Market Snapshot
briefing.com
| Dow | 35265.72 | +204.60 | (0.58%) | | Nasdaq | 14082.75 | -275.65 | (-1.92%) | | SP 500 | 4540.23 | -26.76 | (-0.59%) | | 10-yr Note | -8/32 | 3.85 |
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| | NYSE | Adv 1177 | Dec 1662 | Vol 827 mln | | Nasdaq | Adv 1516 | Dec 2907 | Vol 5.1 bln |
Industry Watch
| Strong: Energy, Health Care, Utilities, Industrials, Consumer Staples |
| | Weak: Consumer Discretionary, Real Estate, Communication Services, Information Technology |
Moving the Market
-- Sense that the market is due for some consolidation after the big run to start the year
-- Digesting a slate of earnings news that has garnered mixed reactions
-- Big losses in Tesla (TSLA) and Netflix (NLFX) following their earnings reports has weighed on the broader market
-- Rising Treasury yields
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Closing Summary
20-Jul-23 16:35 ET
Dow +163.97 at 35225.09, Nasdaq -294.71 at 14063.69, S&P -30.85 at 4536.14
[BRIEFING.COM] Stocks traded on a mixed note today. Concerns about the market being overbought and due for some consolidation precipitated some added selling pressure in Tesla (TSLA 262.90, -28.36, -9.7%) and Netflix (NLFX 437.42, -40.17, -8.4%) following their better than expected Q2 earnings results. Their weakness, and Taiwan Semiconductor Manufacturing Co. (TSM 97.86, -5.20, -5.1%) cautioning about a continued inventory adjustment, fueled the underperformance of mega caps and semiconductor stocks, which have been star performers this year. That weakness weighed heavily on the S&P 500 and Nasdaq.
The Vanguard Mega Cap Growth ETF (MGK) fell 2.1% and the PHLX Semiconductor Index (SOX) declined 3.6%.
Even with today's losses, Tesla, Netflix, and Taiwan Semiconductor Manufacturing Co. are still up 114.2%, 48.5%, and 31.4%, respectively, for the year.
Notably, the broader market showed some remarkable resilience today despite the weakness in the mega cap space. The Invesco S&P 500 Equal Weight ETF (RSP) declined only 0.1% versus a 0.7% decline for the market-cap weighted S&P 500. The Dow Jones Industrial Average, meanwhile, logged its ninth consecutive winning session, boosted by gains in Johnson & Johnson (JNJ 168.38, +9.64, +6.1%), IBM (IBM 138.38, +2.90, +2.1%), and Travelers (TRV 173.63, +3.07, +1.8%) following their earnings reports.
Weekly initial jobless claims came in at the lowest level (228,000) since Mid-May, which was good news regarding the state of the labor market and provided added support for investor sentiment.
Hurt by losses in Tesla and Amazon.com (AMZN 129.96, -5.40, -4.0%), the S&P 500 consumer discretionary sector (-3.4%) closed with the steepest decline among the 11 S&P 500 sectors.
Weak homebuilder components also contributed to the sector's underperformance. The SPDR S&P Homebuilder ETF (XHB) fell 2.0% and the iShares U.S. Home Construction ETF (ITB) dropped 2.6%. D.R. Horton (DHI 125.42, -2.43, -1.9%) was a notable loser after reporting above-consensus earnings. DHI jumped 3.4% in the early going, hitting a new 52-week high shortly after the open, yet it rolled over in a reflection of concerns about an overbought situation.
The utilities (+1.9%) and health care (+1.7%) sectors, meanwhile, closed at the top of the leaderboard.
A jump in market rates, which were more responsive to the initial claims report -- a leading indicator -- than they were to the weaker-than-expected existing home sales and leading economic index data for June, acted as another headwind today for the broader market. The 2-yr note yield rose nine basis points to 4.84% and the 10-yr note yield rose 11 basis points to 3.85%.
- Nasdaq Composite: +34.4% YTD
- S&P 500: +18.1% YTD
- Russell 2000: +11.6% YTD
- S&P Midcap 400: +11.7% YTD
- Dow Jones Industrial Average: +6.3% YTD
Reviewing today's economic data:
- The Philadelphia Fed Index for July checked in at -13.5 (Briefing.com consensus -9.0) versus the prior month's reading of -13.7
- Initial claims for the week ending July 15 decreased by 9,000 to 228,000 (Briefing.com consensus 240,000). That is the lowest level of initial claims since mid-May when the S&P 500 was around 4,100 or 11.4% lower than where it is today. Continuing jobless claims for the week ending July 8 increased 33,000 to 1.754 million.
- The key takeaway from this report is that it connotes continued strength in the labor market and presumably not much fear about an imminent and material drop-off in end demand knowing that initial jobless claims are a leading indicator.
- Existing home sales decreased 3.3% month-over-month in June to a seasonally adjusted annual rate of 4.16 million (Briefing.com consensus 4.25 million) from an unrevised 4.30 million in May. Sales were down 18.9% 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. In short, existing home sales are being crimped more so by the limited supply than by weak demand.
- Weekly EIA natural gas inventories showed a build of 41 bcf versus last week's build of 49 bcf.
- June Leading Indicators -0.7% (Briefing.com consensus -0.6%); Prior was revised to -0.6% from -0.7%
There is no U.S. economic data of note tomorrow.
Market declines ahead of close
20-Jul-23 15:25 ET
Dow +143.53 at 35204.65, Nasdaq -324.11 at 14034.29, S&P -37.82 at 4529.17
[BRIEFING.COM] The S&P 500 and Nasdaq are trading at session lows ahead of the close. The Dow Jones Industrial Average continues to outperform.
Treasuries settled the session with losses after the stronger than expected initial jobless claims report. The 2-yr note yield rose nine basis points to 4.84% and the 10-yr note yield rose 11 basis points to 3.85%.
After the close, Capital One (COF), PPG Industries (PPG), CSX (CSX), and Intuitive Surgical (ISRG) are some of the notable companies reporting earnings.
American Express (AXP), SLB (SLB), AutoNation (AN), and Comerica (CMA) are among the notable names reporting earnings ahead of tomorrow's open.
There is no U.S. economic data of note tomorrow.
Mega caps take indices lower; energy complex settles with gains
20-Jul-23 15:00 ET
Dow +204.60 at 35265.72, Nasdaq -275.65 at 14082.75, S&P -26.76 at 4540.23
[BRIEFING.COM] The major indices turned somewhat lower over the last half hour.
Mega caps continue extended their losses recently, leading to a 2.0% decline in the Vanguard Mega Cap Growth ETF (MGK). The Invesco S&P 500 Equal Weight ETF (RSP), meanwhile, trades flat.
Energy complex futures settled with gains. WTI crude oil futures rose 0.5% to $75.65/bbl and natural gas futures rose 5.0% to $2.73/mmbtu.
On a related note, the S&P 500 energy sector (+1.3%) continues to outperform the broader market.
Earnings movers populate bottom of S&P 500 on Thursday
20-Jul-23 14:30 ET
Dow +156.02 at 35217.14, Nasdaq -272.33 at 14086.07, S&P -30.01 at 4536.98
[BRIEFING.COM] The broader market has slipped a bit in the previous half hour, the S&P 500 (-0.66%) firmly in second place.
S&P 500 constituents Equifax (EFX 216.75, -20.74, -8.73%), Genuine Parts (GPC 155.73, -12.34, -7.34%), and Crown Castle (CCI 106.14, -7.36, -6.48%) pepper the bottom of the standings all weaker following earnings.
Meanwhile, Utah-based regional bank Zions Bancorp (ZION 38.06, +3.60, +10.45%) is today's top performer following last night's earnings.
Gold slips as yields, dollar firm
20-Jul-23 14:00 ET
Dow +230.49 at 35291.61, Nasdaq -214.83 at 14143.57, S&P -17.56 at 4549.43
[BRIEFING.COM] With about two hours to go on Thursday the tech-heavy Nasdaq Composite (-1.50%) is handily in last place among the major averages, consolidating declines near session lows over the prior half hour.
Gold futures settled $9.90 lower (-0.5%) to $1,970.90/oz, pressured in part by a modestly higher dollar and treasury yields.
Meanwhile, the U.S. Dollar Index is up about +0.6% to $100.83.
Page One
Last Updated: 20-Jul-23 09:04 ET | Archive
Wolf is roaming around mega-cap names and other growth stocks
First, the requisite acclimation: the stock market is overbought on a short-term basis and is likely due for a pullback. You might have heard that a time or two in various market narratives, but the market time and again has turned that narrative into the story of the boy who cried wolf.
Cry wolf long enough we suppose, and eventually there will be a wolf. Is today that day where the wolf roams on Wall Street or will it be yet another day that defies the boy's cries?
Currently, the S&P 500 futures are down 13 points and are trading 0.3% below fair value, the Nasdaq 100 futures are down 126 points and are trading 0.8% below fair value, and the Dow Jones Industrial Average futures are down one point and are trading fractionally above fair value.
That mixed indication follows a slate of earnings results from some widely-held and actively-traded stocks, namely Tesla (TSLA), Netflix (NFLX), Johnson & Johnson (JNJ), IBM (IBM), Travelers (TRV), United Airlines (UAL), American Airlines (AAL), Las Vegas Sands (LVS), D.R. Horton (DHI), Abbott Labs (ABT), Taiwan Semiconductor Manufacturing Co. (TSM), and Philip Morris Intl. (PM) to name just a few.
The response to these earnings reports and respective guidance notes has been mixed, yet it is the pullback in Tesla and Netflix that is holding sway as the predominant market mover.
Tesla and Netflix both topped consensus earnings estimates, but TSLA is down 4.3% and NFLX is down 6.2%. It is important to note that TSLA was up 136% for the year going into its report while NFLX was up 62%. Accordingly, there is attempt to focus more on what maybe didn't look so good in their reports as opposed to what was good.
In that vein, Tesla isn't being lauded so much for delivering 47% year-over-year growth in revenue as it is being scorned for a decrease in its profit margins. Netflix isn't being lauded so much for adding a much stronger than expected 5.9 million subscribers in the quarter as it is being scorned for its relatively soft Q3 revenue guidance.
These stocks, then, could be down this morning simply because they were up so much going into their reports, because when you make a move like they did, there is no room for imperfection in the near term.
In any case, the decline in these names has certainly set the tone for the Nasdaq 100 futures, breathing some life into the notion that stocks like this -- and the stock market in general -- is overbought and likely due for a pullback.
Still, even now there isn't a big rush to exit the stock market. That can be seen in the S&P 500 futures and Dow Jones Industrial Average futures, which are signaling only modest changes when the opening bell rings. That seems to be the case because the wolf at this point seems only to be circling the mega-cap stocks and other growth stocks that have made huge moves.
That is understandable taking into account yet another encouraging initial jobless claims report. Specifically, initial claims for the week ending July 15 decreased by 9,000 to 228,000 (Briefing.com consensus 240,000). That is the lowest level of initial claims since mid-May when the S&P 500 was around 4,100 or 11.4% lower than where it is today. Continuing jobless claims for the week ending July 8 increased 33,000 to 1.754 million.
The key takeaway from this report is that it connotes continued strength in the labor market and presumably not much fear about an imminent and material drop-off in end demand knowing that initial jobless claims are a leading indicator.
Separately, the Philadelphia Fed Index for July checked in at -13.5 (Briefing.com consensus -9.0), holding reasonably steady with the prior month's reading of -13.7. A number below 0.0 is indicative of contraction, so the July report suggests the contraction in manufacturing activity in the Philadelphia Fed region did not accelerate in July.
The June Existing Home Sales Report and the June Leading Economic Index will be released at 10:00 a.m. ET.
Treasuries were weaker ahead of this morning's data but extended their losses after the initial claims print. The 2-yr note yield is up 10 basis points to 4.85% and the 10-yr note yield is up 10 basis points to 3.82%.
-- Patrick J. O'Hare, Briefing.com
Las Vegas Sands rolls over as recovery in Q2 and reinstated dividend fail to sustain rally (LVS)
Las Vegas Sands (LVS -4%) may have rolled over analyst earnings and revenue estimates in Q2, but its shares are not winning big today. The casino operator, exclusively in Macao and Singapore, also reinstated its quarterly dividend at $0.20 per share. Even though headlines suggest a solid quarter, a closer look reveals a few weak spots.
For example, LVS's reinstated dividend is well below its most recent quarterly dividend of $0.79 per share, paid out on March 26, 2020. Also, investors may be discouraged by management's remarks regarding shifting to a more balanced capital return program, setting up for lower dividends than before the pandemic, albeit with increased repurchases.
- The good news is that LVS is amid a robust recovery in Macao and Singapore, evident by a 143.3% surge in revenue yr/yr to $2.54 bln and earnings of $0.46, a considerable acceleration from the $0.28 posted last quarter and $(0.34) in the year-ago period. Recall that during this time last year, LVS was effectively shut down, with tight travel and mobility restrictions across Macao. Meanwhile, Singapore was in the early stages of easing pandemic restrictions.
- However, management acknowledged there is still work to be done in its primary markets. For instance, performance in Singapore was impeded by LVS's ongoing $1.0 bln renovation. At the same time, the Chinese premium mass segment has yet to fully recover, keeping a lid on margin growth. Also keeping margins in check is the rate of revenue recovery. During the quarter, LVS reached 85% of 2019 levels regarding mass revenues and nearly 70% of visitation recovery in Macao.
- Still, margins benefit as LVS shifts toward non-gaming, i.e., hotel and food. The company's total percentage of revenue from non-gaming rose to 22% from 17% in 2019. By leaning more heavily on hotel revenue, it was encouraging to see room operating capacity back to 10,700 rooms on average, just under a more typical 12,000, underscoring a major improvement to past staffing shortages.
- Also encouraging were the positive trends stepping on the gas in June, boasting a 97% recovery in mass revenue compared to 2019, nearly a complete rebound. CEO Robert Goldstein was also confident that the macro economy in China will continue to grow despite a slower-than-expected recovery happening at the moment.
Overall, it was a bit of a mixed quarter for LVS. On the one hand, rebounding efforts in Macao and Singapore were uplifting, especially given that it was a steady acceleration through the quarter, with June being LVS's best month. However, on the flip side, Macao and Singapore are still facing some headwinds, with the Chinese premium segment not yet back to 2019 levels and Marina Bay Sands still under renovation. Nevertheless, the positive trends seen during Q2 bode well for LVS as it enters the back half of the year, potentially setting the stage for normalized operations to start 2024.
American Airlines flies in opposite direction of peers as guidance disappoints (AAL)
Following the same flight path as peers Delta Air Lines (DAL) and United Airlines (UAL), American Airlines (AAL) delivered a strong beat-and-raise Q2 earnings report as robust demand for travel during the busy summer season lifted its results. However, unlike those competitors, AAL is losing some altitude following the release of its results and outlook as investors lock in gains.
- Since the company raised its Q2 earnings guidance on May 31, forecasting EPS of $1.45-$1.65 versus its prior outlook of $1.20-$1.49, shares had climbed higher by about 26% prior to today's sell-off.
- The upgraded guidance, combined with DAL's standout Q2 earnings report on July 13, created high expectations for AAL heading into the print this morning.
While AAL did fly past Q2 estimates and bump its FY23 EPS forecast sharply higher to $3.00-$3.75 from $2.50-$3.00, there are a few items that are driving the stock in the opposite direction from the company's rivals.
- For instance, in contrast to DAL and UAL, the company didn't issue upside Q3 EPS guidance. Rather, its outlook of $0.85-$0.95 was only in line with estimates, while UAL's outlook of $3.85-$4.35 was comfortably ahead of expectations.
- Relatedly, AAL disclosed that it anticipates total revenue per available seat mile (TRASM) in Q3 to decrease by about 4.5-6.5%, signaling that it may be losing some pricing power against its competitors.
- Some cracks emerged in Q2 as AAL's TRASM slipped by 0.5% compared to a 1% increase for DAL. This difference suggests that DAL is capitalizing on the trend towards pricier premium seats better than AAL is.
- As AAL loses some pricing power, the company also plans to match UAL's 35-40% wage increase for its pilots, which will push its cost per available seat mile (CASM) higher and pressure its margins.
- DAL, on the other hand, stated during its earnings call that non-fuel costs have reached an inflection point with the rebuild of its capacity now mostly behind the company. In March, DAL agreed to a new contract with its pilots, increasing pay by 34% over the life of the deal.
The main takeaway is that AAL faced a high bar to hurdle and while it surpassed Q2 EPS and revenue expectations, its guidance wasn't quite as strong as its peers, providing enough of an excuse for investors to take some profits following a significant rally.
IBM computing some nice gains following large EPS beat and improves Software segment outlook (IBM)
IBM (IBM +3%) is higher today after reporting a nice EPS beat in Q2 although revenue was a bit light. Investors were also pleased to see IBM reaffirm its FY23 free cash flow outlook of $10.5 bln and it reaffirm its FY23 outlook for constant currency (CC) revenue growth to +3-5%.
- IBM's performance was once again led by Software (+7.5% CC) and Consulting (+5.9% CC) as clients continue to accelerate their digital transformations, modernize their applications and automate their workflows. These are growth vectors that together represent about 75% of IBM's revenue and contribute to a solid base of recurring revenue and profit.
- Software saw good growth across both Hybrid Platform & Solutions, led by Red Hat and Data & AI, and Transaction Processing. Consulting saw growth across all three lines of business and geographies.
- Its Infrastructure segment was the laggard once again with (-13.8% CC) revenue. This segment ebbs and flows more on product launches and IBM is now in the fifth quarter of z16 availability. As expected, IBM says this had a disproportional impact to overall revenue growth this quarter, given the very successful launch of z16 in 2Q22.
- Looking ahead, IBM expects Software segment revenue growth at the high end of Software's mid-single digit model. That is a bump in guidance as IBM said "in-line" in Q1. What's more, revenue growth drives operating leverage, with Software pre-tax margin now expected to expand 1.5-2.0 pts yr/yr. In Consulting, IBM reaffirmed FY23 segment revenue growth in the +6-8% range. IBM continues to expect Infrastructure segment revenue for FY23 to decline.
Overall, investors seem quite pleased with IBM's Q2 report. We think the highlights are the solid EPS beat, its largest beat since 4Q20. Also, the increase in the outlook for Software segment revenue was another bright spot that stood out to us. Software is IBM's largest segment and the key to its profitability, so we think investors are responding to that bump in guidance. We think this report bodes well for other tech names set to report next week.
Netflix streams sharply lower as revenue miss overshadows good net add number (NFLX)
Netflix (NFLX -9%) is streaming sharply lower following its Q2 earnings report last night. It was a mixed report with EPS coming well ahead of prior guidance while revenue came up light. The Q3 guidance was also mixed with upside EPS but downside revs relative to analyst expectations. This was a particularly important quarter because the streaming giant started its long-awaited crackdown on password sharing in the US in Q2. It was originally going to start in late Q1, but NFLX bumped the start into Q2.
- Global streaming paid net adds in Q2 were +5.89 mln. Unfortunately, NFLX no longer provides specific guidance on this metric, but it did say it expects Q3 paid net adds will be similar to Q2 paid net additions. Our take is that the +5.89 mln number sounds pretty good given the churn some expected with the password crackdown. It was also nicely higher than the +1.75 mln posted in Q1.
- A metric for which NFLX still does guide is operating margin. It came in at 22.3%, well ahead of the 19.0% prior guidance, and we think that explains the strong EPS upside. Netflix guided to Q3 operating margin of 22.2%. Netflix's operating margin can be lumpy given its production schedules and there a lot of changes going on. UCAN streaming revenue was flat yr/yr while EMEA revenue was down 1% CC yr/yr.
- Investors were chomping at the bit for an early take on how the password sharing crackdown is going. NFLX cautioned investors that the business impacts roll in over several quarters, but did say people are choosing plans and have retention characteristics that generally look like higher tenure members. Unfortunately, NFLX would not comment on specific numbers of cancellations/new additions.
- In terms of the advertising update, Netflix said it grew it ad plan membership almost 100% sequentially, which is a good trajectory. However, it did say the general ad market is soft. The good thing about NFLX is that its ad business is relatively small. So there is scarcity around NFLX's inventory, which is good. Longer term, NFLX would like to gets ads to 10% of total revs, but that will take time.
So why is the stock lower? We think there are three main reasons:
- First, the Q2 revenue miss and the downside Q3 revenue guidance is a bit troubling. We think investors are more forgiving around an EPS miss because NFLX's operating margin can be lumpy given its production schedules. However, a revenue miss is more of a demand issue.
- Second, we think investors may be disappointed that Netflix did not provide more specific subscriber numbers on password sharing. It sounds like revenue will ramp substantially by Q4, but not providing hard numbers on Q2 churn/cancellations is a bit of a letdown and obscures the picture of how consumers are reacting.
- Third, the stock has made a very strong move since mid-May. The general rotation into tech certainly helped but we think investor sentiment was running high into this report on optimism that the password sharing crackdown was going well. So when NFLX missed on revs and guided lower on Q3 revs, we think that spooked investors a bit and overshadowed the good paid net add numbers.
Tesla fails to steer around margin concerns in Q2, sending shares in reverse (TSLA)
Record vehicle deliveries and moderating raw materials prices helped Tesla (TSLA) drive past 2Q23 EPS and revenue expectations, but the EV makers' declining margins, aggressive investment plans, and warning that more price cuts may be on the way have the stock in reverse today.
- With shares skyrocketing by about 140% this year, resulting in a steep 1-year forward P/E of around 60x, TSLA had little room for error. While there are plenty of positives, including a reaffirm of FY23 production of 1.8 mln vehicles, the blemishes are significant enough to elicit a profit-taking pullback.
- Heading into the report, a popular narrative was that TSLA's margins were set to stabilize in Q2, setting the stage for meaningful improvements in 2H23. Now, however, that presumption looks premature after TSLA's automotive gross margin slipped to about 18%, while GAAP gross margin dove by 682 bps yr/yr to 18.2%, missing expectations.
- The bigger issue, though, is that Elon Musk signaled that more margin-eroding price cuts could soon be on the way as the EV price war rages on. Compared to a year ago, the average selling price has already fallen by nearly 20%.
After digesting that news, earnings call participants were greeted by Musk's proclamation that TSLA will spend more than $1.0 bln by the end of 2024 to develop a supercomputer called "Dojo." That disclosure isn't sitting too well with investors who are becoming increasingly anxious about TSLA's profitability.
- In typical Musk fashion, the eccentric CEO promised that the investments in Dojo, which is accumulating massive amounts of video data from TSLA vehicles, will ultimately make the company's current financial metrics "look silly." Dojo will be used to power TSLA's full self-driving (FSD) technology and is viewed by Musk as the key to substantially increasing the value of current and future vehicles.
- Musk is comfortable with the idea of sacrificing margins for volume since more cars on the road now equates to greater FSD-related revenue down the road. Of course, Musk has over-promised and under-delivered on the development of FSD, so investors are taking his statements with a grain of salt.
- On that note, during the earnings call, he said that he thinks FSD will be better than human driving capability by the end of this year.
Speaking of "looking silly", the Cybertruck was another main topic last night, with Musk seemingly walking back the expectation that deliveries will begin in Q1. Instead, he simply stated that the first deliveries are slated for later this year and that production will gradually increase in 2024.
Overall, it's a mixed bag for TSLA with sales remaining very healthy, but at the expense of margins. Participants wanted to come away from this report with the feeling that margins have bottomed out and are set to improve in 2H, but that didn't happen, resulting in a profit-taking sell-off.
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