Market Snapshot
briefing.com
| Dow | 34456.68 | -18.66 | (-0.05%) | | Nasdaq | 13284.44 | -32.88 | (-0.25%) | | SP 500 | 4365.55 | -6.01 | (-0.14%) | | 10-yr Note | +3/32 | 4.25 |
|
| | NYSE | Adv 1581 | Dec 1219 | Vol 958 mln | | Nasdaq | Adv 2279 | Dec 2009 | Vol 4.8 bln |
Industry Watch
| Strong: Energy, Utilities, Consumer Staples, Real Estate |
| | Weak: Communication Services, Consumer Discretionary, Financials, Materials |
Moving the Market
-- Weak mega cap stocks limit index performance
-- Many stocks recovering from early weakness
-- Worries about China after property developer Evergrande files for Chapter 15 bankruptcy protection in U.S.
-- Treasury yields down from yesterday's settlement
| Closing Summary
18-Aug-23 16:20 ET
Dow +25.83 at 34501.17, Nasdaq -26.16 at 13291.16, S&P -0.65 at 4370.91
[BRIEFING.COM] The stock market had a mixed showing today. Early selling sent the S&P 500 to its lowest level in nearly eight weeks while the Nasdaq slid to a ten-week low. The major indices started to nudge higher, though, around mid-morning on no news. There was a sharp, brief move higher in the last 10 minutes of trading that drove the Nasdaq into positive territory for the only time this session.
Ultimately, the S&P 500 closed flat, the Nasdaq fell 0.2%, and the Dow Jones Industrial Average rose 0.1%. The Russell 2000 had a slight performance edge, gaining 0.5% today.
Initial weakness was driven by losses in mega-cap stocks, worries about China after property developer Evergrande filed for Chapter 15 bankruptcy protection in the U.S., and carryover downside momentum after the persistent selling in August.
Shortly after the open, decliners led advancers by an 11-to-10 margin at the NYSE and a 5-to-4 margin at the Nasdaq. By the close, advancers had a 5-to-4 lead over decliners at the NYSE and an 11-to-10 lead at the Nasdaq.
Six of the 11 S&P 500 sectors closed in the green. Energy (+0.9%) led the pack while communication services (-1.0%) brought up the rear.
On the earnings front, Deere (DE 397.02, -22.14, -5.3%) fell 5.0% despite beating EPS expectations for Q3 and raising its net income guidance for the fiscal year for the third consecutive quarter. Today's selling brought shares of DE below their 50-day (417.34) and 200-day (408.14) moving averages to a seven-week low. Including today's losses, Deere is still up 14.8% since the start of June.
Applied Materials (AMAT 142.66, +5.07, +3.7%), meanwhile, logged a gain after its earnings report. AMAT beat Q3 expectations and issued above-consensus EPS guidance for Q4.
Treasuries settled with gains across the curve. The 2-yr note yield fell five basis points to 4.91%. The 10-yr note yield fell six basis points to 4.25%.
There was no U.S. economic data of note today and Monday's session will also be free of scheduled economic releases.
- Nasdaq Composite: +27.0% YTD
- S&P 500: +13.8% YTD
- S&P Midcap 400: +6.1% YTD
- Russell 2000: +5.6% YTD
- Dow Jones Industrial Average: +4.1% YTD
Treasuries settle with gains
18-Aug-23 15:30 ET
Dow +0.17 at 34475.51, Nasdaq -23.03 at 13294.29, S&P -2.73 at 4368.83
[BRIEFING.COM] The major indices are drifting somewhat lower ahead of the close.
Treasuries settled with gains across the curve. The 2-yr note yield fell five basis points to 4.91%. The 10-yr note yield fell six basis points to 4.25%.
Looking ahead to Monday, there is no U.S. economic data of note.
Energy outperforms
18-Aug-23 15:00 ET
Dow -18.66 at 34456.68, Nasdaq -32.88 at 13284.44, S&P -6.01 at 4365.55
[BRIEFING.COM] The major indices have traded in relatively narrow ranges over the last half hour. Small cap stocks continue to outperform, leading the Russell 2000 to a 0.8% gain.
Energy complex futures settled mixed. WTI crude oil futures rose 0.4% to $80.66/bbl and natural gas futures fell 2.4% to $2.56/mmbtu.
On a related note, the S&P 500 energy sector (+0.7%) remains atop the leaderboard.
Estee Lauder slips in S&P 500 after downside guidance, disclosing cybersecurity incident
18-Aug-23 14:30 ET
Dow +3.92 at 34479.26, Nasdaq -31.96 at 13285.36, S&P -3.92 at 4367.64
[BRIEFING.COM] The S&P 500 (-0.09%) narrowed Friday losses slightly in the last half hour, now down less than 4 points.
S&P 500 constituents Moderna (MRNA 101.63, -4.61, -4.34%), Bio-Techne (TECH 78.09, -2.15, -2.68%), and Estee Lauder (EL 158.15, -3.91, -2.41%) pepper the bottom of the average. For its part, EL is at worse-than three year lows following earnings, underwhelming guidance, and news of a cybersecurity incident.
Meanwhile, Wisconsin-based generator company Generac (GNRC 113.85, +3.38, +3.06%) is near the top of the standings ahead of Hurricane Hilary making landfall which is expected this weekend.
Gold trims weekly losses on Friday, Nasdaq still lower
18-Aug-23 14:00 ET
Dow +2.24 at 34477.58, Nasdaq -45.08 at 13272.24, S&P -6.13 at 4365.43
[BRIEFING.COM] With about two hours to go on Friday the tech-heavy Nasdaq Composite (-0.34%) is today's top lagging index.
Gold futures settled $1.30 higher (+0.1%) to $1,916.50/oz, ultimately down -1.54% on the week as strength in the dollar and treasury yields weighed on the yellow metal.
Meanwhile, the U.S. Dollar Index is down about -0.2% to $103.37.
Page One
Last Updated: 18-Aug-23 09:08 ET | Archive
Stocks poised to extend losses
The S&P 500 futures are down 22 points and are trading 0.5% below fair value. The Nasdaq 100 futures are down 118 points and are trading 0.8% below fair value. The Dow Jones Industrial Average futures are down 144 points and are trading 0.4% below fair value.
Stock futures indicate a lower open despite pleasing earnings and guidance from Applied Materials (AMAT) and Deere (DE) and a drop in market rates. The negative bias stems from concerns about China, as well as the disappointing price action seen so far this month.
China's Evergrande Group filed for Chapter 15 bankruptcy in a New York court, seeking to restructure more than $19 billion in offshore debt. In related news, the People's Bank of China reportedly instructed state banks to intensify their interventions in the foreign exchange market to support the yuan.
There was some safe haven trading action in the Treasury market overnight. The 2-yr note yield is down five basis points to 4.91% and the 10-yr note yield is down nine basis points to 4.22%. The U.S. Dollar Index is down 0.1% to 103.53.
WTI crude oil futures are down 0.9% to $79.15/bbl; natural gas futures are down 2.9% to $2.55/mmbtu; and copper futures are up 0.1% to $3.69/lb.
Applied Materials sees relief from recent selling pressure following uplifting OctQ guidance (AMAT)
Applied Materials (AMAT +3%) is amid a relief rally today following its top and bottom line beats in Q3 (Jul) and uplifting Q4 (Oct) guidance. The semiconductor equipment giant endured meaningful selling pressure lately, sliding by nearly 10% this month. The cause was primarily shifting investor sentiment following the Fitch downgrade to start the month rather than an internal hiccup at AMAT.
- In JulQ, adjusted EPS was relatively flat yr/yr at $1.90 while revs of $6.42 bln translated to a yr/yr decline of 1.5%, AMAT's first quarterly drop since 4Q19.
- Foundry, logic, and flash memory (NAND), which total around 80% of sales, underperformed in the quarter, keeping top-line growth negative.
- Still, during the first half of the year, DRAM revs exceeded AMAT's closest two competitors combined. At the same time, Applied Global Services (AGS) generated record revs of over $1.46 bln in the quarter.
- During its conference call, AMAT discussed two underlying factors driving its current and longer-term performance: AI and ICAPS (IoT, Communication, Automotive, Power, and Sensor). Management remained bullish on these two themes, commenting on how they are two sides of the same coin, meaning that consumer devices, vehicles, and infrastructure are growing more intelligent, relying more on AI. AMAT expressed enthusiasm over the long-term positive effects of this development.
- Meanwhile, the semiconductor industry is undergoing a massive tilt toward regionalization. During the pandemic, governments realized the consequences of outsourcing chip production. AMAT is bullish that as countries seek to build resilient local capacity to support an increasing number of industry verticals, their governments will deploy massive incentives over the next five years.
- In the interim, AMAT is enthusiastic about next quarter, projecting adjusted EPS of $1.82-2.18 and revs of $6.11-6.91 bln, both of which crushed estimates.
It is no secret that current chip demand is soft. Personal electronics, in particular, have seen noticeable weakness this year. However, that has not stopped the market from pushing shares of AMAT firmly higher this year, pricing in a trough in wafer fab equipment spending, a development touched on by Micron (MU) in June and reiterated by peers Lam Research (LRCX) and KLA Corp (KLAC) last month. Meanwhile, the excitement surrounding AI's potential disruption has added further kindling.
Although today's response is relatively mild compared to last month's action, there are reasons to remain optimistic about AMAT's long-term future. The regionalization of chip production is a lesser-discussed catalyst that could spur significant upside during the back half of the decade. Increasing chip content, smarter buildings and devices, and AI should also provide a long-lasting tailwind.
Ross Stores surprises with Q2 upside and robust comps; bodes well for other value retailers (ROST)
Ross Stores (ROST +6%) is heading nicely higher following its Q2 (Jul) report last night. ROST beat handily on EPS and revenue. Comps were much better than expected as well. Also, ROST tends to be conservative on guidance, but offered a pretty bright outlook for the next two quarters. There is a lot to unpack here. The EPS beat was much larger than each of the past two quarters. But what really stood out was the EPS guidance for two reasons:
- First, the in-line EPS guidance for Q3 (Oct) may seem like a nothing burger to many. But to us, and we follow ROST closely, in-line guidance was a nice surprise. ROST typically lowballs guidance then beats when they report. For them to guide in-line shows us they have confidence in their near term performance. Also, the mid-point of the Q3 EPS guidance was above analyst expectations. So it's almost like a guide-up, which is very rare and was a pleasant surprise.
- Second, ROST guided not just for one quarter ahead, but for two quarters. In fairness, ROST did this last year as well when it reported Q2 results in Aug 2022. But this year, the Q4 (Jan) EPS guidance was above analyst expectations. That shows that ROST has confidence about the upcoming holiday period.
- Same store comps came in at +5% in Q2, well ahead of prior guidance of "relatively flat." Comps were primarily driven by higher traffic. Cosmetics and accessories were the strongest areas. Home also performed above average. Performance across geographic areas was broad-based. ROST also raised comp guidance for 2H23. The company previously expected full year flat comps, but now it expects Q3 comps of +2-3% and Q4 comps of +1-2%.
- Q2 operating margin was flat yr/yr at 11.3%, but that was nicely above the 9.8-10.1% prior guidance. ROST benefited from lower ocean and domestic freight costs. Operating margin guidance for Q3 stands at 10.3-10.5%. Another positive metric was consolidated inventories being down 15% yr/yr. Many retailers had too much inventory in 2022 just as consumers pulled back on spending, so it is good to see progress there.
Overall, we are quite impressed with ROST's results and guidance. Even though TJX reported good numbers, we were a bit nervous going in because a high portion of ROST's merchandise is more on the discretionary side. And that's where consumer spend has weakened. ROST focuses heavily on apparel and home goods, but with tight wallets, consumers can do without new outfits for now. Plus ROST does not sell groceries, which has been Walmart's (WMT) saving grace in recent quarters. Also, lower income consumers are squeezed the most by inflation and that is ROST's core customer. To see ROST post these numbers was a surprise, especially the +5% comps.
Higher traffic was the driver of comps, which tells us that maybe ROST is attracting higher income consumers looking to save some money, which is great. Looking ahead, we think this report bodes well for other value / dollar store retailers scheduled to report soon: Burlington (BURL Aug 24), Big Lots (BIG Aug 29), Ollie's Bargain Outlet (OLLI Aug 31). Dollar stores reporting soon include Dollar Tree (DLTR Aug 24), Dollar General (DG Aug 31) and Five Below (FIVE Aug 30).
Deere's JulQ beat-and-raise fails to yield gains as investors worry about longer-term demand (DE)
Deere's (DE -4%) beat-and-raise Q3 (Jul) report is not bringing home the bacon today as slowing sales growth and fears surrounding long-term consequences of higher interest rates trigger selling pressure. Today's reaction resembles what happened following solid Q2 (Apr) results in mid-May; investors remained concerned about demand further on the horizon. However, the stock quickly bottomed after AprQ results.
- In JulQ, earnings expanded at an impressive clip, moving 65.6% higher yr/yr to $10.20, marking Deere's widest earnings beat in over five years. Operating margins spiked across DE's core segments, mostly due to favorable pricing.
- After four quarters of over +20% increases, equipment sales returned to single-digit growth, improving 9.9% to $14.28 bln. The next several quarters will likely see less energetic revenue growth as Deere laps quarters of over +30% increases.
- Another factor that could weigh on future growth is crop prices, squeezing consumers as Deere steadily increases its prices to help offset inflationary pressures. This fear has yet to materialize; sales in Deere's Production & Precision Ag (43% of revs) and Construction & Forestry (24%) segments enjoyed double-digit growth primarily due to higher price realization and shipment volumes. It helped that drier weather conditions put downward pressure on yields in the quarter, keeping prices relatively high.
- Still, companies across various sectors have noticed deflation on some commodities, including Tyson Foods (TSN), which is struggling with significantly lower livestock prices. As such, it could begin to weigh more meaningfully in subsequent quarters.
- A minor blemish from JulQ was Small Ag & Turf (24% of revs) sales edging just 3% higher yr/yr. Shipment volumes took a hit in this segment, reflecting less acceptance of higher prices amongst smaller farm and business owners.
- However, relatively weak Small Ag & Turf sales may have already been priced in after retailers like Tractor Supply (TSCO) and Home Depot (HD) registered depressed demand across their more discretionary products. TSCO was blunt about the current environment last month, noting that it is dealing with tougher conditions than expected at the beginning of JunQ, with shoppers growing increasingly tired of inflation.
- Deere was upbeat on the back half of the year, forecasting net income of $9.75-10.00 bln, up from $9.25-9.50 bln, and its Production & Precision Ag business to enjoy sales growth of +20% yr/yr. Management pointed out that its supply chain continues to see further stabilizing alongside favorable market conditions and an improving operating environment.
The main takeaway from JulQ is that robust headline figures may no longer be sufficient when the overall market is trending down. Minor blemishes, such as lagging Small Ag sales become more glaring while potentially weakening macroeconomic conditions whiteout solid equipment sales growth. A similar dynamic could be seen last quarter and could keep selling pressure on Deere over the immediate term.
Nevertheless, we like Deere's move toward smart farming equipment as it can contribute to steady margin expansion over the long term. Its stronghold on the farming equipment market is also unwavering. Meanwhile, with supply chain disruptions continuing to ease, Deere remains well-positioned for consistent growth.
CVS Health cannot catch a break, sells off after Blue Shield of California mostly cuts ties
CVS Health (CVS -8%) cannot catch a break, falling to its lowest level since November 2020 today following the news that Blue Shield of California, a health insurance firm serving over 4.0 mln members, will no longer utilize CVS's services, instead partnering with Cost Plus Drug (a Mark Cuban outfit) and Amazon (AMZN) Pharmacy. Although worth pointing out, Blue Shield stated that it would continue to rely on CVS for its specialty pharmacy services.
Blue Shield's decision is a significant blow to CVS, not just because of the millions of lost consumers but also because of the potential implications. Other health insurers, non-profit or for-profit, could also move off CVS and other pharmacy benefit managers (PMBs) like Express Scripts (CI), sending a shockwave across the traditional PBM landscape today.
- Specifically for CVS, losing its Blue Shield contract comes at an uncertain time. CVS is facing headwinds related to the partial termination of Centene (CNC) in 2024. Recall in late 2022, CNC decided to move their business to Express Scripts. The decision by CNC placed further pressure on an already-challenged 2024 outlook, given CVS's Star Rating was cut a month earlier.
- CVS's Star Rating for its Aetna National PPO plan was cut to 3.5 from 4.5 in October. The rating cut spooked investors and set its shares' considerable downward move in motion. CVS has discussed actions it will take to mitigate some of the financial impact of a lower rating in 2024, leaning on contract diversification and operational initiatives; CVS announced around 5,000 layoffs ahead of its Q2 report earlier this month. Nevertheless, CVS warned that even if these actions proved successful, they would not close the entire gap from the rating cut.
- Coinciding with these headwinds are CVS's aggressive M&A plans, completing its purchases of Signify Health for $8.0 bln and $10.6 bln for Oak Street Health earlier this year, which could pressure its bottom line even further. Likewise, CVS's medical benefit ratio increased 350 bps yr/yr to 86.2%, underpinning higher outpatient costs.
Bottom line, CVS's lost contract with Blue Shield is concerning. With PBM comprising the most significant chunk of CVS's total sales at around half, future performance could take a material hit. The company already withdrew its FY25 adjusted EPS target of $10.00 earlier this month after slashing its FY24 to $8.50-8.70 from $9.00, translating to flat yr/yr growth. Management noted that it would clarify its longer-term earnings growth outlook in December. After today, we are not holding out breath for much improvement. |
