| | | Market Snapshot
briefing.com
| Dow | 33035.93 | -105.45 | (-0.32%) | | Nasdaq | 12821.32 | -318.55 | (-2.42%) | | SP 500 | 4186.77 | -60.91 | (-1.43%) | | 10-yr Note | -31/32 | 4.95 |
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| | NYSE | Adv 641 | Dec 2170 | Vol 922 mln | | Nasdaq | Adv 1222 | Dec 3047 | Vol 4.6 bln |
Industry Watch
| Strong: Consumer Staples, Utilities |
| | Weak: Communication Services, Consumer Discretionary, Health Care, Real Estate, Industrials |
Moving the Market
-- Mixed reaction to earnings results from Microsoft (MSFT) and Alphabet (GOOG)
-- Selling after yesterday's rebound effort
-- Jump in Treasury yields
-- Relative weakness in mega caps
-- S&P 500 slipping below the 4,200 level
| Closing Summary
25-Oct-23 16:30 ET
Dow -105.45 at 33035.93, Nasdaq -318.55 at 12821.32, S&P -60.91 at 4186.77
[BRIEFING.COM] Today's trade brought many stocks lower, leaving the major indices near their lows of the day. The S&P 500 closed above its 200-day moving average yesterday (now 4,238), but opened below that key level today before ultimately settling below 4,200. The disappointing price action itself acted as a downside catalyst, along with a jump in rates and a big loss in Alphabet (GOOG 126.67, -13.45, -9.6%) following an earnings report that contained some relatively disappointing growth for its cloud business.
Microsoft (MSFT 340.67, +10.14, +3.1%) was a winning standout after reporting some impressive growth for its Azure business, but other mega caps slid alongside Alphabet. The Vanguard Mega Cap Growth ETF (MGK) fell 2.2% versus a 1.4% decline in the S&P 500. The equal weighted S&P 500, meanwhile, fell 1.1%.
General Dynamics (GD 242.40, +9.40, +4.0%), Visa (V 236.85, +2.20, +0.9%) and Waste Management (WM 164.07, +9.44, +6.1%) also registered gains after impressing with their quarterly results while Boeing (BA 177.73, -4.63, -2.6%) and Texas Instruments (TXN 141.79, -5.13, -3.5%) saw sizable declines.
Nine of the 11 S&P 500 sectors declined. The communication services sector (-5.9%) was the worst performer by a wide margin, weighed down by Alphabet. The utilities (+0.5%) and consumer staples (+0.3%) sectors were alone in positive territory at the close.
The 10-yr note yield climbed 11 basis points to 4.95% and the 2-yr note yield rose two basis points to 5.12%. Yields were already moving up, but turned higher in response to this morning's release of the September New Home Sales report, which showed the strongest annual rate of sales (759,000) since February 2022. Another wave of selling hit the Treasury market following a $52 billion 5-yr note sale that met dismal demand.
In other news, Rep. Mike Johnson (R-LA) was elected Speaker of the House after receiving unanimous Republican support.
- Nasdaq Composite: +22.5% YTD
- S&P 500: +9.0% YTD
- Dow Jones Industrial Average: -0.3% YTD
- S&P Midcap 400: -3.5% YTD
- Russell 2000: -6.2% YTD
Reviewing today's economic data:
- Weekly MBA Mortgage Applications Index -1.0%; Prior -6.9%
- September New Home Sales 759K (Briefing.com consensus 683K); Prior was revised to 676K from 675K
- The key takeaway from the report is that new home sales activity in September picked up noticeably, aided by lower prices and reportedly mortgage rate concessions from builders.
Thursday's economic calendar features:
- 8:30 ET: Advance Q3 GDP (Briefing.com consensus 4.0%; prior 2.1%), advance Q3 GDP Chain Deflator (Briefing.com consensus 2.7%; prior 1.7%), weekly Initial Claims (Briefing.com consensus 210,000; prior 198,000), Continuing Claims (prior 1.734 mln), September Durable Orders (Briefing.com consensus 1.5%; prior 0.2%), Durable Orders ex-transportation (Briefing.com consensus 0.3%; prior 0.4%), advance September goods trade balance (prior -$84.3 bln), advance September Retail Inventories (prior 1.1%), and advance September Wholesale Inventories (prior -0.1%)
- 10:00 ET: September Pending Home Sales (Brieefing.com consensus 0.5%; prior -7.1%)
- 10:30 ET: Weekly natural gas inventories (prior +97 bcf)
Treasuries settle with losses
25-Oct-23 15:35 ET
Dow -43.96 at 33097.42, Nasdaq -292.26 at 12847.61, S&P -52.99 at 4194.70
[BRIEFING.COM] The major indices moved modestly higher in recent action.
The 10-yr note yield climbed 11 basis points to 4.95% and the 2-yr note yield rose two basis points to 5.12%.
Thursday's economic calendar features:
- 8:30 ET: Advance Q3 GDP (Briefing.com consensus 4.0%; prior 2.1%), advance Q3 GDP Chain Deflator (Briefing.com consensus 2.7%; prior 1.7%), weekly Initial Claims (Briefing.com consensus 210,000; prior 198,000), Continuing Claims (prior 1.734 mln), September Durable Orders (Briefing.com consensus 1.5%; prior 0.2%), Durable Orders ex-transportation (Briefing.com consensus 0.3%; prior 0.4%), advance September goods trade balance (prior -$84.3 bln), advance September Retail Inventories (prior 1.1%), and advance September Wholesale Inventories (prior -0.1%)
- 10:00 ET: September Pending Home Sales (Brieefing.com consensus 0.5%; prior -7.1%)
- 10:30 ET: Weekly natural gas inventories (prior +97 bcf)
Energy complex settles mixed
25-Oct-23 15:00 ET
Dow -106.73 at 33034.65, Nasdaq -312.65 at 12827.22, S&P -61.35 at 4186.33
[BRIEFING.COM] The major indices trade just off session lows now.
Energy complex futures settled higher. WTI crude oil futures rose 1.9% to $85.40/bbl and natural gas futures rose 1.5% to $3.01/mmbtu. The S&P 500 energy sector trades flattish.
Six of the 11 sectors sport declines larger than 1.0%. The communication services (-5.9%), consumer discretionary (-2.3%), and real estate (-2.3%) sectors are the worst performers.
MarketAxess, Automatic Data among top laggards in S&P 500 on Wednesday
25-Oct-23 14:25 ET
Dow -70.70 at 33070.68, Nasdaq -292.40 at 12847.47, S&P -55.06 at 4192.62
[BRIEFING.COM] The S&P 500 (-1.30%) is in second place once more on Wednesday afternoon.
S&P 500 constituents MarketAxess (MKTX 210.05, -25.87, -10.97%), Automatic Data (ADP 218.21, -22.24, -9.25%), and Fortive (FTV 64.35, -5.90, -8.40%) dot the bottom of the index, all following quarterly results/guidance.
Meanwhile, Wabtec (WAB 104.09, +4.15, +4.15%) is one of today's best performers following earnings/guidance.
Gold settles higher as geopolitical concerns ease somewhat
25-Oct-23 14:00 ET
Dow -107.09 at 33034.29, Nasdaq -315.93 at 12823.94, S&P -61.26 at 4186.42
[BRIEFING.COM] With about two hours left on Wednesday the tech-heavy Nasdaq Composite (-2.40%) is still today's top laggard.
Gold futures settled $8.80 higher (+0.4%) to $1,994.90/oz, allowed higher even against strength in the dollar and treasury yields, after headlines that Israel has agreed to delay its ground invasion into Gaza.
Meanwhile, the U.S. Dollar Index is up about +0.2% to $106.52.
Page One
Last Updated: 25-Oct-23 08:59 ET | Archive
A game of tug of war
There was a trading tug of war around the S&P 500's 200-day moving average in yesterday's session. The bulls won and a managed to secure a close above that key technical level. Nonetheless, there wasn't a lot of air between the closing price (4,247.68) and the 200-day moving average (now 4,238.72), so there is a bit of hesitation in the early trade tied to an inclination to see if there will be follow-through to the recovery effort.
It seems only fitting then that two of the market's biggest companies -- Microsoft (MSFT) and Alphabet (GOOG) -- are being tugged in different directions following their earnings reports to create a mixed picture in the early going. Microsoft, which reported some impressive growth for its Azure business, is up 4.7%, and Alphabet, which reported some relatively disappointing growth for its cloud business, is down 5.9%.
Currently, the S&P 500 futures are down 15 points and are trading 0.4% below fair value, the Nasdaq 100 futures are down 89 points and are trading 0.5% below fair value, and the Dow Jones Industrial Average futures are down 61 points and are trading 0.2% above fair value.
Microsoft is providing some extra pull for the Dow Jones Industrial Average futures along with Boeing (BA), which came up shy of analysts' consensus earnings estimate but reaffirmed its FY23 operating cash flow and free cash flow guidance at the same time it lowered it 737 MAX delivery forecast. Shares of Boeing are up 3.2%.
Still, the overhang of Alphabet's weakness along with a 6.7% decline in Texas Instruments (TXN), which came up shy of analysts' consensus earnings estimate and said it continues to operate in a weak environment and that weakness in the industrial end market has broadened, has been a bit of a counter tug for the broader market.
IBM (IBM), Meta Platforms (META), Whirlpool (WHR), KLA-Tencor (KLAC), and ServiceNow (NOW) are scheduled to report their results after today's close, which is to say there is plenty of tension still on the earnings reporting line that is making it challenging for the market to pull hard one way or the other.
The volatility in the Treasury market has been another limiting factor. The 10-yr note yield eclipsed 5.00% earlier this week before dropping to 4.80%. It is currently at 4.88%, up four basis points from yesterday's settlement in front of the September New Home Sales Report at 10:00 a.m. ET (Brieifng.com consensus 683,000; prior 675,000) and the $52 billion 5-yr note auction at 1:00 p.m. ET.
Tucked in between those two happenings will be yet another floor vote in the House at 12:00 p.m. ET for the Speaker position. The latest nominee is Mike Johnson (R-LA) and there is some chatter that he might actually get enough votes (217 needed) to win.
Mr. Johnson is the GOP's fourth nominee for Speaker, so seeing will be believing when it comes to the voting process.
In the same vein, seeing will be believing for the stock market when it comes to winning the tug of war again at the 200-day moving average. That battle isn't over yet, and market participants are waiting to see from which side interest rates, earnings results, and geopolitics will be pulling.
-- Patrick J. O'Hare, Briefing.com
F5 Networks dodges the market sell-off as Q4 results shine in light of peers' warning signs (FFIV)
Network security provider F5 Networks (FFIV +3%) is dodging attacks from plenty of sellers today following its solid Q4 (Sep) report yesterday after the close. FFIV registered solid upside on its top and bottom lines during the quarter while issuing decent FY24 guidance, with earnings and revs tracking modestly below consensus. While this type of guidance could be met by selling pressure, investors were happy to shrug it off after FFIV's peers sounded some alarms ahead of its Q4 report.
We mentioned yesterday that A10 Networks (ATEN) and NetScout Systems (NTCT) were potential canaries in the coal mine following their weak quarterly outlooks. ATEN issued bearish Q3 and Q4 guidance earlier this month, citing stubborn macroeconomic headwinds weighing on results. Specifically, the company continued to endure spending delays as customers pushed out their capital expenditure plans, particularly smaller companies. Then, a couple of weeks later, NTCT guided SepQ revs below consensus due to similar challenges, including higher spending scrutiny and project funding delays.
That is not to say FFIV did not encounter similar hurdles during Q4. Management acknowledged the unfavorable economic landscape. However, its highlights from the quarter demonstrated its ability to buck these trends better than its peers, underpinning a potential competitive edge.
- The most notable comment from FFIV was signs of stabilization. The company witnessed strength from its enterprise vertical, like ATEN, including technology and financial services customers. While this was partially offset by softness from service providers, similar to what we heard from peers, FFIV still managed to expand revs moderately, up 1% yr/yr to $707 mln, ahead of consensus and at the higher end of its $690-710 mln forecast.
- Meanwhile, FFIV is displaying its operating discipline, expanding operating margins by a whopping 600 bps yr/yr to 33.9%. Recall FFIV taking actions to adjust its operations during FY23, resolving supply chain pressures and returning to normalized delivery times. As a result, FFIV boasted adjusted EPS of $3.50, well above its prior guidance of $3.15-3.27.
- Looking ahead to FY24, FFIV expects to maintain current margins, leading to EPS growth of +5-7% yr/yr. While this target was slightly below expectations, it should not be brushed aside so quickly, given current demand conditions. Further, although FFIV's FY24 revenue growth projection of flat to down low single-digits yr/yr missed the mark, it would have been considerably higher when excluding a 6 pt headwind from the company's backlog reduction.
- FFIV also provided a glimpse into its FY25 view, which is shaping up to be a much better year than FY24. Management expects revenue growth in mid-single-digit territory. It also anticipates operating margins to expand again, targeting at least 35% margins.
Bottom line, FFIV is avoiding the broader market sell-off today by delivering Q4 results that provided a much-needed sigh of relief following warnings from peers. We like that FFIV outlined its financial goals for two years, which the company did not do last year.
Microsoft starts FY24 on strong note; Azure was the star of the show, PC demand stabilizing (MSFT)
Microsoft (MSFT +3%) is heading nicely higher today after kicking off FY24 on a positive note. The software giant reported a huge EPS beat for Q1 (Sep) last night. In fact, this was its largest EPS beat in 2+ years. Not only that, but MSFT guided Q2 (Dec) revenue nicely above analyst expectations. The guidance includes MSFT's recently closed acquisition of Activision Blizzard. It was not part of SepQ results but it did boost DecQ guidance.
- Let's start with Azure. It grew +28% CC (constant currency), which was well above prior guidance of +25-26% CC. Azure continues to take share as customers migrate their existing workloads and invest in new ones. A few things stand out. First, at +28% CC, Azure finally halted its downward growth trend: +27% CC in JunQ, +31% in MarQ, +38% CC in DecQ, +42% CC in SepQ, +46% CC in JunQ. SepQ results included roughly 3 points from AI services, so that was good to see. With Azure getting so large, it's understandable that its growth rates will moderate, so that does not bother us much. But it was notable to see even a slight uptick in SepQ.
- Another thing that stood out with Azure was solid guidance for DecQ at +26-27% CC, with an increasing contribution from AI. What we found notable is that MSFT does not usually guide beyond the next quarter, but the company added some language for the second half of the fiscal year. Specifically, Azure CC revenue growth in 2H should remain roughly stable compared to Q2 (Dec), assuming optimization and new workload trends continue and with the growing contribution from AI. We view the fact that MSFT provided a longer term view as a sign of confidence. And it's good to see the growth rates stop their downward trends and settle in the mid-20% range.
- In terms of segment performance, MSFT reported upside in all three segments, which does not happen that often. Intelligent Cloud and More Personal Computing were particularly strong. In MPC, Windows OEM revenue was significantly ahead of internal expectations driven by stronger-than-expected consumer channel inventory builds and stabilizing PC market demand, particularly in commercial. Gaming revenue was ahead of expectations.
- In its commercial business, the trends from the prior quarter continued. MSFT saw healthy renewals, particularly in Microsoft 365 E5. Higher-than-expected AI consumption contributed to revenue growth in Azure. In its consumer business, PC market unit volumes are returning to pre-pandemic levels. Advertising spend landed roughly in line with expectations. In gaming, strong engagement was helped by the Starfield launch, which benefited Xbox content and services.
Overall, this was an impressive way to start FY24. It was not just the big EPS and robust guidance, but Azure really stood out as the star of the show. It's rare to see Azure come in 2 pts above the high end of guidance. It sounds like AI is adding a nice tailwind. Another encouraging sign was MSFT saying that PC market demand was stabilizing. That is probably more positive than we have heard in a few quarters. Finally, closing the deal on massive video game publisher Activision was a nice boost to guidance. It was great to see the deal close right before the upcoming holiday season.
Texas Instruments registers rare earnings miss as a weak demand environment intensified in Q3 (TXN)
A weak demand environment continues to plague Texas Instruments (TXN -3%), contributing to its first earnings miss in four years on deteriorating sales growth in Q3. The chip maker did warn last quarter that demand would remain unfavorable through Q3, noting that there would likely be no material changes. However, things did change, just in the wrong direction.
- TXN's industrial end market, its largest at 40% of FY22 revs, endured broadening weakness across nearly all sectors, leading to sales falling by mid-single digits sequentially, a deterioration from flat sequential growth in Q2. Meanwhile, communications equipment (7% of FY22 revs), a consistent laggard this year, stayed stuck in reverse, dropping by an upper teens percentage.
- Management did not delve into too many details surrounding end-market demand, repeating that if there were something significant changing from one quarter to the next, it would be highlighted.
- With nearly half of TXN's end markets registering declining sales growth sequentially, the solid growth in automotive (up mid-single digits), personal electronics (up roughly 20%), and enterprise systems (up in the high single digits) were overshadowed. In total, revenue was flat qtr/qtr and down 13.5% yr/yr at $4.53 bln.
- Regarding the UAW negotiations, TXN did not appear overly concerned, stating that it services close to 1,000 different OEMs, underpinning substantial broadness in who it serves.
- The sliding revenue growth in Q3 was the primary drag on margins, a persistent weak spot for TXN. Gross margins contracted by 690 bps yr/yr, widening from the 540 bp drop last quarter. As a result, EPS of $1.80 met the midpoint of TXN's prior guidance of $1.68-1.92 but missed analyst forecasts. Worth noting is that EPS excluded a $0.05 benefit for items not originally in TXN's outlook.
- While improving gross margins will require an improving demand backdrop, TXN's investment commitments are also weighing on its bottom line. TXN is pouring $5.0 bln into planned capacity expansion every year through 2026. At the same time, TXN's inventory is nearing desired levels, leading to the company lowering factory starts in the quarter, an additional drag on margins.
- The road ahead is more of the same: a weak environment, reflected in TXN's Q4 guidance. The company anticipates EPS of $1.35-1.57 and revs of $3.93-4.27 bln, both markedly lower than Q3's figures.
Automotive remained healthy, and personal electronics continued to mount a solid comeback. However, outside of these areas, there were not many silver linings in TXN's Q3 report. Margins must improve for shares to begin stabilizing. Unfortunately, because TXN will not waver on its investments, this will require demand to start rebounding. Without a more precise timeline on when demand will return, TXN remains a risky play.
Alphabet's cloud miss is clouding over upside report that features upswing in ads business (GOOG)
When Alphabet's (GOOG) core advertising business struggled last year and into early 2023 as marketers pulled back on spending, its cloud business remained a key bright spot as it continued to churn out solid growth while turning its first profit in 1Q23. In Q3, the tables turned as GOOG's advertising business outperformed expectations while cloud disappointed with revenue growth slowing to 22%, missing analysts' estimates. Although GOOG still exceeded top and bottom-line expectations -- extending its winning streak against these forecasts to three consecutive quarters -- the shortfall in cloud is more than offsetting the upside earnings report.
- GOOG's advertising business still makes up the bulk of its total revenue (about 78% in Q3), but its growth prospects are largely pinned to the expansion of its cloud business. With the emergence of generative AI, which requires massive amounts of computing power and data storage, cloud's importance has only increased. Therefore, to see cloud's revenue growth slow to 22% from 27% last quarter and its operating income decline by 33% qtr/qtr is discouraging.
- Adding salt to the wound is that competitor Microsoft (MSFT) experienced an acceleration of growth for Azure, the company's cloud business. Last night, MSFT reported strong Q1 results that featured better-than-expected growth of 28% for Azure, beating the company's guidance of 25-26%. That is up slightly from last quarter's increase of 27%.
- The divergence in performance suggests that GOOG is falling further behind MSFT in the AI race. CFO Ruth Porat cited cost-cutting initiatives from some of its customers as the cause for the shortfall, but MSFT didn't see a slowdown in demand.
- On the positive side, the momentum that began to build in GOOG's advertising business last quarter accelerated in Q3. Marketing budgets seem to be thawing out further, which is a good sign for Meta Platforms' (META) Q3 earnings report after the close today.
- GOOG's dominant search business was a source of strength, easing concerns that it's losing ground to MSFT in this area. MSFT sunk $13 bln into OpenAI and has incorporated generative AI capabilities into its Bing search platform, but Google Search & Other revenue still grew by 11.4%, up from 5% in Q2.
- YouTube's rebound also hit a higher gear in Q2 as revenue increased by 11.3% compared to growth of just 4.4% in Q2. In addition to marketing budgeting cuts, YouTube has been pressured by rising competition from TikTok, but YouTube seems to have stymied TikTok's share gains. Shorts, which is YouTube's answer to TikTok's short format videos, now average over 70 bln daily views.
Overall, it was a solid quarter for GOOG as the turnaround in its advertising business picked up steam, but the selloff in the stock illustrates that its AI-related growth prospects are now front and center. Securing new cloud business from AI-based companies is a big piece of the growth puzzle for GOOG, so the fact that cloud came up short in Q3 has market participants questioning whether growth forecasts for GOOG are too high.
General Electric flying higher as Aerospace segment once again shines in beat-and-raise report (GE)
Unlike its industrial counterpart 3M (MMM), General Electric (GE) was facing heightened expectations heading into its Q3 earnings report, as reflected in the stock's 60%+ run since the beginning of the year. Bolstered once again by its red-hot Aerospace segment, the company didn't disappoint, delivering another impressive beat-and-raise report that further highlights the success of its vast transformation. That transformation, which has included the recent spin-off of its Healthcare segment and the divestitures of stakes in Baker Hughes (BKR) and AerCap (AER), will come to a conclusion when GE completes its spin-off of GE Vernova.
In addition to reporting earnings, GE disclosed that it expects to complete the spin-off in 2Q24. Previously, the company had said that it anticipates the spin-off to occur "sometime in early 2024", so it seems that it has pushed the timing back a bit.
However, more importantly, the two segments that comprise GE Vernova -- Renewable Energy and Power -- posted stronger results and are gaining momentum. In fact, in Renewable Energy, both the grid and onshore businesses were profitable for the first time in many years, leading to a 72% increase in overall profit for the segment. This bodes well for GE Verona's valuation when the spin-off does take place, which is a positive for GE as it may attain a more favorable price for GE Vernova.
With Renewable Energy and Power finally experiencing a turnaround, GE is nearly firing on all cylinders.
- Aerospace stole the show once again as organic revenue jumped by 25%, nearly matching last quarter's growth of 28%. Demand for jet engines and for service repairs remains robust due to the ongoing strength in the commercial airline industry. On the defense side, which has dealt with supply chain issues for a few years now, revenue increased by a solid 8%.
- GE doesn't see these positive trends fading over the remainder of the year as it lifted its organic revenue growth forecast to the low 20% range from its prior outlook of high-teens to 20% growth.
- Renewable Energy generated revenue growth of 14%, led by healthy sales of equipment across the grid businesses and the North America onshore market. The passage of the Inflation Reduction Act in August of 2022 provided the initial spark to turn this segment around. Price increases and cost cutting measures have helped to accelerate the recovery.
- This combination of improved demand, pricing, and lower costs helped to narrow Renewable Energy's overall operating loss to ($317) mln from ($934) mln in the year-earlier period.
- Power, which provides gas turbines and power generation equipment, did see orders slip to (1)% from 7% last quarter, but profit jumped by 61% to $200 mln on favorable pricing and increased productivity.
The main takeaway is that GE is in as healthy shape as it has been in many years, mainly thanks to its successful transformation plan and the robust recovery in the commercial airline industry. With Renewable Energy and Power gaining momentum, the planned spin-off of GE Vernova is in good position to draw significant interest from investors -- assuming business conditions don't take a meaningful turn for the worse before 2Q24.
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