Market Snapshot
briefing.com
| Dow | 33278.82 | -228.64 | (-0.68%) | | Nasdaq | 13215.75 | -3.58 | (-0.03%) | | SP 500 | 4261.91 | -26.14 | (-0.61%) | | 10-yr Note | -30/32 | 4.68 |
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| | NYSE | Adv 544 | Dec 2294 | Vol 989 mln | | Nasdaq | Adv 1307 | Dec 3047 | Vol 4.5 bln |
Industry Watch
| Strong: Communication Services, Information Technology, Consumer Discretionary |
| | Weak: Utilities, Energy, Materials, Real Estate, Financials, Health Care |
Moving the Market
-- Rising Treasury yields still top of mind
-- Wait-and-see following steep losses in September
-- Relative strength in mega caps still offering some support, but many mega caps pulled back from their highs
-- S&P 500 failed to breach the 4,300 level, which coincided with the market deterioration
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Closing Summary
02-Oct-23 16:30 ET
Dow -74.15 at 33433.31, Nasdaq +88.45 at 13307.78, S&P +0.34 at 4288.39
[BRIEFING.COM] Today was the first trading day of the new month and second calendar day of the fourth quarter. Stocks followed a familiar pattern, though, and struggled alongside rising market rates. The final standing for the S&P 500 was a bit misleading, as it belied broad weakness below the surface.
The Invesco S&P 500 Equal Weight ETF (RSP) fell 1.1% and nine of the 11 S&P 500 sectors saw a decline. The rate-sensitive utilities sector was noticeably weak, plunging 4.7%. The energy sector (-2.1%) was another laggard, sliding with oil prices ($89.71/bbl, -1.10, -1.2%), which was partially a reaction to a stronger dollar and a Reuters report that OPEC's oil output rose in September.
Relative strength in the mega cap space proved to the be the difference for the market-cap weighted S&P 500 and Nasdaq Composite. The Dow Jones Industrial Average and the Russell 2000, meanwhile, registered losses of 0.2% and 1.6%, respectively.
Following a big move in September, the 10-yr note yield jumped another 11 basis points to 4.68% after hitting 4.70% earlier. The 2-yr note yield settled seven basis points higher at 5.11%. Those moves occurred in the midst of a better-than-expected ISM Manufacturing Index for September and some pleasing construction spending data for August, although yields were rising in front of those 10:00 a.m. ET releases.
The S&P 500 tested the 4,300 level at its high this morning, but failed to break above it. That failure, along with the 10-yr note yield hitting 4.70% at its high of the day, invited additional selling activity.
Mega cap stocks took on a safe-haven visage that mitigated broad market losses. They were not immune to selling activity, but saw an uptick in buying in the late afternoon that enabled the three major indices to close off their lows. NVIDIA (NVDA 447.82, +12.83, +3.0%), Apple (AAPL 173.75, +2.54, +1.5%), and Microsoft (MSFT 321.80, +1.38, +1.9%), which were relative strength leaders throughout the session, were standouts in that regard. The Vanguard Mega Cap Growth ETF (MGK) closed up 1.0%.
The communication services (+1.5%), information technology (+1.3%), and consumer discretionary (+0.3%) sectors, all of which house mega-cap components, were alone in positive territory at the close.
- Nasdaq Composite: +27.2% YTD
- S&P 500: +11.7% YTD
- S&P Midcap 400: +1.6% YTD
- Dow Jones Industrial Average: +0.9% YTD
- Russell 2000: -0.3% YTD
Reviewing today's economic data:
- The September ISM Manufacturing PMI checked in at 49.0% (Briefing.com consensus 47.8%), up from 47.6% in August. The dividing line between expansion and contraction is 50.0%, so the September reading denotes an ongoing contraction in the manufacturing sector, but at a slower pace than the prior month. September marked the 11th straight month the PMI reading has been below 50.0%.
- The key takeaway from the report is the understanding that the pace of contraction in the manufacturing sector slowed in September, which is something that will be construed as an economy tracking more for a soft landing at this juncture than a hard landing.
- Total construction spending increased 0.5% month-over-month in August (Briefing.com consensus 0.5%) after increasing an upwardly revised 0.9% (from 0.7%) in July. Total private construction was up 0.5% month-over-month while total public construction increased 0.6% month-over-month. On a year-over-year basis, total construction spending was up 7.4%.
- The key takeaway from the report is that there was balanced strength in August between private and public construction spending that gave a boost to total construction spending, which was up nicely year-over-year, leaving it well out of any hard-landing zone.
Tuesday's economic data is limited to the August JOLTS - Job Openings report at 10:00 a.m. ET.
Treasury yields settle sharply higher
02-Oct-23 15:30 ET
Dow -154.23 at 33353.23, Nasdaq +34.09 at 13253.42, S&P -14.33 at 4273.72
[BRIEFING.COM] The market is moving mostly sideways ahead of the close.
The 2-yr note yield settled seven basis points higher at 5.11% and the 10-yr note yield jumped 11 basis points to 4.68%.
Tuesday's economic data is limited to the August JOLTS - Job Openings report at 10:00 a.m. ET.
Energy complex futures settle mixed
02-Oct-23 15:05 ET
Dow -228.64 at 33278.82, Nasdaq -3.58 at 13215.75, S&P -26.14 at 4261.91
[BRIEFING.COM] Things are little changed at the index level over the last half hour.
Energy complex futures settled the session lower. WTI crude oil futures fell 2.4% to $88.62/bbl. Natural gas futures fell 2.9% to $2.85/mmbtu.
The S&P 500 energy sector (-2.6%) is among the worst performers still.
NextEra Energy, Kellanova slide in S&P 500 on Monday
02-Oct-23 14:30 ET
Dow -182.04 at 33325.46, Nasdaq +24.33 at 13243.65, S&P -18.83 at 4269.22
[BRIEFING.COM] The S&P 500 (-0.44%) is in second place on Monday afternoon, trading modestly off session lows.
S&P 500 constituents NextEra Energy (NEE 50.93, -6.36, -11.10%), Kellanova (K 52.32, -3.52, -6.30%), and Danaher (DHR 212.06, -7.85, -3.57%) pepper the bottom of the index. Utilities constituent NEE is weaker today as bond yields climb, while DHR and K slip after completing separation of Veralto (VLTO 87.15, +2.59, +3.06%) and WK Kellogg Co (KLG 13.01, -1.67, -11.38%), respectively.
Meanwhile, Viatris (VTRS 10.25, +0.39, +3.96%) is outperforming after announcing updates to plans to divest some businesses.
Dollar, yield strength pressures gold to start Q4
02-Oct-23 14:00 ET
Dow -170.42 at 33337.08, Nasdaq +33.07 at 13252.40, S&P -16.48 at 4271.57
[BRIEFING.COM] With about two hours to go on Monday the tech-heavy Nasdaq Composite (+0.25%) remains the sole major average in positive territory.
Gold futures settled $18.90 lower (-1.0%) to $1,847.20/oz as solid gains in the dollar and treasury yields have applied pressure to the yellow metal.
Meanwhile, the U.S. Dollar Index is up about +0.6% to $106.84.
Page One
Last Updated: 02-Oct-23 09:00 ET | Archive
Walking gingerly into October
The month of September is in the rearview mirror, as is the third quarter. Today marks the first trading day of October and the second calendar day of the fourth quarter. Market participants have high hopes for the stock market to get back on a winning track this month.
Those high hopes are being suppressed this morning, however, by some higher interest rates. The 2-yr note yield is up seven basis points to 5.11% and the 10-yr note yield is up eight basis points to 4.65%.
Currently, the S&P 500 futures are down 11 points and are trading 0.3% below fair value, the Nasdaq 100 futures are down 13 points and are trading fractionally below fair value, and the Dow Jones Industrial Average futures are down 85 points and are trading 0.3% below fair value.
Buyers continue to show some reluctance even though Congress managed to avert a government shutdown by passing a continuing resolution at the last minute. That resolution, though, only keeps the government running until November 17, meaning the funding issue/fight wasn't settled, only deferred.
Notably, the continuing resolution does not contain funding for Ukraine; meanwhile, Rep. Matt Gaetz (R-FL) said he is going to bring a motion to remove House Speaker McCarthy from speakership because he worked with Democrats in passing a resolution that averted a shutdown, according to CNN.
The political drama clearly isn't over and neither is the UAW strike. Something else that is just getting started again, though, is student loan payments. Borrowers with federal student loan debt saw a three-year forbearance period end on October 1.
The resumption of student loan payments is casting a shadow on the economic outlook along with the lag effect of the Fed's rate hikes.
It is understandable, then, that market participants are walking into October somewhat gingerly, mindful that rising interest rates are a real headwind but that the fourth quarter is typically a market-friendly period.
Whether the latter rings true this year should have a lot to do with the path interest rates take, as well as the path the mega-cap stocks take.
There will be some economic data today that holds some sway over the Treasury market. Specifically, the ISM Manufacturing Index for September (Briefing.com consensus 47.8%; prior 47.6%) will be released at 10:00 a.m. ET. This report follows on the heels of some official manufacturing PMI data out of China that showed a return to expansion mode in September and some final PMI readings for eurozone countries that were improved from the preliminary readings but still in a contraction area below 50.0%.
-- Patrick J. O'Hare, Briefing.com
Tesla's Q3 production miss is shrugged off, but a possible Cybertruck delay could disappoint (TSLA)
Following a record-setting Q2 in which Tesla (TSLA) produced more than 466,000 vehicles, the electric vehicle maker took a step back in Q3 as production fell by nearly 8% qtr/qtr to 430,488 vehicles. The total missed analysts' expectations, but the shortfall didn't exactly come as a major surprise, either. Over the past couple of weeks, estimates had been coming down, indicating that analysts underestimated the impact of TSLA's planned downtimes at its Shanghai factory.
In order to prepare for the upcoming Model 3 refresh, TSLA has been upgrading its facility in China, which cut into Q3 production numbers. Since this was telegraphed by Elon Musk during the Q2 earnings call, and since the production decline doesn't appear to be demand related, market participants are largely shrugging off the miss.
More importantly, though, TSLA also stated that its 2023 volume target of 1.8 mln vehicles remains unchanged.
However, there are a couple items that can't be brushed aside as easily as the production miss.
- Over the weekend, the Wall Street Journal reported that the long-awaited Cybertruck launch appears to be pushed back yet again. Originally scheduled to debut in 2021, Cybertruck was finally expected to arrive in Q3, according to Elon Musk. That delivery event, though, that Musk alluded to last April hasn't materialized, putting market participants and prospective customers back into a guessing game.
- Since Cybertruck is viewed as a meaningful growth catalyst for 2024 and beyond, another significant delay could negatively impact production and earnings estimates for next year. Unlike the Q3 production miss, that would likely put a dent into the stock.
- There is also some concern that TSLA's inventories are building to uncomfortable levels amid rising interest rates and mounting macroeconomic concerns in China. Rather than the Q3 production miss being solely attributable to factory shutdowns, TSLA may also be looking to manage inventories by building fewer vehicles.
- In Q2, global vehicle inventory (days of supply) surged by 300% yr/yr to 16 and climbed higher from Q1's mark of 15.
Overall, market participants are willing to give TSLA a pass on the Q3 production miss since the shortfall appears to mostly be related to scheduled factory shutdowns. Still, there is some cause for concern as TSLA's inventory levels continue to rise, and as the company seemingly backtracks once again on its Cybertruck launch aspirations.
Toast feeling slightly burned after receiving a downgrade at Mizuho today (TOST)
A downgrade to "Neutral" from "Buy" at Mizuho today has Toast (TOST -3%) feeling slightly burned. Shares of the digital technology platform built for the restaurant industry did recover much of their initial losses today. Still, the stock trades lower on the day, returning toward its flatline on the year.
Briefing.com points out that although shares have endured meaningful volatility this year, there has not been widespread bearish sentiment surrounding TOST. Although some analysts initiated coverage on the stock at "Neutral" or "Equal-Weight" ratings, today's downgrade at Mizuho marked the first time an analyst lowered its rating since mid-February.
The lack of negativity likely stems from TOST delivering solid figures recently, underscoring decent turnaround efforts after an incredibly challenging FY22, when shares lost nearly half their value. TOST is also coming off a relatively healthy quarter, headlined by raised FY23 guidance. Also, although TOST recently announced its CEO Chris Comparato would depart on January 1, 2024, incoming CEO Aman Narang is a worthy successor, serving as Co-President for over a decade and COO since June 2021. Aman Narang is also a Co-Founder of the company. Furthermore, Mr. Comparato would remain on the Board.
- A notable highlight from Q2 was TOST's deeper ties to the hotel industry, inking a deal with Marriott (MAR) to serve as its dining platform, whether full-service, quick-service, or poolside ordering. The partnership underpins TOST's capacity to expand beyond smaller businesses and strengthen its enterprise segment. Also, by launching its platform across various dining venues at Marriott, TOST showcased its flexibility in reaching additional subsets of the restaurant industry.
- Additionally, gross payment volume (GPV) did decelerate to +38% yr/yr in Q2 from +50% in Q1. However, management noted that GPV trends remained stable and consistent with seasonal expectations, an uplifting development given the sticky food-away-from-home inflation.
- Toast Capital, the company's offering for restaurants to access loans advanced by its bank partner, is a compelling longer-term focus. The product fell slightly short of expectations in Q2, and near-term dynamics are not shaping up favorably, projecting the mix of credit to increase, weighing on TOST's core net take rate as FY23 progresses. However, TOST continues to see demand from new and existing customers, reinforcing its view that restaurants are underbanked. Meanwhile, default rates have been either in line or slightly ahead of expectations. If macroeconomic conditions worsen, TOST also boasts the flexibility to scale back on the program temporarily.
TOST may be amid a lackluster response today after receiving a downgrade at Mizuho. Economic headwinds could hinder growth over the near term, especially if inflation edges back up. However, we like TOST's long-term fundamentals. The company will likely enjoy favorable consequences from the pandemic as more restaurants engage in digital transformations. Furthermore, TOST has yet to unlock the full potential of overseas expansion.
Rivian stuck in neutral despite topping Q3 production estimates (RIVN)
For investors and followers of Rivian Automotive (RIVN), there's a lot to digest this morning after the electric vehicle maker reported better-than-expected Q3 production data and was the focal point of a mostly negative story in the financial media. Specifically, the Wall Street Journal published an article that highlighted RIVN's high production costs and complex assembly, which is causing the company to lose over $30K on every vehicle that it sells.
The article also pointed out that while RIVN's losses are narrowing as it cuts costs, it's still burning through over $1.0 bln in cash per quarter. In order to stop the bleeding and to achieve a gross profit -- a milestone that RIVN believes it can achieve by year end -- the company will need to simultaneously reduce expenses, ramp up production, and likely increase vehicle prices.
That's a daunting challenge, especially in this environment, but RIVN has some believers in its corner within the analyst community. This morning, Evercore ISI upgraded RIVN to Outperform from In-line while pegging a $35 price target on the stock. The upgrade comes on the heels of Robert W. Baird naming RIVN as a "Fresh Pick" last week, commenting that it believes RIVN can realize greater cost benefits as the supply chain improves and through the use of more in-house components.
- Production is indeed improving, reaching 16,304 vehicles in Q3 to beat expectations, while increasing by 23% qtr/qtr. Perhaps more importantly, the company reiterated its annual production forecast of 52,000 vehicles, which was bumped higher from 50,000 when it reported Q2 results on August 8.
- Currently, RIVN only has one facility that is producing its R1T pickup trucks, R1S SUVs, and EDVs (electric delivery vehicles). That plant, located in Normal, IL, has a total capacity of 150,000 vehicles. However, RIVN is also has plans to build a new facility in Georgia, which will be capable of producing up to 400,000 vehicles annually. Production in Georgia is currently expected to begin in 2026.
- While RIVN has a far way to go, it is making good progress in terms of profitability. In Q2, adjusted EBITDA improved to ($881) mln from ($1.30) bln in the year-earlier period. This was fueled by a $35,000 gross profit per vehicle delivered improvement from Q1, driven by material cost reductions, higher production, and increased revenue per vehicle.
The main takeaway is that RIVN continues to move in a positive direction as it gradually ramps up production and cuts costs, but its path to profitability remains uncertain, especially if higher interest rates persist and/or macroeconomic conditions take a turn for the worse.
Mondays are typically Merger Mondays, but today is Spinoff Monday as Q4 gets under way (K)
Several companies are spinning off business segments today as new independently traded entities.
If it may seem odd that all three are spinning off on the same day, it is likely because Q4 starts today. This way, the Q4 earnings reports will include the whole quarter, which is cleaner and simpler when they report early next year. And for Aramark, its new fiscal year starts today, so the whole year will be separate. So the timing does make sense. Let's break it down:
- Kellogg (K): This is the highest profile spin-off today. Kellogg is finally effectuating its long-awaited separation. Kellogg is separating its snacks and cereal segments.
- The company is splitting into two independently traded companies. Kellogg will be renamed Kellanova and will continue to trade on the NYSE under the ticker symbol "K", while WK Kellogg will begin trading on the NYSE under the ticker symbol "KLG".
- Post separation, Kellanova will be comprised of the snacking business (Pringles, Cheez-It, Pop Tarts, Nutri-Grain etc.). WK Kellogg will be comprised of cereal brands (Corn Flakes, Frosted Flakes, Fruit Loops, Special K, Rice Crispies etc.).
- We think breaking out the two segments makes a lot of sense. The snacks business is larger and growing faster. Letting it trade separately will hopefully garner a higher multiple when it is not weighed down by the slower growth cereal division.
- We have to think Pepsico (PEP) shareholders may be a bit jealous today. They have been wanting PEP to separate its snacks segment (Lay's, Doritos, Cheetos etc.) as PEP has been hurt by a shift in consumer preference away from carbonated soda.
- Danaher (DHR): Medical equipment giant Danaher is spinning off Veralto (VLTO), its environmental-and-applied solutions segment.
- Aramark (ARMK) is spinning off Vestis (VSTS), its uniform rental services business. Aramark will then focus on its food and facilities management units. Vestis will then be a direct competitor with Cintas (CTAS), which is a huge supplier of uniform rentals for all types of businesses.
ZoomInfo's reiterated FY23 outlook insufficient in reigniting confidence in beaten-down shares (ZI)
ZoomInfo's (ZI) reaffirmed FY23 outlook Friday after the bell is not doing much to reignite confidence in its ailing stock today. ZI's reiterated FY23 adjusted EPS and revenue forecasts of $0.99-1.00 and $1.225-1.235 bln, respectively, are not particularly exciting given that these estimates were previously trimmed in late July. Also on Friday, ZI took further steps as part of its broader turnaround plan, announcing that its COO Joseph Hays would no longer serve as an executive officer, transitioning to the Executive VP of International Expansion. ZI also made a few other minor organizational changes.
Shares of the data-gathering SaaS firm, primarily used across sales teams, have encountered one gap-down after another since reaching all-time highs in November 2021. The underlying factor behind ZI's relatively weak stock throughout the past two years is what one would expect from a software-based organization selling to sales teams: Rising interest rates have curbed growth prospects while putting valuations under a microscope. For perspective, ZI was trading over 100x forward earnings when its shares hit record highs nearly two years ago. Currently, the stock carries a 16x forward earnings multiple.
- ZI has been streamlining its organizational structure throughout the year, trimming its workforce by 3% beginning in June and implementing other adjustments to enhance efficiency. Given that growth has decelerated rapidly over the past several quarters, slowing from +45.5% in 3Q22 to +15.5% in Q2, it would not be surprising to see ZI announce additional cost-saving measures as it contends with a potentially lengthy slowdown in customer spending.
- Speaking of which, customers' flight from growth to profitability has been a substantial thorn in ZI's side. This dynamic was the primary culprit behind the company's disappointing Q2 report in late July. Making ZI's struggles more glaring is that competitors are performing significantly better despite dealing with similar headwinds.
- For example, Salesforce (CRM) issued robust FY24 (Jan) guidance in late August despite experiencing a measured buying environment.
- Likewise, HubSpot (HUBS) hiked its FY23 financial goals meaningfully in following Q2 earnings in August despite incorporating persistent customer budget tightening.
- The unfavorable demand landscape has generated further headwinds surrounding ZI's focus on improving profitability. The company's FY23 earnings outlook translates to a modest 12% improvement yr/yr, well below its 53% jump in FY22. Still, it should be noted that ZI is confident in maintaining at least 40% adjusted operating margins despite lower-than-expected revenue, as its streamlining efforts have helped offset the challenging economic backdrop.
As a software provider centered around boosting sales of other software firms, ZI has faced a particularly challenging year compared to some of its rivals. While some encouraging remarks have been made by others in this industry, such as CRM noticing a stabilizing spending environment, elevated interest rates will likely keep customer spending in check. As a result, even though ZI has been stuck in a downward trend for some time, it will likely continue to find it difficult to mount a turnaround without aggressively cutting costs or noticing a significant turnaround in demand.
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