Market Snapshot
| Dow | 34214.22 | -227.16 | (-0.66%) | | Nasdaq | 13283.14 | -185.99 | (-1.38%) | | SP 500 | 4349.30 | -52.98 | (-1.20%) | | 10-yr Note | -4/32 | 4.48 |
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| | NYSE | Adv423 | Dec2449 | Vol854 mln | | Nasdaq | Adv1202 | Dec3149 | Vol5.0 bln |
Industry Watch
| Strong:-- |
| | Weak:Consumer Discretionary, Information Technology, Materials, Real Estate, Industrials |
Moving the Market
-- Ongoing fallout after Fed decision amid concerns that peak policy rate has not been reached
-- Big move up in Treasury yields following the FOMC decision kept pressure on equities; the 10-yr note yield settled at its highest level since 2007
-- Weak mega cap stocks pacing broad based losses
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Closing Summary
21-Sep-23 16:20 ET
Dow-370.46at 34070.92,Nasdaq-245.14at 13223.99,S&P-72.20at 4330.08
[BRIEFING.COM] The stock market had a downtrend day. The major indices were under pressure from the start, but faded to session lows in the late afternoon trade. The indices ultimately closed near those levels with losses ranging from 1.1% to 1.8%. The S&P 500, which closed just above 4,400 yesterday, spent the whole session below that level today.
The biggest factor driving the weakness was the bump in market rates that started yesterday afternoon in response to the Fed's hawkish hold. Specifically, the Fed indicated that it may not be done yet raising rates, that it is unlikely to cut rates in 2024 as much as the market had been thinking, and that the neutral rate might be higher than the estimated longer-run rate (2.5%).
The 2-yr note yield was at 5.05% just before yesterday's FOMC decision was released, but settled at 5.14% today after hitting 5.20% earlier. The 10-yr note yield, at 4.32% just before the FOMC decision was released, rose another 13 basis points from yesterday's settlement to 4.48% -- its highest level since 2007.
Losses were broad based, led by the mega caps and growth stocks. The Vanguard Mega Cap Growth ETF (MGK) fell 2.0% and the Russell 3000 Growth Index fell 1.9%.
Ten of the 11 S&P 500 sectors declined more than 1.0% today. The health care sector (-0.9%) saw the slimmest loss while the real estate sector (-3.5%) registered the sharpest decline by a decent margin.
There were some standout winners that had specific catalysts to account for the relative strength on this otherwise downbeat day.Paramount Global(PARA13.30, +0.06, +0.5%),Warner Bros. Discovery(WBD11.51, +0.01, +0.1%), andFOX Corp.(FOXA32.14, +0.99, +3.2%) logged gains afterCNBCreported that a resolution to the Hollywood writers' strike may be reached soon.
Splunk(SPLK144.43, +24.84, +20.8%) was another top performer after news that it's being acquired byCisco(CSCO53.34, -2.16, -3.9%) for $28 billion, or $157.00 per share, in cash.
In other news, the Bank of England voted 5-4 to leave its bank rate unchanged at 5.25%. The Hong Kong Monetary Authority and Swiss National Bank also left their key interest rates unchanged at 5.75% and 1.75%, respectively, whereas the Riksbank and Norges Bank both raised their key interest rates by 25 basis points to 4.00% and 4.25%, respectively.
- Nasdaq Composite: +26.4% YTD
- S&P 500: +12.8% YTD
- S&P Midcap 400: +2.8% YTD
- Dow Jones Industrial Average: +2.8% YTD
- Russell 2000: +1.2% YTD
Reviewing today's economic data:
- Weekly Initial Claims 201K (Briefing.com consensus 225K); Prior was revised to 221K from 220K; Weekly Continuing Claims 1.662 mln; Prior was revised to 1.683 mln from 1.688 mln
- The key takeaway from the report is that the low level of initial claims shows that the labor market is still operating in a tight mode, which is going to remain a basis for the Fed to keep operating with a restrictive interest rate mindset.
- September Philadelphia Fed Index -13.5 (Briefing.com consensus -2.0); Prior 12.0
- Q2 Current Account Balance -$212.1 bln (Briefing.com consensus -$222.0 bln); Prior was revised to -$214.5 bln from -$219.3 bln
- August Existing Home Sales 4.04 mln (Briefing.com consensus 4.10 mln); Prior 4.07 mln
- The key takeaway from the report is that existing home sales continue to be crimped by a confluence of factors: higher mortgage rates and higher prices that are hurting affordability; limited supply; a lack of mobility due to remote work opportunities; and disinterest in moving by existing homeowners who are reluctant to give up a low-rate mortgage for a higher-rate mortgage.
- August Leading Indicators -0.4% (Briefing.com consensus -0.4%); Prior was revised to -0.3% from -0.4%
Friday's economic calendar will feature:
- 9:45 ET: Preliminary September S&P Global US Manufacturing PMI (prior 47.9) and preliminary September S&P Global US Services PMI (prior 50.5)
Stocks pullback ahead of the close
21-Sep-23 15:35 ET
Dow-334.37at 34107.01,Nasdaq-221.91at 13247.22,S&P-66.79at 4335.49
[BRIEFING.COM] The market took a sharp turn lower recently.
The 10-yr note yield settled 13 basis points higher at 4.48%. The 2-yr note yield rose one basis point to 5.14%.
Friday's economic calendar will feature:
- 9:45 ET: Preliminary September S&P Global US Manufacturing PMI (prior 47.9) and preliminary September S&P Global US Services PMI (prior 50.5)
Energy complex settles mixed
21-Sep-23 15:05 ET
Dow-227.16at 34214.22,Nasdaq-185.99at 13283.14,S&P-52.98at 4349.30
[BRIEFING.COM] The major indices sit near session lows with losses ranging from 0.7% to 1.4%.
Energy complex futures settled mixed. WTI crude oil futures fell 0.2% to $89.55/bbl and natural gas futures rose 4.2% to $2.84/mmbtu. The S&P 500 energy sector is near the top of the leaderboard, but still down 1.1%.
Elsewhere, the CBOE Volatility Index is up 6.9% or 1.10 to 16.24.
REITs, consumer discretionary stocks dot bottom of S&P 500
21-Sep-23 14:30 ET
Dow-213.11at 34228.27,Nasdaq-173.20at 13295.93,S&P-51.10at 4351.18
[BRIEFING.COM] The rebound off session lows was recoiled in the past half hour, the S&P 500 (-1.16%) now back within reach of today's worst levels.
S&P 500 constituentsAlexandriaRE(ARE 104.19, -8.05, -7.17%),DollarTree(DLTR 106.33, -4.97, -4.47%), andCaesarsEntertainment(CZR 48.09, -2.08, -4.15%) are among today's top laggards. ARE dips alongside real estate peers which is due in part to the readthrough of today's home sales report which saw higher mortgage rates and higher prices denting affordability, while DLTR and CZR are lower in tandem with the broader consumer discretionary space.
Meanwhile, shipping giantFedEx(FDX 263.16, +12.64, +5.05%) is atop the S&P following last night's earnings beat, repurchase news which fueled a plethora of Wall Street analyst target increases.
Gold pressured by higher-for-longer Fed stance
21-Sep-23 14:00 ET
Dow-155.44at 34285.94,Nasdaq-141.33at 13327.80,S&P-41.38at 4360.90
[BRIEFING.COM] The tech-heavy Nasdaq Composite (-1.05%) is still today's top lagging index as we approach two hours to go on Thursday.
Gold futures settled $27.50 lower (-1.40%) to $1,939.60/oz, pressured by yesterday's Fed higher-for-longer approach.
Meanwhile, the U.S. Dollar Index is up about +0.1% to $105.29.
Page One
Last Updated: 21-Sep-23 09:00 ET | Archive
Interest rate angst driving stocks lower
It is setting up to be a tough open for stocks, which continue to grapple with the Fed's inference from yesterday that it may not be done yet raising rates, that rates are going to stay higher for longer, and that the market should dial back its rate-cut expectations for 2024. The added point of consternation is that Fed Chair Powell acknowledged that the neutral rate might be higher than the Fed's estimate for the longer-run rate (2.5%).
In brief, the equity futures market is mirroring the interest rate angst that is showing up in the Treasury market.
The 2-yr note yield is up four basis points to 5.17%, but it had been at 5.05% just before yesterday's FOMC announcement, and the 10-yr note yield is up 13 basis points to 4.48% after scraping 4.32% just before yesterday's FOMC announcement.
Currently, the S&P 500 futures are down 38 points and are trading 0.9% below fair value, the Nasdaq 100 future are down 191 points and are trading 1.2% below fair value, and the Dow Jones Industrial Average futures are down 192 points and are trading 0.6% below fair value.
The movement in rates has overshadowed the positive response toFedEx's (FDX)earnings report, news thatCisco (CSCO)is going to acquireSplunk (SPLK)for $28 billion, or $157 per share, in cash, and reports fromCNBCthat the Hollywood writers' strike may soon be ending.
Individual news items are not driving the market. The early trade is a macro trade, which is to say the early declines should be broad based as participants key on higher rates as a basis to sell stocks in a less discriminate fashion.
The latest jobless claims report certainly didn't lower the interest rate temperature in the room. Initial claims for the week ending September 16 declined by 20,000 to just 201,000 (Briefing.com consensus 225,000), hitting their lowest level since January. Continuing jobless claims for the week ending September 9 decreased by 21,000 to 1.662 million.
The key takeaway from the report is that the low level of initial claims shows that the labor market is still operating in a tight mode, which is going to remain a basis for the Fed to keep operating with a restrictive interest rate mindset.
In other economic news, the Philadelphia Fed Index dropped to -13.5 in September (Briefing.com consensus -2.0) from 12.0 in August with the index for new orders checking in at -10.2 versus 16.0 in August. The dividing line between expansion and contraction is 0.0. Something else that stands out in this report is that the indexes for prices paid (to 25.7 from 20.8) and prices received (to 14.8 from 14.1) both increased month-over-month.
The Q2 Current Account Balance deficit narrowed to $212.1 billion (Briefing.com consensus -$222.0 billion) from an upwardly revised -$214.5 billion (from -$219.3 billion) in Q1.
The August Existing Home Sales Report and August Leading Indicators Report will be released at 10:00 a.m. ET. As it stands now, the jump in rates is providing an indicator that will lead to a weak start for stocks.
-- Patrick J. O'Hare, Briefing.com
KB Home can't build on upside report to push shares higher as lower margins, sale prices weigh (KBH)
Following in the footsteps ofLennar(LEN) andToll Brothers(TOL), which each posted blowout quarterly results over the past month,KB Home(KBH) delivered its own upside report last night, easily surpassing Q3 revenue and EPS estimates. Demand clearly remains strong for new homes -- as illustrated by a 54% surge in new orders for KBH -- with the supply of existing homes on the market remaining extremely tight. However, rising mortgage rates are taking a toll on KBH and the industry as home affordability becomes a more pressing concern.
- In order to mitigate the impact of rising mortgage rates on home buyers, KBH has increased its incentives and concessions. This is reflected in the average selling price dropping by 8% yr/yr to $466,300. Total revenue also declined by 14% yr/yr, representing its steepest decline in three years.
- Lower selling prices leads to lower margins, which was the case for KBH in Q3. Excluding inventory related charges, housing gross profit margin plunged by 550 bps yr/yr to 21.5% with higher construction costs adding further pressure.
- With margins contracting, it then follows that earnings are also on the decline. Although KBH's EPS of $1.80 handily beat expectations, it was still down by 37% on a yr/yr basis.
- On the positive side, the jump in new orders indicates that the incentives are working from a demand standpoint. Furthermore, the cancellation rate improved significantly to 21% compared to 35% in the year-earlier period.
- It's worth pointing out, though, that KBH is lapping a very favorable yr/yr comparison. In 3Q22, net orders dove by 50% as the rapid rise in mortgage rates and inflation caused many prospective home buyers to postpone their home buying decisions.
The bottom line is that it's really a mixed bag for KBH and other homebuilders. If looking at the situation from a "glass half full" perspective, higher mortgage rates are benefitting KBH and others because it's exacerbating the under-supply issue for existing homes on the market. However, if looking at it from a "glass half empty" view, higher mortgage rates are forcing homebuilders to ramp up incentives in order to improve affordability and keep demand strong. Since rising mortgage rates are ultimately compressing margins and profitability through lower average selling prices, we believe it's hard to see higher rates as a net positive. Longer-term, though, we do believe that KBH and its peers are in good position once rates cool down due to the supply and demand dynamics.
Broadcom gaps lower on reports Alphabet (GOOG) could stop utilizing its AI chips by 2027 (AVGO)
Broadcom (AVGO)gapped lower today after a report fromThe InformationhighlightedAlphabet (GOOG)potentially moving away from AVGO's AI chips; instead, designing them in-house. The report also touched on the possibility GOOG replacing AVGO as its ethernet switches provider across its data centers, opting to buy fromMarvell (MRVL).
The move from GOOG follows its broader push to design its chips in-house. Earlier this year,The Informationreported on GOOG replacingSamsung (SSNLF)by 2025 in favor of its in-house processors, designed by its Tensor team. With its primary smartphone competitorApple (AAPL), already moving off third parties, likeIntel (INTC), opting for in-house designs, GOOG is following suit to maintain pace with the speed and efficiency improvements gained through developing a chip in-house. The move may also cut costs for GOOG by a material amount each year.
What does this mean for AVGO?
- Although AAPL is AVGO's single-largest customer, comprising approximately 20% of FY22 (Oct) revenue, given its presence in the wireless communications industry, we suspect sales to GOOG make up a meaningful portion of total revenue, making GOOG's possible move material to future financials.
- Furthermore, AI is becoming a lucrative market for AVGO going forward. During its JulQ earnings call earlier this month, CEO Hock Tan stated that AI could comprise over 25% of its Semiconductor revenue in FY24, translating to around a fifth of total revenue. With the AI boom being a significant factor in AVGO's +45% jump YTD, any loss of AI-related demand could be met by meaningful disappointment and subsequent selling pressure.
- It should also be noted how critical AI will likely be to AVGO's near-term financial performance. During JulQ, AVGO's AI product portfolio kept overall revenue from sinking yr/yr. Looking ahead to Q4 (Oct), AI will remain the silver lining during a challenging demand environment, keeping AVGO's Semiconductor segment from experiencing flat yr/yr revenue growth.
- However, GOOG's shift away from AVGO for its AI chips may not result in a material hit to AVGO's quarterly results over the near term.The Informationreported that GOOG would not drop AVGO as a supplier until 2027, although it was unclear if it would slowly wind down its dependence on AVGO in the interim.
Today's news of GOOG potentially moving off AVGO is undoubtedly a concerning development. AVGO shares have steadily declined after hitting all-time highs the day before JulQ results. There is plenty of enthusiasm surrounding AI, which has likely been priced into the stock, leaving open significant downside risk. Still, GOOG's possible move off AVGO does not underscore cooling AI demand. Instead, it follows a trend by the tech giant of designing more of its handset components in-house. While we remain cautious about AVGO given its considerable rally this year, its primary focus, AI, is still showing signs of outsized demand.
Cisco looks to accelerate its software-based transformation with acquisition of Splunk (CSCO)
Traditionally thought of as a leading networking equipment manufacturer,Cisco(CSCO) has been gradually evolving into a cloud software company that generates more revenue from subscriptions and licenses. That transformation kicked into high gear this morning after CSCO announced that its acquiring data analytics and cybersecurity companySplunk(SPLK) for $157/share in cash, amounting to a $28 bln price tag -- the largest acquisition CSCO has ever made.
The offer is a fairly generous one with the $157/share bid representing a 32% premium to yesterday's closing price. On a P/S basis, CSCO is paying roughly 7x SPLK's estimated revenue for FY24. Shares of CSCO are trading lower on the buyout news perhaps over concerns that the company is overpaying and is taking on too much risk in a fragile macroeconomic environment. Furthermore, CSCO will need to tap into the capital markets to finance this deal, which could negatively impact earnings. As of July 29, 2023, CSCO had long-term debt of $6.7 bln, but that figure is likely to rise.
These concerns aside, we believe that the deal makes sense and the addition of SPLK would be a good fit, transforming CSCO into an observability and cybersecurity powerhouse.
- In the months leading up to this deal, CSCO made a series of much smaller acquisitions that bolstered its cybersecurity and AI capabilities: namely, it bought Lightspin in March, Armorblox in May, and Oort in August. While those acquisitions strengthened its technology, none of them really move the needle in terms of CSCO's financials. However, that won't be the case with SPLK.
- The transaction is expected to be cash flow positive and accretive to gross margin in year one, and accretive to non-GAAP EPS in year two. After an up and down year in 2022. SPLK has turned a corner in 2023 and has delivered solid results.
- SPLK has been making its own transition to a cloud-based model, shifting from an on-premise/license software provider to more of a SaaS company. This has created more predictable recurring revenue streams and has boosted its margins.
- On August 23, SPLK posted an impressive beat-and-raise Q2 earnings report, despite operating in a tough business climate characterized by lengthening sales cycles and IT spending cuts. Cloud ARR increased by a healthy 27% while the cloud portion of Q2 bookings reached 64%, near the high end of its outlook of between 55-65%.
- Meanwhile, CSCO's transformation is also paying dividends, as illustrated by a beat-and-raise earnings report on August 17 that also featured its strongest top-line growth in over a decade. Notably, total software grew by 17% yr/yr and software subscription revenue jumped by 20%. Non-GAAP EPS and operating margin also reached new quarterly records.
- With the rise of generative AI, tools such as observability, data analytics, and security will only become more critical for enterprises. Accordingly, SPLK's offerings should be in the wheelhouse for companies that are looking to capitalize on AI technology.
Overall, SPLK is a good fit for CSCO as its observability and data analytics capabilities will complement CSCO's network security, cloud security, and endpoint security products. Given how competitive the cybersecurity industry is, with many sizable companies operating within it, we would be surprised if this deal ran into regulatory hurdles. With market participants feeling even more jittery about the market and economic growth following yesterday's FOMC announcement, the timing of this acquisition probably isn't ideal. The idea of tacking on substantial integration and execution risks in this environment isn't going over well. In the long run, though, we believe that this deal could become a meaningful growth catalyst for CSCO.
Darden Restaurants trades flat despite upside results; Olive Garden and LongHorn did well (DRI)
Darden Restaurants (DRI)is roughly flat despite reporting solid Q1 (Aug) earnings this morning. DRI operates several restaurant chains, including Olive Garden, LongHorn Steakhouse and the recently acquired Ruth's Chris Steak House. DRI reported decent EPS upside while revenue was slightly better than analyst expectations. DRI also reaffirmed FY24 adjusted EPS guidance of $8.55-8.85.
- DRI reported solid comps at +5.0% on a consolidated basis, above the company's full year guidance of +2.5-3.5% and modestly above the +4.0% comps posted in Q4 (May). In a similar pattern to what we saw in Q4, comps were led by LH at +8.1%, followed by OG at +6.1%. Fine Dining comps were the laggard at -2.8%. DRI declined to increase full year comp guidance because it is only one quarter in the books and uncertainty remains.
- Higher prices helped comps. Overall pricing was up about 6%, mostly from price increases implemented last fiscal year, while DRI expects a full year benefit closer to mid-3s. Unfortunately, we did not get comp guidance for Q2 (Nov), which is typically a slow quarter with back-to-school, so there is a little bit of a lull in casual dining. On the other hand, Q2 OG comps could get a boost from the return of its popular Never Ending Pasta promotion.
- On the cost side, commodity inflation was a bit less than expected, so that was a benefit. However, DRI cautioned that while commodities might be easing, labor is still pretty high.
- In terms of its macro view, DRI says the consumer continues to be resilient, but they seem to be a little bit more selective. DRI is seeing a little softness vs last year among consumers with household incomes above $125,000. That primarily affects its fine dining brands but also affects its other brands. However, DRI says food away from home can be one of the most difficult things consumers can give up. DRI is confident it is well positioned for whatever it has to deal with.
- Importantly, Q1 marked DRI's first quarter including its recent Ruth's Chris acquisition. DRI now expects to realize more synergies than originally anticipated. In terms of migrating RC under the Darden platform, DRI is about to embark on the hardest part, the actual conversion to new systems and processes. DRI plans to complete it in phases over the next 9 months to limit disruptions as much as possible.
Overall, this was a decent start to FY24. Comps were quite good and we are heartened to see the improvement on commodity inflation. However, we think the fairly modest upside to the headline numbers, coupled with DRI's decision to not increase FY24 comp guidance is keeping the stock in check. The stock has been trending lower recently, signaling perhaps some cautious sentiment heading into this report. But there was not enough here to jolt the stock back to an uptrend. Finally, we think this report is perhaps a slight positive for other casual restaurant chains set to report when earnings season kicks off next month, includingBJRI, BLMN, CAKE, EAT, TXRH.
FedEx transported higher as competitors' recent struggles help drive outsized AugQ results (FDX)
Investors are transporting shares ofFedEx (FDX +4%)significantly higher today after the shipping behemoth delivered its widest earnings beat in three years in Q1 (Aug) on solid sequential volume gains, capturing meaningful upside due to competitors' recent struggles. Recall during the quarter,UPS (UPS)faced tense negotiations with the Teamsters, triggering more volume diversion than anticipated. At the same time,Yellow Corp (YELLQ), a leading less-than-truckload (LTL) shipping provider, filed for bankruptcy, causing its customers to seek alternate carriers. FDX also bumped its FY24 (May) earnings guidance modestly higher and announced plans to repurchase $1.5 bln shares in FY24.
- Adjusted EPS of $4.55, a 32% improvement yr/yr, stemmed from FDX's DRIVE initiatives announced in April. FedEx Ground and Express each realized advantages from DRIVE, expanding adjusted operating margins 480 bps yr/yr to 13.3% and 40 bps to 2.1%, respectively. Conversely, FedEx Freight margins contracted 290 bps to 21% as a dynamic volume environment continued to pressure the segment. Still, sequentially, Freight's margins edged roughly 100 bps higher.
- Revenue growth stayed in reverse, dropping 7% yr/yr to $21.68 bln, FDX's fourth-straight quarter of declining yr/yr revenue. However, FDX warned of challenging conditions last quarter, projecting continuous volume declines, albeit at a moderating pace, so the yr/yr decline does not come as much of a surprise. Ground sales moved 3% higher yr/yr on a 1% jump in volume. Express sales took a 9% tumble but saw a sequential moderation in volume declines. Freight revs saw the most severe decrease at 16%, driven by a 13% volume drop.
- Importantly, FDX expects to maintain most of the volume it added during the quarter due to the headwinds endured by UPS and Yellow. Ground and Express added approximately 400,000 in average daily volume directly tied to the threat of a strike at UPS. Meanwhile, Freight benefited from about 5,000 incremental average daily shipments due to Yellow's closure during August.
- Following sequential improvements in AugQ and the benefits of DRIVE starting to pour in, FDX was confident in raising the low end of its FY24 adjusted EPS estimate by $0.50 to $17.00-18.50. The midpoint of this outlook assumes flat revenue growth yr/yr, down slightly from previous guidance of flat to low-single-digit percent growth but still ahead of consensus.
Although shares were steadily sliding from July highs leading into FDX's AugQ report, they were still up over 10% since Q4 (May) results in late June, reflecting mounting excitement over the potential gains from competitors' woes. FDX surpassed these rising expectations in AugQ and provided encouraging comments surrounding its ability to hold onto its newfound market share.
There are still reasons to pump the brakes. Management is closely monitoring economic activity in North America and Europe, keeping an eye on inventory restocking, inflation, and e-commerce trends. Deterioration across these trends would likely clip future volumes at FDX. As such, although we like FDX's AugQ performance and improved market share, it is critical to proceed with a healthy degree of caution. |
