Market Snapshot
briefing.com
| Dow | 34885.74 | -61.16 | (-0.18%) | | Nasdaq | 13539.43 | -92.01 | (-0.67%) | | SP 500 | 4423.66 | -15.40 | (-0.35%) | | 10-yr Note | -26/32 | 4.26 |
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| | NYSE | Adv 736 | Dec 2138 | Vol 813 mln | | Nasdaq | Adv 1242 | Dec 3102 | Vol 6.2 bln |
Industry Watch
| Strong: Utilities |
| | Weak: Communication Services, Real Estate, Health Care, Consumer Discretionary |
Moving the Market
-- Lacking conviction after the S&P 500 closed below its 50-day moving average yesterday
-- Festering worries about China's weak economic activity after it reported another decline in home prices
-- Retailers outperforming after Target (TGT) and TJX Cos. (TJX) reported earnings
-- S&P 500 finding resistance on an early test of its 50-day moving average (4,449)
-- Selling remains consistent with consolidation efforts
-- Rising Treasury yields
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Closing Summary
16-Aug-23 16:30 ET
Dow -180.65 at 34766.25, Nasdaq -156.42 at 13475.02, S&P -33.53 at 4405.53
[BRIEFING.COM] The stock market closed on a downbeat note, building on yesterday's losses in another light-volume session at the NYSE. Weakness had been more modest in the early going, though, due to a lack of conviction from either buyers or sellers.
The S&P 500 hit its 50-day moving average (4,449) shortly after the open, but was unable to breach that key technical level, which then invited renewed selling interest. The major indices had been trading in relatively narrow ranges until the 2:00 p.m. ET release of the FOMC Minutes from the July meeting induced some whipsaw action.
There was some knee-jerk selling in response to some hawkish sounding headlines from the minutes. For example, "most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy."
That view wasn't exactly surprising, however, considering remarks made by Fed Chair Powell after the July 25-26 meeting. All together, the minutes didn't contain anything too surprising. Mindful of that, stocks rebounded from the knee-jerk selling, yet that effort stalled out as the 10-yr note yield climbed above 4.25% and eclipsed a closing high yield from last October. The 2-yr note yield settled three basis points higher at 4.97%.
The S&P 500 ultimately closed just above the 4,400 level and at its lows for the session, continuing the consolidation trade that took root at the start of the month. The market-cap weighted S&P 500 fell 0.8% while the Invesco S&P 500 Equal Weight ETF (RSP) dropped 0.7%. The Vanguard Mega Cap Growth ETF (MGK) fell 0.9%.
Only one of the S&P 500 sectors logged a gain -- utilities (+0.5%) -- while the consumer discretionary sector (-1.3%) saw the biggest decline.
Festering growth concerns also contributed to the weakness today after China reported another decline in home prices.
The U.S., however, saw stronger-than-expected housing starts and industrial production in July. Also, the Atlanta Fed GDPNow model was updated and is estimating 5.8% real GDP growth in the third quarter, up from 5.0% previously. That news created some rate hike angst in the Treasury market.
On the earnings front, Target (TGT 128.75, +3.70, +3.0%) and TJX Cos. (TJX 89.31, +3.54, +4.1%) were winning standouts after reporting results.
- Nasdaq Composite: +28.7% YTD
- S&P 500: +14.7% YTD
- S&P Midcap 400: +7.2% YTD
- Russell 2000: +6.3% YTD
- Dow Jones Industrial Average: +4.9% YTD
Reviewing today's economic data:
- The weekly MBA Mortgage Applications Index fell 0.8% with refinance applications falling 2.0% while purchase applications were flat from last week.
- Total housing starts increased 3.9% month-over-month in July to a seasonally adjusted annual rate of 1.452 million units (Briefing.com consensus 1.446 million) and building permits increased 0.1% month-over-month to a seasonally adjusted annual rate of 1.442 million (Briefing.com consensus 1.460 million).
- The key takeaway from the report is that the increase in starts and permits, albeit modest, was driven by single-family units, which are badly needed in a supply-constrained existing home market.
- Total industrial production increased 1.0% month-over-month in July (Briefing.com consensus 0.3%) following a downwardly revised 0.8% decline (from -0.5%) in June. The capacity utilization rate jumped to 79.3% (Briefing.com consensus 79.0%) from a downwardly revised 78.6% (from 78.9%) in June. Total industrial production was down 0.2% yr/yr. The capacity utilization rate of 79.3% was 0.4 percentage point below its long-run average.
- The key takeaway from the report is that most major market groups recorded growth in July, demonstrating that there was a pickup in activity that fits with an economy that continues to operate in a growth mode despite the Fed's rate hikes.
- The weekly EIA crude oil inventories showed a draw of 5.96 million barrels following last week's build of 5.85 million barrels.
Market participants will receive the following economic data tomorrow:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 240,000; prior 248,000), Continuing Claims (prior 1.684 mln), and August Philadelphia Fed survey (Briefing.com consensus -9.0; prior -13.5)
- 10:00 ET: July Leading Indicators (Briefing.com consensus -0.4%; prior -0.7%)
- 10:30 ET: Weekly natural gas inventories (prior +29 bcf)
Treasuries settled with losses
16-Aug-23 15:35 ET
Dow -135.26 at 34811.64, Nasdaq -119.80 at 13511.64, S&P -24.81 at 4414.25
[BRIEFING.COM] The major indices turned sharply lower recently. The S&P 500 is trading just above the 4,400 level.
Treasuries settled with losses across the curve. The 2-yr note yield rose three basis points to 4.97%. The 10-yr note yield rose four basis points to 4.26%.
Market participants will receive the following economic data tomorrow:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 240,000; prior 248,000), Continuing Claims (prior 1.684 mln), and August Philadelphia Fed survey (Briefing.com consensus -9.0; prior -13.5)
- 10:00 ET: July Leading Indicators (Briefing.com consensus -0.4%; prior -0.7%)
- 10:30 ET: Weekly natural gas inventories (prior +29 bcf)
Energy complex settles lower
16-Aug-23 15:05 ET
Dow -61.16 at 34885.74, Nasdaq -92.01 at 13539.43, S&P -15.40 at 4423.66
[BRIEFING.COM] The market traded in a narrow range over the last half hour.
Energy complex futures settled the session lower. WTI crude oil futures fell 2.0%, slipping below $80.00/bbl to $79.46/bbl. Natural gas futures fell 2.6% to $2.59/mmbtu.
On a related note, the S&P 500 energy sector (-0.4%) trades near the middle of the pack among the 11 sectors.
Post-FOMC Minutes volatility
16-Aug-23 14:40 ET
Dow +28.79 at 34975.69, Nasdaq -41.64 at 13589.80, S&P -1.75 at 4437.31
[BRIEFING.COM] The major indices saw some whipsaw action immediately after the release of the FOMC Minutes for the July meeting.
The minutes showed that "most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy." Also, participants cited a number of tentative signs that inflation pressures could be abating.
Treasuries had a less volatile reaction than stocks. The 2-yr note yield is up two basis points to 4.97% and the 10-yr note yield is up four basis points to 4.25%.
Gold and copper futures settle lower
16-Aug-23 14:05 ET
Dow -60.68 at 34886.22, Nasdaq -84.09 at 13547.35, S&P -13.44 at 4425.62
[BRIEFING.COM] Things are little changed at the index level recently.
Gold futures settled today's session down $7.30 (0.38%) at $1,928.70/oz. Copper futures settled $0.01 lower (0.4%) at $3.66/lb.
Most of the S&P 500 sectors slipped into negative territory.
Buy-the-dip momentum missing in August
There is not a lot of conviction in the equity futures trade this morning, partly because market participants are hesitant to get fully on board with buy-the-dip action knowing that it hasn't been rewarded this month.
Currently, the S&P 500 futures are down nine points and are trading 0.2% below fair value, the Nasdaq 100 futures are down 36 points and are trading 0.2% below fair value, and the Dow Jones Industrial Average futures are down 55 points and are trading 0.2% below fair value.
Sure, some stocks -- like NVIDIA (NVDA) -- have bounced following an extended period of weakness, but the indices have not found any buy-the-dip momentum in August. Entering today, the Russell 2000 is down 5.4% this month, the Nasdaq Composite is down 5.0%, the S&P Midcap 400 is down 3.7%, the S&P 500 is down 3.3%, and the Dow Jones Industrial Average is down 1.7%.
Those declines, however, have followed quite a hot streak of gains for the broader market, so the August pullback continues to be looked at as a normal period of consolidation during a seasonally weak period.
It is important to note, too, that the selling this month has been a low-volume affair, implying that that there hasn't been a lot of conviction on the part of sellers. The key consideration is that there has been a lot of disinterest among buyers for various reasons that range from valuation concerns to interest rate angst to vacation plans.
During the August pullback, though, the market narrative has focused largely on China's disappointing activity and rising market rates in the U.S. as proximate causes for the pullback. Both are part of today's trading mix.
China reported a 0.1% year-over-year decline in July home prices, adding to a string of weak economic data; meanwhile, the 10-yr note yield is up one basis point to 4.23%, leaving it on the doorstep of challenging the high yield close of 4.25% last October.
Technical traders will be paying close attention to the Treasury market, and the same can be said for the stock market after the S&P 500 closed yesterday below its 50-day moving average (currently 4,449).
Some of the hesitation in the equity futures trade this morning can likely be attributed to a desire to wait and see how the cash market behaves around that important technical level. Will it quickly reclaim a posture above that mark or will it continue to slide?
In other words, will it pay to buy the dip or will it work to keep trimming positions?
Fortunately, housing starts and building permits were not trimmed in July. Total housing starts increased 3.9% month-over-month to a seasonally adjusted annual rate of 1.452 million units (Briefing.com consensus 1.446 million) and building permits increased 0.1% month-over-month to a seasonally adjusted annual rate of 1.442 million (Briefing.com consensus 1.460 million).
The key takeaway from the report is that the increase in starts and permits, albeit modest, was driven by single-family units, which are badly needed in a supply-constrained existing home market.
The July Industrial Production and Capacity Utilization Report will be released at 9:15 a.m. ET and then the FOMC Minutes for the July 25-26 meeting will be released at 2:00 p.m. ET.
On the earnings front, Target (TGT) and TJX Cos. (TJX) released their quarterly results. Both retailers topped earnings estimates and both stocks are trading higher in pre-market action. That is especially noteworthy in the case of Target, which lowered its FY24 earnings and comparable store sales guidance.
-- Patrick J. O'Hare, Briefing.com
Brinker pulls back despite EPS beat; we think comps could have been better (EAT)
Brinker Intl (EAT -3.5%) is heading lower following its Q4 (Jun) earnings results this morning. This restaurant operator (Chili's, Maggiano's) posted solid EPS upside with in-line revenue. It also guided FY24 EPS and revs in-line.
- Same restaurant comps were decent but not as strong as MarQ. Comps came in at +6.6% (Chili's +6.3%; Maggiano's +9.1%), which is down from +10.8% (Chili's +9.6%, Maggiano's +21.6%) in Q3 (Mar). FY23 comps were +8.1% (Chili's +7.0%; Maggiano's +17.3%). Comps in JunQ were driven by higher menu pricing and favorable item mix.
- What makes the comps a bit disappointing is that EAT was benefitting from higher menu prices. Also, it was lapping fairly easy comps in the year ago period, especially at its Chili's unit: +3.1% (Chili's +0.3%, Maggiano's +30.1%). Restaurant operating margin (non-GAAP) moved higher to 13.4% from 12.5% a year ago.
- During FY23, EAT says it made significant shifts to its strategy to drive its core dining channel business and help drive margin improvement. EAT pulled back on discounting and reduced its focus on investment in virtual brands. It also aimed to simplify operations, it invested in labor which has reduced manager turnover, and it returned to national advertising for the first time in more than three years. EAT saw good progress with its JunQ results.
Overall, we think these were decent results given the macro headwinds. EAT's comps were a bit underwhelming given the easy comparison. With that said, we like EAT's strategy of moving away from aggressive promotion, which allows it to more appropriately price its menu and offer premium trade-up options. Its menu prices were too low, in our view.
The stock has remained rangebound in the $34-42 area for much of 2023 and it does not look like this report will cause a change there. However, the stock is now at the low end of that range, which makes us a bit nervous.
JD.com drops as lingering concerns surrounding China eclipse decent Q2 results (JD)
Underscoring lingering unease surrounding China, JD.com (JD -2%) is dropping today despite registering decent upside on its top and bottom lines in Q2. The China-based e-commerce giant, primarily competing with Alibaba's (BABA) online shopping platforms, has struggled this year, seeing its share price cut by nearly 40%. Stacked against Alibaba, which has hugged its flatline for most of the year, JD's lengthy downward trend becomes even more disappointing.
Why are investors not pouring into JD as they did with Alibaba last week following its Q2 results? Alibaba's uplifting Q2 results represented more of a turnaround story. Zooming out, Alibaba has suffered a much further fall from grace than JD, particularly after being in the crosshairs of the Chinese government's tech crackdown. Also, although JD was lapping slightly less favorable yr/yr figures in Q2, its metrics did not reach the same level as Alibaba's. Furthermore, JD's EPS beat in Q2 was significantly less than its Q1 upside, unlike Alibaba's Q2 beat. There may also be pockets of AI-related enthusiasm surrounding Alibaba, given its substantial cloud business.
- JD still delivered several highlights in Q2, including accelerating revenue growth of 7.6% yr/yr to RMB 287.93, up from +1.4% last quarter.
- Like Alibaba, JD benefited strongly from third-party growth, primarily regarding robust advertising demand. As a result, third-party marketplace GMV growth accelerated for the second-straight time in Q2.
- Product revenue climbed 3% higher yr/yr, led by electronics and home appliances, which enjoyed 11% sales growth, an encouraging development after several quarters of dampened demand in these categories. In fact, JD mentioned just last quarter that it continued enduring challenges in its core home appliances, home goods, and electronics categories.
- On the flip side, general merchandise revs were down 9% yr/yr in Q2, primarily due to soft supermarket performance. JD is still lapping a period when this category experienced pronounced gains due to COVID.
- Still, on the whole, JD Retail revs edged 5% higher yr/yr in Q2. However, profitability came under pressure due to challenging yr/yr comparisons and JD's user experience investments; JD launched a series of strategic priorities during the quarter. As a result, Non-GAAP operating margins slipped by 90 bps yr/yr to 3.0%.
- JD does not provide formal guidance but did offer a few remarks on the general economy. One executive pointed out that macroeconomic and industrial conditions remain uncertain. However, the company remains confident in China's long-term economic development.
The main takeaway from JD's Q2 report was that spending was relatively healthy, especially surrounding the company's core electronics and home appliances products. However, with economic data from China continuing to spark broader fears that the region's recovery efforts have not just stalled but could be in decline, JD's Q2 highlights are overshadowed. JD may continue struggling during the year unless the broader Chinese economy can begin a more substantial post-COVID turnaround.
Target trades higher on EPS beat but cautious on 2H; WMT outperforming TGT (TGT)
Target (TGT +3%) is trading higher after reporting Q2 (Jul) results. Target again beat handily on EPS, although it has now missed on revs in back-to-back quarters. We said in our preview that our main concern was the guidance and TGT guided Q3 (Oct) EPS well below consensus. But TGT has been conservative with its EPS guidance lately and we think investors are catching on to that and not punishing them. TGT also lowered full year adjusted EPS guidance to $7.00-8.00 from $7.75-8.75.
- After three consecutive large EPS misses, Target has now posted three consecutive large EPS beats. Target had too much inventory in 1H22 just as the consumer slowed spending on discretionary items. Having to discount that hurt EPS last year, but TGT said it entered this fiscal year in a much better inventory position. Q2 ending inventory was 17% lower yr/yr, with discretionary categories down 25%, reflecting its cautious planning approach and the benefit of a faster global supply chain.
- Same store comps came in at -5.4% (in-store -4.3%; digital -10.5%), a bit worse than the prior guidance of a low-single digit decline although TGT did say it expected a wide range of possibilities. TGT saw continued growth in frequency businesses (Essentials & Beauty and Food & Beverage) partially offset declines in discretionary categories. For Q3, TGT expects comps in a wide range around a mid-single digit decline.
- Comp trends in Q2 softened in the second half of May into June, before there was meaningful recovery in both traffic and comps in July. Inflation in frequency categories like Food & Beverage and Essentials is causing these categories to absorb a much higher portion of consumers' budgets. In addition, consumers are spending more on services like leisure travel, entertainment, and food away-from-home. This is putting pressure on discretionary products. Reductions in pandemic-related stimulus are also having an impact.
- Besides comps, another metric we watch is operating margin. Operating margin in Q2 jumped to 4.8% from 1.2% a year ago. This was in-line with guidance which called for a sequential decline from Q1's 5.2% result. Margin expansion vs last year was caused by lower markdowns, lower freight costs, price increases etc., partially offset by higher inventory shrink (theft, organized retail crime). Shrink drove nearly a full point of profit pressure vs last year.
So, why is the stock higher? We think the hefty EPS beat coupled with TGT saying July comps were meaningfully better than June comps is propelling the stock. Investors always like to see a retailer close a quarter strong with comps. Plus, TGT says back-to-school is off to a good start. We also think investors are maybe discounting that downside EPS guidance as TGT has lowballed guidance in recent quarters.
On a final note, investors may wonder why Walmart (WMT) is trading at new highs, but Target is near its lows. We can sum it up in a word: groceries. Walmart US said in its 10-K that groceries accounted for 59% of FY22 revs while Target reported Food & Beverage accounting for just 21% of FY22 revs. That is a huge difference. In other words, TGT has much higher exposure to discretionary items and that's an area where consumers are not spending. WMT's high exposure to groceries is really helping it.
TJX is maximizing buying interest today following buoyant Q2 results and raised FY24 guidance (TJX)
TJX (TJX +3%) seeks to max out its gains today after ringing up beats across the board in Q2 (Jul), topping earnings, revenue, and same-store sales estimates. At the same time, the off-price retailer, which also owns the HomeGoods, Marshalls, Sierra, and Homesense banners, lifted its FY24 (Jan) outlook considerably.
- TJX grew its bottom line by 23.2% yr/yr to $0.85 per share, surpassing its forecast of $0.72-0.75 with ease and translating to its widest beat since 1Q23 (Apr). TJX's top line also saw solid growth, climbing 7.7% to $12.76 bln, while same-store sales jumped off the page, improving by +6%, well above TJX's +2-3% prediction, with the core Marmaxx segment delivering +8% comp growth.
- Management remarked that traffic trends improved, boosting certain categories in particular, like accessories and apparel.
- After several quarters of declining comp growth at HomeGoods, TJX finally returned the banner to positive territory, expanding comps by +4% in Q2. Leading into TJX's earnings report, we mentioned that Q2 could finally mark the return of positive comp growth at HomeGoods, particularly after home furnishings e-commerce giant Wayfair (W) posted such upbeat JunQ numbers earlier this month.
- On a side note, HomeGoods' performance adds another bullish sign ahead of JulQ reports from home furnishings retailers La-Z-Boy (LZB) and Williams-Sonoma (WSM) next week.
- International comps remained upbeat; TJX Canada was up +1%, and TJX International (Europe and Australia) was up +3%. Like in the U.S., traffic increased in TJX's overseas markets.
- After trimming its FY24 outlook last quarter, TJX reversed course in Q2. The company is now targeting FY24 EPS of $3.66-3.72, up from $3.39-3.48, and comps of +3-4%, up from +2-3%.
Although July retail sales data was better than expected, TJX still operates during a period of elevated budget scrutiny from consumers. Apparel firms like PVH (PVH), which owns Tommy Hilfiger and other popular brands often sold at TJX stores, discussed a challenging environment back in June. Under Armour (UAA), which can also be found in TJX locations, commented earlier this month on troubles in the U.S. wholesale channel from elevated sector-wide inventories. However, as an off-price retailer, the difficult economic climate can be a double-edged sword, as TJX buys excess inventory at favorable prices, boosting its merchandise margins. This dynamic was illuminated by Q2 pre-tax profit margins tacking on 120 bps yr/yr to 10.4%, crushing TJX's 9.3-9.5% projection.
Overall, TJX's Q2 results underscore a growing shift amongst consumers to prioritize value during the current inflationary environment. We continue to view off-price retail as a healthy place to be, especially as inflationary trends, albeit cooling, remain quite sticky. On a final note, TJX's numbers today are a good sign ahead of many peers' upcoming reports, including Ross Stores (ROST) on August 17, Dollar Tree (DLTR) and Burlington Stores (BURL) on August 24, and Five Below (FIVE) on August 30.
Cardinal Health heads lower following smaller EPS beat and weak overall market (CAH)
Cardinal Health (CAH -2.4%) is heading lower following Q4 (Jun) results last night. The stock initially traded higher and set a new 52-week high but has pulled off its highs. This distributor of pharmaceuticals and medical supplies reported upside for both EPS and revenue. However, the EPS upside was smaller than recent quarters as CAH broke its string of three double-digit EPS beats.
- Its Pharma segment is by far the larger of CAH's two segments. It was also what drove the strong results. JunQ segment revenue increased 15% to $49.7 bln driven by brand and specialty pharmaceutical sales growth from existing customers. CAH said it continued to see broad-based strength in pharmaceutical demand spanning across product categories, brand, specialty, consumer health and generics and from its largest customers.
- Medical segment sales were flat yr/yr at $3.8 bln. That's not great, but it's an improvement from a -5% yr/yr decline in Q3 (Mar). This segment was impacted by lower PP&E volumes and pricing, partially offset by inflationary impacts. This decrease within Products and Distribution was offset by growth in at-Home Solutions.
- Looking ahead to FY24, CAH expects Pharma segment revenue growth of +10-12%, down from +15% growth in FY23. CAH expects growth from its generics program with volume growth and consistent market dynamics. CAH expects the year to follow typical seasonality patterns for Pharma with Q3 (Mar) being the largest segment profit dollar quarter due to the usual timing of branded manufacturer price increases.
- On the Medical side, CAH concedes that it still has blocking and tackling to do against the turnaround to both drive demand and improve cost performance. For FY24, CAH expects to return to growth as the company reaffirmed its view of +3% revenue growth for Medical. The growth outlook is modest but that follows a -5% decline in FY23.
Overall, this was a decent quarter for Cardinal Health. Its Pharma segment continues to perform well. However, FY23 was a rough year for its Medical segment. The silver lining is that it sounds like there will be some progress in FY24. As for the weakness in the share price today, we think it's a combination of a smaller EPS beat and a weak overall market.
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