretionary and non-discretionary spending.
Looking ahead to Monday, market participants will receive the following economic data:
- 10:00 a.m. ET: May Wholesale Inventories (Briefing.com consensus -0.1%; prior -0.1%)
- 3:00 p.m. ET: May Consumer Credit (Briefing.com consensus $21.0 billion; prior $23.0 billion)
Treasuries settle mixed
07-Jul-23 15:30 ET
Dow -56.67 at 33865.50, Nasdaq +43.73 at 13723.15, S&P +6.17 at 4419.03
[BRIEFING.COM] The major indices continue to drift lower ahead of the close.
Treasuries settled the session mixed. The 2-yr note yield fell seven basis points to 4.94% and the 10-yr note yield rose one basis point to 4.05%.
Looking ahead to Monday, market participants will receive the following economic data:
- 10:00 a.m. ET: May Wholesale Inventories (Briefing.com consensus -0.1%; prior -0.1%)
- 3:00 p.m. ET: May Consumer Credit (Briefing.com consensus $21.0 billion; prior $23.0 billion)
DJIA slips back into the red
07-Jul-23 15:00 ET
Dow -6.83 at 33915.34, Nasdaq +74.93 at 13754.35, S&P +14.24 at 4427.10
[BRIEFING.COM] The major indices continued to drift somewhat lower over the last half hour. The Dow Jones Industrial Average slipped into negative territory again.
Energy complex futures settled the session in mixed fashion. WTI crude oil futures rose 2.8% to $73.85/bbl and natural gas futures fell 1.1% to $2.57/mmbtu.
On a related note, the S&P 500 energy sector (+2.7%) remains in first place among the 11 sectors. The materials (+1.5%) and industrials (+0.7%) sectors are the best performers aside from energy.
MSFT slips back into the red, weighing down major indices
07-Jul-23 14:35 ET
Dow +27.15 at 33949.32, Nasdaq +96.65 at 13776.07, S&P +18.53 at 4431.39
[BRIEFING.COM] The major indices all pulled back somewhat over the last half hour. They have maintained positive positions, though, despite the modest decline.
The downside moves coincided with Microsoft (MSFT 340.25, -1.04, -0.3%) slipping back into negative territory.
Separately, the CBOE Volatility Index is down 6.0% or 0.92 to 14.52.
Russell 2000 outperforms
07-Jul-23 14:00 ET
Dow +45.88 at 33968.05, Nasdaq +97.00 at 13776.42, S&P +19.96 at 4432.82
[BRIEFING.COM] The Russell 2000 is pacing index level gains, up 1.8%.
It has been partially boosted by outperforming energy and regional bank shares. On a related note, the SPDR S&P Regional Banking ETF (KRE) is up 2.8% and the S&P 500 financials sector is up 0.7%. The energy sector is the best performer by a decent margin, up 2.6%.
Gold futures settled the session up 0.9% to $1,933.70/oz. Copper futures rose 1.2% to $3.78/mmbtu.
June employment report fits soft landing and additional rate hike zones
What we saw yesterday is that the stock market is starting to pay more attention to rising interest rates. That is the case because rising, risk-free rates create added competition for stocks and create headwinds for further multiple expansion efforts.
The 2-yr note yield hit a 16-year high of 5.12% yesterday before backing down. The 10-yr note yield topped 4.00% for the first time since March (i.e., just before the mini banking crisis). Where they go today is a bit of a mystery, only because the June employment report was relatively bond friendly in terms of payroll growth but less friendly in terms of average hourly earnings growth.
Briefly, nonfarm payrolls increased by 209,000 in June (Briefing.com consensus 220,000) and there were downward revisions to April and May that, combined, showed 110,000 fewer jobs than originally thought. Average hourly earnings, though, increased a stronger than expected 0.4% (Briefing.com consensus 0.3%) and May was revised up to 0.4% (from 0.3%), so the year-over-year change in June was unchanged at 4.4%.
The key takeaway from the report is that it continued to fit in the soft landing zone, as payroll growth slowed but remained positive; meanwhile, an increase in the average workweek and the 0.4% increase in average hourly earnings are a boon for aggregate earnings that will continue to support both discretionary and non-discretionary spending.
Something else the June employment report won't change is the Fed's view that additional tightening action is likely going to be appropriate. That view should manifest itself with a 25-basis points rate hike at the July FOMC meeting but the key question is, how much more tightening -- if any -- will there be after that?
The fed funds futures market still sees a "one-and-done" view of the world. According to the CME FedWatch Tool, the probability of a second rate hike at the September, November, and December FOMC meetings is just 24.0%, 40.4%, and 37.4%, respectively.
That could ratchet higher if next week's CPI Report for June is unfriendly.
There has been some knee-jerk volatility in the Treasury market and the equity futures market following the release of the employment data. The 2-yr note yield went from 5.02% to 4.91% right after the release, but is back up to 4.99%, down two basis points from yesterday's settlement. The 10-yr note yield went from 4.07% to 4.01%, but is back up to 4.07%, up three basis points from yesterday's settlement.
The futures for the major indices all pivoted from negative readings to positive readings before shifting back into negative territory. Currently, the S&P 500 futures are down six points and are trading 0.2% below fair value, the Nasdaq 100 futures are down 17 points and are trading 0.1% below fair value, and the Dow Jones Industrial Average futures are down 46 points and are trading 0.1% below fair value.
Notable headlines from the June Employment Situation Report:
- June nonfarm payrolls increased by 209,000 (Briefing.com consensus 220,000). The 3-month average for total nonfarm payrolls slipped to 244,000 from 247,000. May nonfarm payrolls revised to 306,000 from 339,000. April nonfarm payrolls revised to 217,000 from 294,000.
- June private sector payrolls increased by 149,000 (Briefing.com consensus 210,000). May private sector payrolls revised to 259,000 from 283,000. April private sector payrolls revised to 179,000 from 253,000.
- June unemployment rate was 3.6% (Briefing.com consensus 3.6%), versus 3.7% in May. Persons unemployed for 27 weeks or more accounted for 18.5% of the unemployed versus 19.8% in May. The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 6.9% versus 6.7% in May.
- June average hourly earnings were up 0.4% (Briefing.com consensus 0.3%) versus an upwardly revised 0.4% (from 0.3%) in May. Over the last 12 months, average hourly earnings have risen 4.4%, versus 4.4% for the 12 months ending in May.
- The average workweek in June was 34.4 hours (Briefing.com consensus 34.3), versus 34.3 hours in May. Manufacturing workweek was unchanged at 40.1 hours. Factory overtime was unchanged at 3.0 hours.
- The labor force participation rate was unchanged at 62.6%.
- The employment-population ratio was unchanged at 60.3%.
-- Patrick J. O'Hare, Briefing.com
Costco's comp growth dips again in June, but sales for non-discretionary items remain healthy (COST)
Sluggish demand for big-ticket discretionary items continued to weigh on Costco's (COST) comparable sales growth in June, which slipped to +3.0% when excluding the impacts from changes in gas prices and foreign exchange. That's down slightly from May and April, when the company generated comp growth of +3.3% and +4.3% respectively.
- Similar to recent months, the primary culprit that slowed COST's growth in June was a decline in average ticket size of 5.4%, reflecting the pullback in spending for pricier product categories such as electronics, appliances, jewelry, and home furnishings. For some context, average ticket size decreased by 4.2% in Q1.
While COST's comp growth in June is a far cry from the double-digit performances seen a year ago, its results still indicate that business is healthy overall.
- For instance, it's worth pointing out that COST is lapping a very challenging year-ago number when total company comps jumped by 13.0% and e-commerce comps were up by 8.3%. The e-commerce channel, which has substantial exposure to big-ticket product categories (~60% of total e-commerce sales), only declined by 0.4% yr/yr in June.
- That also marks a meaningful improvement from May, when e-commerce sales fell by 7.0%.
- Furthermore, customer traffic remained strong, increasing by 3.6% in the U.S., indicating that consumers are still looking to save money by purchasing food and everyday items in bulk. Staying true to recent form, COST's strongest product categories in June included food, sundries, and health and beauty.
- COST's consistent traffic growth is also a function of membership increases and its very high renewal rates. In Q1, household members increased by about 7% to 69.1 mln, while renewal rates remained at record highs of 92.6% for the U.S. and Canada.
Despite these positives, shares are sliding lower today. However, with the stock up by about 10% since COST reported Q3 results on May 26, some profit-taking is likely in play. Overall, we have a positive view of COST's sales results for June as they likely reflect continued share gains in the food and everyday item categories, while demand for big-ticket items has at least steadied.
Levi Strauss heads lower after offering some pretty skinny EPS guidance (LEVI)
Levi Strauss (LEVI -7%) is heading sharply lower today despite the largest jeans brand in the world reporting in-line Q2 (May) results last night. The main problem was a sharp drop in FY23 EPS guidance to just $1.10-1.20 from $1.30-1.40. LEVI also trimmed its FY23 sales guidance. LEVI posted strong DTC (direct-to-consumer, which means company-operated stores and online) and international sales. Unfortunately, it also saw continued softness in its US wholesale segment.
- As we mentioned in our preview, we knew this would be a difficult quarter for LEVI because it has been implementing its ERP transition. This accelerated approximately $100 mln of US revenue from Q2 to Q1. The ERP implementation led to downtime and lessened LEVI's ability to ship product. This was largely responsible for LEVI seeing Q2 revenue decline 9% yr/yr. Excluding this ERP shift, Q2 revs would have been down just 2%.
- By segment, its DTC channel posted 14% growth and that was despite lapping very strong 22% growth in the prior quarter. DTC saw broad-based positive comps across geographies, driven by higher traffic and volume. Company-operated e-commerce also accelerated, up 21%, with growth across all segments and brands. Global wholesale was down 22%. Growth was strong in Asia and Latin America, but more than offset by softer performance in the US and Europe. The good news is that US wholesale represents less than 30% of total revenue, down from 40% a decade ago, as LEVI has been shifting its focus to grow DTC and international.
- LEVI sees two main drivers to the slowdown of its US wholesale business: First, the macro effects of higher inflation and a slowing US economy has put increased pressure on the price sensitive consumer. Second, LEVI's inventory backlog created supply chain challenges in its US distribution centers, resulting in LEVI's inability to fulfill all demand. The lower fill rate resulted in higher customer out-of-stocks and less newness on the floor the last few quarters. In response, LEVI is taking surgical price reductions and with its ERP implementation done, inventory levels continue to improve.
- In terms of the reduced guidance, while LEVI has experienced stronger than anticipated trends in its international and DTC businesses, the reduction is mostly due to softer US wholesale trends. LEVI is also expecting lower gross margin in 2H, mainly due to its targeted price cuts to capture market share in US wholesale.
Overall, investors are clearly not too pleased with LEVI's FY23 EPS guidance reduction. It was a pretty substantial amount. It is clear that LEVI's US wholesale business is struggling quite a bit. DTC and international remain bright spots, but US wholesale has been a notable laggard. It shows that even top notch brands like Levi's are not immune from macro headwinds. We would be cautious about bottom fishing down here just yet. We would want to see its US wholesale segment at least stabilize first. Its peer Kontoor Brands (KTB -8%), which owns Wrangler and Lee jeans, is lower in sympathy.
Alibaba rallies as prospects of Ant IPO rise in wake of fine from China's central bank (BABA)
Chinese fintech Ant Group is being fined 7.12 bln yuan by The People's Bank of China (PBOC) for a variety of violations, including in the areas of financial consumer protection and corporate governance, and that's a good thing for Alibaba (BABA).
Of course, the fine itself isn't a positive, but what it represents is a significant turning point for Ant Group and BABA, which holds an approximate 33% stake in the company.
- Ever since BABA co-founder and former CEO Jack Ma criticized Chinese regulators for "outdated supervision" and for stifling innovation in October 2020, his company became the face of a rampant crackdown on anti-competitive behavior in China. In fact, his comments and the Chinese government's reaction to them ultimately led to the withdrawal of Ant's proposed IPO in late 2020, which was expected to create a windfall for BABA with a valuation approaching $40 bln.
- Living under the thumb of Chinese regulators has been especially brutal for BABA. Market share losses at the hands of JD.com (JD), PDD Holdings (PD), and others, along with slowing growth for both its e-commerce and cloud businesses, have characterized this period.
- Last quarter, the China commerce segment posted a mid-single digit yr/yr decline in GMV, while cloud revenue fell by 3%.
- BABA's stock price reflects these ongoing troubles, diving by over 70% since Jack Ma's inflammatory speech.
- The company, though, has made meaningful progress in addressing regulators' monopolistic concerns, announcing in late March a reorganization plan that will break the company up into six individual business groups.
- On June 20, BABA took the next step forward in executing that initiative after announcing a major shake-up at the top that will see Joseph Tsai, Executive Chairman, succeed Daniel Zhang as Chairman of the company. Additionally, Eddie Wu, who currently serves as Chairman of Taobao and Tmall Group, will replace Mr. Zhang as CEO, who will stay on board to lead BABA's Cloud Intelligence segment.
- Mr. Tsai and Mr. Wu, who helped launch BABA, are both viewed as close allies to Mr. Ma, signaling that Ma's influence at BABA is set to increase.
- Meanwhile, Ant Group has implemented its own transformation plan, cutting down its sprawling operations and becoming a financial holding company that subjects it to banking rules and capital requirements. It's likely not a coincidence that the announced fine, which essentially marks an end to the regulatory issues that hung over Ant Group, comes after BABA and Ant disclosed these sweeping changes.
The bottom line is that the fine -- which came in a bit lower than expectations -- sets the stage for Ant to move forward and pursue its growth strategies, and possibly revisiting an IPO down the road. With this overhang removed, Ant Group's valuation is poised to increase, which is a significant positive for BABA.
The Big Picture
Last Updated: 07-Jul-23 14:55 ET | Archive
Q2 earnings reporting period adds up to something important
First quarter earnings for the S&P 500 declined 2.0%. Second quarter blended earnings for the S&P 500 are expected to decline 7.4%, according to FactSet. Add up those two quarters and, well, you get no earnings growth for the first half of 2023.
But who is counting?
The first half of 2023 was the best first half for the Nasdaq of any year since 1983. For the S&P 500, it was the best since 2019.
Who needs actual earnings growth when you have the promise of earnings growth in your back pocket? Apparently, the Nasdaq and S&P 500 didn't. All that means now, though, is that the bar of earnings expectations ahead of the upcoming reporting season for the June quarter has gotten higher.
It's All Relative
It seems silly to suggest that an earnings decline of 7.4% is a "high bar," but the stock market moves in relative terms when it comes to earnings.
That's why the stock of a company reporting a large loss can get a big boost if that large loss was less than expected and/or guidance for future losses is better than expected. That is also why the stock of a company reporting a year-over-year decline in earnings can get a big boost if that decline was less than expected and/or guidance for future quarters is better than expected.
It's all relative to consensus estimates, and what we saw in the first quarter reporting period that took place in April and May is that the consensus estimates were too pessimistic.
On March 31, S&P 500 earnings for the first quarter were projected to decline 6.6%. When it was all said and done, they declined only 2.0%. Key to the market's performance, however, was that the mega-cap stocks, generally speaking, lived up to expectations and then some.
The move in their stocks carried the market through the first half of the year, but as the first half of the year was drawing to a close, participation widened out to include many more stocks. In fact, the Invesco S&P 500 Equal-Weight ETF (RSP) outperformed the market-cap weighted S&P 500 by 70 basis points in June.
It did so because investors were enthused by the understanding that the economy was holding up better than expected, that inflation was coming down, and that the Fed, presumably, was nearing the end of its tightening cycle.
That is why the bar of expectations is high going into the second quarter reporting period. Investors are expecting more out of these non-mega-cap stocks in terms of their earnings results, and certainly their guidance, because they have found reason in a strong labor market to believe the economy is going to avoid a hard landing.
The Bar Is High
Sure enough, FactSet informs us that third quarter earnings are projected to increase 0.3% and that fourth quarter earnings are projected to increase 7.8%. Add up those two quarters and, well, you have earnings growth in the second half of the year.
Those forecasts are why the bar of expectations for the second quarter reporting period is also high. Market participants will be expecting guidance that corroborates the earnings growth outlook for the second half of the year. They don't want to hear about margin pressures. They want to hear about margin expansion that is being aided by lower costs, higher prices, and steady/improving demand.
The demand story should have some foundation in the continued strength of the labor market, although tighter lending standards following the spring banking crisis, a contraction in the manufacturing sector, stubbornly high inflation, and higher interest rates are worrisome fissures in that foundation.
Nonetheless, analysts' optimism is embedded in rising forward 12-month EPS estimates and an earnings outlook for calendar year 2024 that envisions nearly 12% growth in S&P 500 earnings.
A Mega Number
There will be a smattering of June quarter earnings reports in the coming week, but the threshold into a busier reporting period will be crossed on July 14 when BlackRock (BLK), Citigroup (C), JPMorgan Chase (JPM), UnitedHealth (UNH), and Wells Fargo (WFC) share their results.
Per usual, the banks won't give much quantitative guidance, yet their qualitative remarks on loan demand, credit quality, capital markets activity, and regulatory matters will act as a trading guidepost in the early stages of the reporting period.
Beyond that, the guidance from the industrial companies and technology companies will hold sway as the market movers along with the mega-cap names before the retailers close things out at the end of the reporting period.
The mega-caps include Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), Amazon.com (AMZN), NVIDIA (NVDA), Tesla (TSLA), and Meta Platforms (META). Add up their market caps and, well, you get a mega number that approximates $11.1 trillion.
They aren't "the market," but they account for nearly a third of the S&P 500's market capitalization. When they move, the market moves with them, as everybody saw in the first half of the year.
Taking a closer look at FactSet estimates, the energy sector is expected to be the biggest detractor from second quarter earnings growth with a blended growth rate of -48.9% year-over-year, which accounts for negative 6.36 percentage points. Health care (-17.0% or -2.78 percentage points), materials (-31.7% or -1.3 percentage points), and information technology (-3.7% or -0.66 percentage points) are the other big drags.
The largest contributors to second quarter earnings are consumer discretionary (+27.4% or 1.55 percentage points), communication services (+12.9% or 1.01 percentage points), and financials (+3.2% or 0.50 percentage points).
What It All Means
On March 31, second quarter earnings were projected to decline 4.7%. Today, they are estimated to decline 7.4%. Since March 31, the S&P 500 has risen 7.8%.
When earnings estimates go down and stock prices go up, you see what is called multiple expansion. It is an unusual dynamic considering stocks generally follow earnings estimate trends, but in this regard, the stock market isn't operating in the present. Rather, it is operating in a future that involves renewed earnings growth.
That is a rationale for the multiple expansion, and it is a basis for why the bar of expectations is high ahead of the second quarter earnings reporting season.
The market-cap weighted S&P 500 trades at a premium 19.1x forward twelve-month estimates, which, to begin with, incorporate growth in the next six months. If that growth doesn't materialize as expected in the guidance, then one should reasonably expect to see a slowdown in the momentum trade that has carried the market higher this year despite the absence of earnings growth.
If the growth does materialize, though, then the future estimate trend should remain the stock market's friend.
Add it all up and, well, there is a lot riding on this second quarter earnings reporting period.
-- Patrick J. O'Hare, Briefing.com
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