Market Snapshot
briefing.com
| Dow | 33127.24 | -286.89 | (-0.86%) | | Nasdaq | 12983.80 | -202.37 | (-1.53%) | | SP 500 | 4224.16 | -53.84 | (-1.26%) | | 10-yr Note | +28/32 | 4.92 |
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| | NYSE | Adv 765 | Dec 2001 | Vol 1.1 bln | | Nasdaq | Adv 1354 | Dec 2911 | Vol 4.6 bln |
Industry Watch
| Strong: -- |
| | Weak: Consumer Discretionary, Energy, Financials, Information Technology, Materials |
Moving the Market
-- Watching price action in Treasuries after the 10-yr yield hit 5.00% overnight
-- Rising geopolitical uncertainty drives risk aversion ahead of the weekend
-- Weakness in regional bank stocks after some disappointing earnings results from the likes of Regions Financial (RF), Western Alliance (WAL), and Comerica (CMA)
-- Weak mega caps weighing on index losses
| Closing Summary
20-Oct-23 16:30 ET
Dow -286.89 at 33127.24, Nasdaq -202.37 at 12983.80, S&P -53.84 at 4224.16
[BRIEFING.COM] The stock market closed out the week with decent losses, plagued by uncertainty surrounding potential developments in the Israel-Hamas conflict and ongoing interest rate volatility. As a result, today's trade had a risk-off vibe ahead of the weekend when participants cannot react in real-time while the markets are closed for trading.
The 10-yr note yield hit 5.00% yesterday for the first time since 2007. It was met with resistance there and the 10-yr yield pulled back to 4.92% in overnight action. It would eventually retest 4.99%, but once again it was met with resistance. The 10-yr note yield ultimately settled at 4.92%, which is six basis points lower than yesterday.
The disappointing action today also stemmed from the ongoing dysfunction in the House of Representatives. Following three failed rounds of voting, Rep. Jim Jordan (R-OH) lost the status of Speaker of the House nominee after a GOP conference vote went against him by a "wide margin," according to Punchbowl News. The House will now head home for the weekend without another vote, according to CNBC.
Weakness in regional bank stocks following some disappointing earnings news was another overhang for the market today. Regions Financial (RF 14.44, -2.04, -8.5%), Comerica (CMA 37.95, -3.54, -8.5%), and Western Alliance Bancorp (WAL 42.22, -3.86, -8.4%) were among the losing standouts in that regard. The SPDR S&P Regional Banking ETF (KRE) declined 4.0%.
Meanwhile, Dow component American Express (AXP 141.57, -8.05, -5.4%) reported better than expected earnings and reaffirmed FY23 guidance, but still sold off amid concerns about the potential for a future deterioration in credit quality.
The major indices settled near their worst levels of the day, which left the S&P 500 below its 200-day moving average (4,233). Many stocks participated in the downside move that was led by the mega cap stocks. The Vanguard Mega Cap Growth ETF (MGK) fell 1.5% while the market-cap weighted S&P 500 declined 1.3%. The Invesco S&P 500 Equal Weight ETF (RSP) dropped 1.3%.
Eight of the 11 S&P 500 sectors closed down by at least 1.0%. The defensive-oriented consumer staples (-0.4%) and health care (-0.4%) sectors saw the slimmest declines. On the flip side, the energy (-1.7%) and information technology (-1.7%) sectors logged the steepest losses.
There was no U.S. economic data of note today and there is no data of note on Monday.
- Nasdaq Composite: +24.1% YTD
- S&P 500: +10.0% YTD
- Dow Jones Industrial Average: -0.1% YTD
- S&P Midcap 400: -1.5% YTD
- Russell 2000: -4.6% YTD
S&P 500 revisiting earlier low
20-Oct-23 15:05 ET
Dow -230.64 at 33183.49, Nasdaq -169.15 at 13017.02, S&P -43.56 at 4234.44
[BRIEFING.COM] The S&P 500 is revisiting its 200-day moving average heading into the close.
The 2-yr note yield fell eight basis points today, but rose four basis points this week, to 5.09%. The 10-yr note yield fell six basis points today, but jumped 29 basis points this week, to 4.92%.
Looking, there is no economic data of note on Monday.
Energy complex settles lower; stocks remain near session lows
20-Oct-23 15:00 ET
Dow -188.83 at 33225.30, Nasdaq -148.78 at 13037.39, S&P -38.02 at 4239.98
[BRIEFING.COM] Things are little changed at the index level over the last half hour.
WTI crude oil futures fell 0.4% to $88.05/bbl and natural gas futures fell 1.8% to $2.90/mmbtu.
On a related note, the S&P 500 energy sector (-1.5%) sports the largest decline followed by the information technology (-1.4%) and consumer discretionary (-1.4%) sectors. The real estate sector (+0.1%) is alone in positive territory.
S&P 500 just off session lows
20-Oct-23 14:30 ET
Dow -206.11 at 33208.02, Nasdaq -153.85 at 13032.32, S&P -40.13 at 4237.87
[BRIEFING.COM] The S&P 500 (-0.94%) is in second place to this point on Friday afternoon.
S&P 500 constituents Oracle (ORCL 101.32, -7.02, -6.48%), Generac (GNRC 89.24, -4.72, -5.02%), and V.F. Corp (VFC 17.88, -0.68, -3.66%) pepper the bottom of today's standings. GNRC caught a cautious initiation out of Exane BNP Paribas, while VFC gives back a portion of this week's Engaged Capital-related rally.
Meanwhile, tobacco firm Philip Morris International (PM 92.85, +2.12, +2.34%) is near the top of the S&P; PM reported mixed Q3 results yesterday morning, and the stock sold off about -2.7%.
Gold tops out above $2K on Friday, finishes off those levels
20-Oct-23 14:00 ET
Dow -128.97 at 33285.16, Nasdaq -113.73 at 13072.44, S&P -27.86 at 4250.14
[BRIEFING.COM] With about two hours remaining on Friday the tech-heavy Nasdaq Composite (-0.86%) is today's top laggard, down almost 115 points vs. 205 points at today's lows (-1.54%).
Gold futures settled $13.90 higher (+0.7%) to $1,994.40/oz, rallying +2.7% this week (now +6.9% month-to-date) as ongoing geopolitical tensions in Ukraine and Israel fueled haven asset demand. Today the yellow metal peaked above $2K for the first time since August.
Meanwhile, the U.S. Dollar Index is down about -0.1% to $105.13.
Page One
Last Updated: 20-Oct-23 09:02 ET | Archive
Steered by interest rate angst
In extended trading yesterday, the yield on the 10-yr note hit 5.00%. It quickly backed off from that level when it did, hitting 4.92% in overnight action, but it moved back up to 4.99% without any news basis for doing so before backing down again to 4.96%.
The nettlesome factor is that there is a geopolitical basis for yields to move lower. The Israel-Hamas situation is intensifying on reports that make it sound as if a ground invasion of Gaza is imminent. This is not the news market participants like to consider going into the weekend when markets are closed for trading.
Accordingly, the equity futures market is being buffeted by the counterintuitive dynamic of rising rates in the face of potential geopolitical conflict. Neither is good in its own right at this point, but combined, they are a deterrent for buyers.
The S&P 500 futures are down 15 points and are trading 0.4% below fair value, the Nasdaq 100 futures are down 62 points and are trading 0.4% below fair value, and the Dow Jones Industrial Average futures are down 97 points and are trading 0.3% below fair value.
The weakness this morning follows on the heels of yesterday's weakness, which also had overtones of interest rate angst that weren't precisely related to Fed Chair Powell's speech and his concession that evidence suggests Fed policy is not too tight yet. We say that knowing that the probability of a rate hike at either the November, December, January, or March FOMC meetings was reduced in the wake of his speech.
That speech, by the way, was followed by a Q&A where Mr. Powell averred that the rise in Treasury yields has been driven by term premiums, not higher expected inflation.
In any case, the bottom line is that rising rates, no matter the catalyst, have been a headwind for the stock market, which is also agitated by the inability of the House to elect a new Speaker. That is standing in the way of Congress conducting its legislative business; and President Biden, in a speech last night, served notice that he will be asking Congress to approve additional funding to support Ukraine and Israel.
That funding, assuming it is approved, won't be forthcoming until a Speaker is elected.
These issues have been drowning out much of the third quarter earnings reporting season so far, although the outsized responses yesterday to the reports from Netflix (NFLX) and Tesla (TSLA) did go to show that investors aren't oblivious to other happenings.
Dow component American Express (AXP) was the featured reporter before today's open. It topped the consensus EPS estimate by a comfortable margin, reaffirmed its FY23 guidance, and said it sees mid-teens EPS growth in FY24. Nonetheless, its stock is indicated 1.0% lower in a market that is being steered more at the moment by interest rate angst.
-- Patrick J. O'Hare, Briefing.com
CSX stuck at the depot today as Q3 results contained pockets of strength and weakness (CSX)
CSX (CSX) shares are stuck at the depot today, avoiding the broader market sell-off but not gaining much steam either. Being pulled from both directions reflects the overall tone from the railroad giant's Q3 report. CSX barely missed bottom-line estimates but squeaked out a beat on its top line. Meanwhile, management's remarks surrounding its business lines and end markets contained areas of strength offset by other areas of weakness.
However, an overwhelmingly positive comment from CSX, potentially explaining why shares are still trending slightly positive, was that it is noticing gradually improving sequential trends across several of its end markets during Q3, boosting management's confidence in a much more favorable 2024.
- The most notable standout was CSX's Intermodal business, which, albeit posted a 14% revenue drop yr/yr on a 7% decline in volumes, enjoyed improving dynamics as the quarter progressed, echoing comments from Union Pacific (UNP) and J.B. Hunt (JBHT) earlier this week. CSX stated that volumes in the summer turned positive on a yr/yr basis, improving since.
- However, on the flip side, international intermodal activity remained weak. CSX did not see any clear signs of a positive inflection yet, as retailers stay cautious about the health of the end consumer. CSX did note that activity stabilized in the quarter as destocking slowed, but it has not seen this translate to higher order rates or imports.
- CSX's operating ratio, a good gauge of profitability used commonly within the railroad industry, continued to rise to 63.8% from 59.9% in Q2, underpinning bearish themes touched on all year. These include lower fuel recovery, reduced intermodal storage revs, lower export coal prices, and higher cost inflation, particularly regarding labor.
- Still, after management mentioned how unsatisfactory this result was, it outlined that it would analyze its entire network to see where it could operate more efficiently.
- Other businesses, including merchandise, minerals, and coal, were positive standouts in the quarter despite registering weak sales growth. Merchandise enjoyed solid core pricing gains offset by lower fuel surcharge, with automotive demonstrating meaningful strength. Minerals were sustained by infrastructure activity, while coal was boosted by export demand, which soared 26% yr/yr.
CSX's Q3 report was a story of give and take, wrapped in a layer of cautious optimism heading into the end of 2023 and the beginning of 2024. While a general unease regarding the global economy persists, illuminated by shares of CSX hugging their flatline on the year, there are reasons to view the glass half full.
American Express's affluent customer base underpins results, but cautious outlook hits shares (AXP)
Bolstered by a more affluent customer base that continues to spend freely on travel and entertainment, American Express (AXP) comfortably beat Q3 EPS and revenue expectations. The company's upside performance comes on the heels of a large earnings miss from competitor Discover Financial Services (DFS), which saw an uptick in delinquencies and acknowledged that it's seeing some signs of stress among its customers.
Despite AXP's stronger report, shares are still trading lower today, putting additional downward pressure on the DJIA. We believe there are a couple primary reasons for the sell-off.
- Most notably, AXP opted to only reaffirm its FY23 guidance, even though it exceeded Q3 estimates. This same situation played out last quarter when the company beat on the top and bottom-lines but chose to stick with its EPS forecast of $11.00-$11.40 and revenue growth of 15-17%. This apprehension to bump its FY23 outlook higher illustrates that AXP is still quite cautious about the economy and the impact that rising interest rates are having.
- Relatedly, like DFS, the company significantly increased its provisions for credit losses in preparation for a possible upswing in debt defaults. Specifically, provisions for credit losses jumped by 58% yr/yr to $1.23 bln. However, a silver lining is that AXP's net reserve build of $321 mln was down from last year's figure of $387 mln.
These issues are clouding over the positive aspects of AXP's earnings report.
- As has been the case for the past couple of years, AXP's customers are still spending on travel and entertainment (T&E), albeit, at a slightly slower pace. In Q3, the T&E category experienced growth of 13% on an FX-adjusted basis compared to 14% in Q2.
- Another common theme that remained in place for AXP is that the company is enjoying particular success with younger generations. Once again, Millennials and Gen Z consumers were AXP's fastest-growing cohort with spending up by 18% in the U.S. on a yr/yr basis. In total, these customers accounted for over 60% of all new customer sign ups globally.
- Finally, AXP's FY24 guidance of revenue growth in excess of 10% with mid-teens EPS growth is slightly above expectations.
Overall, this was another solid report for AXP, especially when considering how rising interest rates took such a significant toll on DFS's earnings. The company's reluctance to increase its FY23 guidance is overshadowing the good results, though, indicating that it remains quite cautious on its outlook for the remainder of the year.
SolarEdge not looking very sunny today; stock sharply lower on European demand decline (SEDG)
SolarEdge (SEDG -30%) is not looking very sunny today. This supplier of solar PV inverters is trading sharply lower after lowering Q3 guidance pretty significantly last night. The company lowered its Q3 revenue outlook to just $720-730 mln, well below prior guidance of $880-920 mln.
- SEDG's CEO Zvi Lando cited what he described as "substantial unexpected cancellations and pushouts of existing backlog from our European distributors." He attributes this to higher than expected inventory in the channels and slower than expected installation rates. In particular, installation rates for Q3 were much slower at the end of the summer and in September when traditionally there is a rise in installation rates.
- Unfortunately, the impact will continue beyond Q3. SEDG expects significantly lower revenue in Q4 as the inventory destocking process continues. The company did not provide specific Q4 revenue guidance, but it looks like the company will end the year on a pretty significant down note.
- And it is not just the top line, it looks like margins are going to take a significant hit as well. SolarEdge lowered its Q3 non-GAAP gross margin guidance to 20.1-21.1%, which is well below prior guidance of 28-31%. Also, Q3 non-GAAP operating income was slashed to just $12-31 mln from $115-135 mln prior guidance. SEDG did not guide for EPS, but we can extrapolate a weak number based on this margin outlook.
- Another concern with SEDG is that its headquarters, its R&D center, a manufacturing plant and the majority of its employees are located in Israel. SEDG makes clear that its lowered guidance is unrelated to the tragic events that have unfolded in Israel. While there has been some impact on daily routines at its HQ, its offices/facilities are open worldwide, including in Israel. SEDG is manufacturing and providing customer support without interruption.
Why is the stock reacting so poorly? A big reason is because Europe had been a rare area of strength, but now even it is beginning to crack. On its Q2 call, SEDG noted it posted record revenue in Europe even as it was facing revenue declines in the US and the rest of world. Later, at an investor conference in early September, the company said underlying demand in Europe continued to be strong. In fact, SEDG conceded it neglected the US market a bit during 2022 because it had a greater belief in the European market. This newfound weakness in Europe has caught investors by surprise.
Also, Briefing.com notes that Europeans turned to solar in a big way in 2022, following Russia's invasion of Ukraine. The EU was a big importer of oil & gas from Russia, but sanctions caused EU countries to find alternative sources to heat their homes. There is much less reliance on Russia now and that fear has dissipated. We suspect that is lowering demand for solar this winter. Finally, its closest peer, Enphase Energy (ENPH -14%), is trading sharply lower on this new guidance. It is also dragging down other solar names: SPWR -13%, RUN -8.6%, JKS -7%, MAXN -4.4%, CSIQ -4%, FSLR -1%.
Hewlett Packard Enterprise gaps down on disappointing FY24 and longer-term financial targets (HPE)
Hewlett Packard Enterprise (HPE -7%) gaps below its 200-day moving average today, returning to June levels, following its bearish FY24 (Oct) guidance yesterday after the close. The servers, storage, and networking software provider targeted EPS of $1.82-2.02 and sales growth in constant currency of +2-4%.
HPE did reiterate its FY23 EPS and sales estimates of $2.11-2.15 and +4-6% in constant currency, respectively. Last night also marked HPE's initial longer-term financial targets through FY26. The company projected constant currency sales growth of +2-4% and intent to return 65-75% of free cash flow to shareholders.
- Still, it is hard to overlook a downbeat year ahead for HPE. Its top and bottom-line projections for FY24 represent decelerations from FY23, which, despite the surging popularity of AI, has not showered HPE with outsized growth. At the same time, while HPE's longer-term targets incorporate a compounded annual growth rate for an annualized revenue run-rate of 35-45%, its constant currency sales prediction does not signal a significant boost from AI, which, alongside high-performance computing (HPE), has been a primary focus for the company.
- During its Q3 (Jul) earnings call in late August, HPE commented that the interest in its AI and supercomputing offerings from enterprise customers remains elevated, translating into substantially higher demand for its HPC and AI businesses. Unfortunately for HPE, this newfound demand has not transformed into meaningful top-line growth, with sales decelerating over the past three quarters, recently registering +0.7% yr/yr in Q3.
- Meanwhile, missing FY24 EPS expectations is disappointing given HPE's pivot to higher-growth, higher-margin markets. This shift has led to new customer logos, greater recurring revenue, margins, and EPS, fueling HPE's past bumps to its full-year earnings. However, it does not seem to provide a sustainable tailwind entering FY24.
- Nevertheless, HPE anticipates increasing its total addressable market by nearly $100 bln over a four-year period, led by a combination of its pivoting strategy and AI.
- An underlying factor is the challenging macroeconomic environment. Management discussed the IT landscape throughout the past several quarters, noting that it is witnessing a slowdown across various parts of the IT industry. The picture has not improved over the past year; customers remain prudent in budgeting, given the many economic uncertainties clouding their near-term view.
Overall, HPE's updated financial targets for this year and the next three years were underwhelming given the brewing excitement regarding AI, HPC, and businesses' ongoing digital transformations. After HPE's Q3 report, we mentioned that its volatile margins and light revenue growth associated with its AI business keep a lid on potential share appreciation. After last night's guidance, we continue to hold this view and think it is better to remain on the sidelines until HPE's top line better represents its excited comments surrounding AI.
Alcoa's Q3 earnings miss keeps selling pressure elevated; however, 2024 may be a rebound year (AA)
Alcoa (AA -8%) continues to struggle with mining gains as shares sink to 52-week lows today following the aluminum producer's second earnings miss this year in Q3. Revenue also remained in decline, tumbling nearly 9% yr/yr, AA's fifth-straight quarter of falling sales. Alumina (aluminum oxide) and aluminum shipments did tick 11% and 1% higher sequentially, keeping revenue of $2.6 bln, which matched analyst expectations, from sinking further. However, the higher shipments only partially offset lower realized prices. Management repeated that demand across some key end markets stayed weak in the quarter, which will linger into Q4, reflected in AA's unchanged FY23 shipment forecast.
Nevertheless, although Q3 results appear lackluster on the surface, digging deeper reveals some silver linings ahead of a potential rebound year in 2024.
- CEO William Oplinger, who stepped into the corner office last month, outlined the company's top priorities to position it for a return to growth next year. Mr. Oplinger noted the primary focus is gaining approvals for bauxite mining in Western Australia. AA's recent revised MMP submission is currently under review by regulators. Approval for its two mines is critical given how massive the Huntly and Willowdale mines are, supplying around half of Australia's total alumina.
- AA is also focused on successfully restarting its Alumar smelter in Brazil, which has not gone as planned. AA announced a restart of aluminum smelting capacity at this smelter over two years ago, expecting it to be operational by 4Q22, illuminating how challenging this restart has been.
- Enhancing productivity is AA's third priority, targeting margin improvements across each of its sites. Controlling costs will go a long way to improving AA's margin profile. For perspective, AA has not registered positive earnings since 2Q22.
With these priorities in place, Mr. Oplinger explained his optimism about the year ahead. Aluminum inventories in terms of days of consumption are at historically low levels, placing the market in a favorable position when demand rebounds. Additionally, the automotive sector is an important market for AA, given how much aluminum is required. While the UAW negotiations add a layer of unease, AA is confident that the industry will experience growth next year as OEMs ramp up to 2019 levels. Meanwhile, construction should begin to pick up next year relative to 2023 as inflation slows and interest rates stabilize. Over the long term, AA remains bullish on aluminum, citing further electric vehicle penetration and upbeat solar installation demand.
Bottom line, AA delivered underwhelming results in Q3, a continuation from previous quarters, hurting its shares' ability to finally find buyers and establish support after a 40% sell-off this year. However, even though headwinds remain, including geopolitical and macroeconomic uncertainties, the steps AA is taking in the immediate term should help position the company to capitalize on what is shaping up to be a possible rebound year in 2024.
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