| | | Market Snapshot
briefing.com
| Dow | 37863.80 | +395.19 | (1.05%) | | Nasdaq | 15310.97 | +255.32 | (1.70%) | | SP 500 | 4839.81 | +58.87 | (1.23%) | | 10-yr Note | -3/32 | 4.178 |
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| | NYSE | Adv 1884 | Dec 842 | Vol 1.0 bln | | Nasdaq | Adv 2598 | Dec 1619 | Vol 5.6 bln |
Industry Watch
| Strong: Communication Services, Information Technology, Financials, Consumer Discretionary, Real Estate, Industrials |
| | Weak: Consumer Staples, Utilities |
Moving the Market
-- S&P 500 trading at a new all-time high
-- Ongoing strength in mega caps and semiconductor stocks
-- Treasuries pulling back from intraday high yields acting as support for equities
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Closing Summary
19-Jan-24 16:25 ET
Dow +395.19 at 37863.80, Nasdaq +255.32 at 15310.97, S&P +58.87 at 4839.81
[BRIEFING.COM] The stock market closed this abbreviated week on a strong note on above-average volume at the NYSE. The S&P 500 closed at a fresh record high (4,839.81) with a 1.2% gain. The Dow Jones Industrial Average logged a 1.1% gain and the Nasdaq Composite closed 1.7% higher.
Strong mega cap and semiconductor shares were propping up index gains in the early going while the broader market traded more mixed. Semiconductor and mega cap stocks maintained their outperformance, but by the close, just about everything was trading higher.
The PHLX Semiconductor Index (SOX) jumped 4.0%; the Vanguard Mega Cap Growth ETF (MGK) closed 1.6% higher; the Invesco S&P 500 Equal Weight ETF (RSP) rose 0.8%; the Russell 3000 Growth Index saw a 1.4% gain; and the Russell 3000 Value Index registered a 0.9% gain.
Nine of the 11 S&P 500 sectors closed with a gain and five of them jumped more than 1.0%. In addition to the sectors that house mega cap components, the real estate (+1.0%) and financials (+1.6%) sectors saw the largest gains. The latter was helped in part by a sizable gain in Travelers (TRV 211.67, +13.32, +6.7%), which reported above-consensus earnings and revenue.
The gain in Travelers also offered a measure of support to the Dow Jones Industrial Average.
The only S&P 500 sectors to register a declined were consumer staples (-0.3%) and utilities (-0.1%).
Upside momentum in the stock market picked up steam as Treasuries pulled back from intraday high yields. The 2-yr note yield, which hit 4.42% earlier, settled seven basis points higher at 4.41% and the 10-yr note yield, which tested the 4.20% level, settled unchanged for the day at 4.15%.
- S&P 500: +1.5%
- Nasdaq Composite: +2.0%
- Dow Jones Industrial Average: +0.5%
- S&P Midcap 400: -1.5%
- Russell 2000: -4.1%
Reviewing today's economic data:
- December Existing Home Sales 3.78 mln (Briefing.com consensus 3.80 mln); Prior 3.82 mln
- The key takeaway from the report is that high mortgage rates continue weighing on the overall level of activity, though they have not stopped prices from continuing to climb.
- January Univ. of Michigan Consumer Sentiment - Prelim 78.8 (Briefing.com consensus 68.8); Prior 69.7
- The key takeaway from the report is that the increase in sentiment was accompanied by another drop in year-ahead inflation expectations, which have returned to a level not seen in three years.
Looking ahead, Monday's economic data is limited to the December Leading Indicators Index (Briefing.com consensus -0.3%; prior -0.5%) at 10:00 ET.
S&P 500 remains near high ahead of the close
19-Jan-24 15:30 ET
Dow +389.56 at 37858.17, Nasdaq +233.56 at 15289.21, S&P +55.12 at 4836.06
[BRIEFING.COM] The S&P 500 is still near its session high heading into the close, which would mark a new all-time high close.
The 2-yr note yield rose seven basis points to 4.41% and the 10-yr note yield settled unchanged at 4.15%.
Looking ahead, Monday's economic data is limited to the December Leading Indicators Index (Briefing.com consensus -0.3%; prior -0.5%) at 10:00 ET.
Everything rally continues
19-Jan-24 15:05 ET
Dow +414.96 at 37883.57, Nasdaq +239.11 at 15294.76, S&P +58.78 at 4839.72
[BRIEFING.COM] The major indices are trading just below session highs, which is also a new all-time high for the S&P 500.
Just about everything is coming along for the upside ride. The Russell 3000 Growth Index is up 1.3% and the Russell 3000 Value Index is up 0.9%.
Ten of 11 S&P 500 sectors are trading up while the utilities sector trades flat and the consumer staples sector shows a 0.1% decline. Five sectors are up by more than 1.0%.
Broadcom, PayPal among top S&P 500 performers on Friday
19-Jan-24 14:25 ET
Dow +420.44 at 37889.05, Nasdaq +224.03 at 15279.68, S&P +55.39 at 4836.33
[BRIEFING.COM] The S&P 500 (+1.16%) is in second place to this point on Friday afternoon.
Elsewhere, S&P 500 constituents Broadcom (AVGO 1211.84, +67.93, +5.94%), PayPal (PYPL 65.66, +3.57, +5.75%), and Texas Instruments (TXN 174.96, +8.05, +4.82%) pepper the top of the index. Goldman resumed coverage of AVGO at Buy, and UBS upgraded TXN to Buy from Neutral.
Meanwhile, Molina Healthcare (MOH 368.63, -12.43, -3.26%) is at the bottom of the S&P, underperforming alongside peers like CNC -2.14%, CI -1.81%, and HUM -1.55%.
Gold trims weekly declines on Friday
19-Jan-24 14:00 ET
Dow +353.04 at 37821.65, Nasdaq +208.80 at 15264.45, S&P +50.98 at 4831.92
[BRIEFING.COM] With about two hours to go on Friday afternoon the tech-heavy Nasdaq Composite (+1.39%) is atop the standings, holding firmly near today's highs.
Gold futures settled $7.70 higher (+0.4%) to $2,029.30/oz, ultimately ending down -1.1% this week as yields, equities, and the dollar are posting weekly gains with just a little time left.
Meanwhile, the U.S. Dollar Index is down about -0.2% to $103.32.
Page One
Last Updated: 19-Jan-24 09:04 ET | Archive
Pre-open strength in semiconductor stocks and mega caps boosting market
The S&P 500 futures are up 18 points and are trading 0.5% above fair value, the Nasdaq 100 futures are up 100 points and are trading 0.8% above fair value, and the Dow Jones Industrial Average futures are up 163 points and are trading 0.5% above fair value.
Ongoing strength in mega cap and semiconductor stocks has boosted the broader market ahead of the open. NVIDIA (NVDA) is a top performer in that respect after Meta Platforms (META) CEO Mark Zuckerberg posted on Instagram that the company is purchasing AI products including 350k H100s (NVDA) by the end of this year.
The positive bias also stems from favorable reactions to some earnings news, like Dow component Travelers (TRV), which is up more than 5.0% pre-open.
Treasury yields turned higher, but equity futures maintained their positive bias. 2-yr note yield is up three basis points to 4.36% and the 10-yr note yield is up one basis point to 4.15%.
In other news, Houthi militants fired missiles at a US owned commercial vessel, according to Bloomberg.
Today's economic calendar features:
- 10:00 ET: December Existing Home Sales (Briefing.com consensus 3.80 mln; prior 3.82 mln) and preliminary January University of Michigan Consumer Sentiment (Briefing.com consensus 68.8; prior 69.7)
- 16:00 ET: November net Long-Term TIC Flows (prior $3.3 bln)
iRobot plummets after reports suggesting the EU Commission will block its merger with AMZN (IRBT)
iRobot (IRBT -27%) hit a snag yesterday after the close following a WSJ article reporting that the European Commission intends to block Amazon's (AMZN) previously announced $1.7 bln takeover of the Roomba vacuum maker. Shares of IRBT are sinking on the news, hitting decade lows.
WSJ mentioned that Commission officials told AMZN executives that the deal would likely be rejected, harking back to concerns the regulatory body expressed late last year regarding competition restriction among other robot vacuum cleaner manufacturers. Specifically, AMZN could simply not allow iRobot rivals to list their products on its marketplace, thus blocking consumers' access to compare products on one platform.
Objections to the European Commission's reasoning for blocking the merger aside, AMZN may have already grown cold toward its proposed acquisition, first announced in August 2022, given the amount of red tape associated with the transaction. For example, it was reported that AMZN skipped a settlement offer with the European Commission earlier this month.
While the possibility of the EU's anti-trust arm blocking the AMZN/IRBT merger is having a negligible impact on AMZN shares, likely due to the relatively small size of the deal, investors are viewing it as a death knell for IRBT.
- When AMZN announced its agreement to acquire IRBT, the robot vacuum maker was struggling, registering sharp quarterly revenue drawdowns as pandemic-induced tailwinds dwindled. Since the announcement, growth has continued to fall, recently declining over 33% yr/yr to $186.18 mln, markedly below pre-pandemic levels of around $250.00 mln.
- Without the AMZN lifeline, IRBT's future is now highly uncertain. Exacerbating the company's woes is a tumultuous economic environment rife with inflation weighing heavily on the end consumer, leading to a meaningful pullback in discretionary spending.
With how many internet-of-things (IoT) devices are under AMZN's control, from its Echo assistant device to the Ring doorbell, acquiring a robotically controlled vacuum fit nicely. However, AMZN was likely aware of the regulatory backlash given the abundance of products acquiring data on households it already amassed. The U.K. did clear the deal last year, while the U.S. FTC is still investigating the merger, but it was clear from around March of last year, given their comments, that the EU would pose a high hurdle. The European Commission has until February 14 to reject or approve the merger officially. We anticipate a volatile backdrop for IRBT until that time.
Wayfair furnishing some strong gains after announcing another major workforce reduction plan (W)
Online furniture and home decor company Wayfair (W) has been no stranger to cost-cutting and workforce reduction initiatives over the past couple of years and the company announced another major restructuring move this morning. After eliminating 1,750 positions one year ago, Wayfair is now laying off approximately 1,650 more employees, or 13% of its workforce, amid a sluggish sales environment for home furnishings.
- The stock is reacting positively to the news since the workforce reduction will deliver annualized cost savings of more than $280 mln. In turn, Wayfair's profitability outlook for 2024 has just improved, even if revenue growth remains subdued.
- In fact, CEO Niraj Shah commented that in a hypothetical flat revenue environment, the company would now be positioned to generate over $600 mln in adjusted EBITDA in 2024, well above expectations. For some context, Wayfair generated adjusted EBITDA of $214 mln for the nine months ended September 30, 2023, which is a vast improvement over the ($345) mln in the year-earlier period.
- Restructuring actions have played a key role in Wayfair's profitability turnaround as operating expenses declined by 11% in Q3, enabling adjusted EBITDA to swing to a positive $100 mln from ($124) mln in the year-earlier period. However, greater efficiencies within its supply chain and a more favorable merchandise mix have also helped to improve margins. Last quarter, gross margin expanded by 210 bps yr/yr to 31.1%.
- The story hasn't been as upbeat in regard to demand, and we presume that conditions haven't materially improved since the end of Q3. During Q3, average order value (AOV) slid by nearly 9% to $297 as customers reined in spending on home decor and home improvement projects. The company forecasted that AOV would experience further compression in Q4, while guiding for revenue to be flat to up low-single digits for Q4, further disappointing investors.
The main takeaway is that this next round of restructuring has further enhanced Wayfair's profitability outlook, insulating the company's bottom-line from a prolonged slump in category demand.
Wendy's hires long time PepsiCo exec as its new CEO (WEN)
Wendy's (WEN) has named long time PepsiCo (PEP) executive Kirk Tanner as its new CEO, effective February 5. The company also reaffirmed FY23 guidance, likely to ease investor concerns that the change was perhaps being motivated by a weak Q4 result when WEN reports next month. Mr. Tanner succeeds Todd Penegor, who has served as CEO since May 2016 and has held senior leadership positions at Wendy's for more than a decade.
- Mr. Tanner most recently served as CEO of North American Beverages at PepsiCo, and joins Wendy's with 30+ years of experience across beverages, snacks and foodservice. At PepsiCo, he oversaw the $26+ bln business unit, which accounts for 30% of PEP's overall business. Before that, he oversaw PepsiCo's Global Foodservice division, during which time he expanded through strategic partnerships, new product lines and significant deals with major sports leagues and restaurant chains.
- Mr. Penegor did some good things during his tenure, perhaps most notably the re-launch of breakfast a few years ago. He has grown the digital business, with global digital sales mix reaching 13% in Q3 and total digital sales growing 30% yr/yr as its loyalty program continues to gain momentum. He has also been good about remodeling stores and has made some decent menu innovations with a focus on value.
- One of the first challenges the new CEO will face is getting customer traffic back up, which has been weak recently. The $75K+ income consumer continues to be healthy and WEN continues to see traffic growth in that segment. However the sub-$75K segment has been more stressed. WEN has been seeing some trade down from mid-scale casual and sit down into QSR, but WEN is also seeing some trade out from lower-income consumers out of QSR and into food at home.
- Also, we wonder if part of the reason for the change was in response to activist hedge fund Blackwells Capital reportedly preparing to challenge Wendy's board to push for improvements, according to a Reuters report in December (see InPlay archive).
- Part of the frustration is that WEN's share price has done little in recent years. It had been in an uptrend in the early years of Penegor's tenure from 2016-19, but has stalled out since then, mostly trading sideways. By comparison, McDonald's (MCD) has performed much better and has been in a general uptrend.
Overall, we view this as a good move for Wendy's. Tanner has some impressive credentials at PepsiCo. And we think hiring an outsider makes sense to bring new perspectives and perhaps shake things up a bit. Penegor had been promoted from within, but WEN wants to bring in an outsider this time. We are a bit surprised the stock is seeing only a muted reaction. We think this is good news for WEN to hopefully start getting the stock moving again. We look forward to the Q4 call next month to get a sense of what changes might be in store.
J.B. Hunt Transport's Q4 report point to favorable developments despite a challenging economy (JBHT)
Intermodal and trucking transportation titan J.B. Hunt Transport (JBHT) may have registered its fifth straight earnings miss in Q4 on another quarter of falling yr/yr revenue growth. However, economic signals are still pointing to an eventual turnaround. Intermodal volumes maintained their upward momentum in the quarter, a leading indicator of a possibly more significant recovery down the road. Furthermore, JBHT's earnings miss was entirely the result of higher insurance and claims expenses, which slashed $0.38 per share off the company's bottom line.
- JBHT delivered EPS of $1.47 in Q4, a 23% drop yr/yr, falling short of analyst expectations. Inflation has its tentacles on nearly every aspect of the economy, including insurance. Carriers are hiking premiums as a result of increasing litigation settlements. Verdicts exceeding $1.0 mln have jumped drastically over the past decade, primarily affecting the larger trucking companies, which bear a disproportionate share of escalating claims costs.
- This development is worth paying attention to as it can affect the GAAP earnings of many of JBHT's peers throughout the upcoming earnings season. Knight Swift Transport (KNX), XPO Inc (XPO), Old Dominion (ODFL), and Marten Transport (MRTN) are a few that come to mind.
- Revenue slipped yr/yr for the fourth consecutive quarter, dropping by 10% yr/yr to $3.3 bln. However, this figure was consistent with analyst forecasts. JBHT was blunt on the freight environment, commenting that compared to 2023, not much has changed. Still, CEO John Roberts III was upbeat about several opportunities across all divisions this year.
- One such opportunity is Intermodal, JBHT's largest segment, comprising roughly 50% of revenue. This business is enjoying positive volume momentum, increasing by 6% yr/yr in the quarter, partially constrained by last season's pricing, which tends to be a lagging indicator. JBHT sees a large amount of freight expected to be converted from over-the-road to intermodal. Regarding pricing, JBHT is beginning the 2024 bid season and should have better insight over the next several months.
- Dedicated Contract Services, which comprises around a quarter of JBHT's revenue, boasted stable margins in Q4. However, management warned that due to truck count losses and a lack of fleet growth, top and bottom-line performance will be hindered in 2024. Still, JBHT noted that its pipeline in this business remains strong and is working diligently to execute its robust pipeline.
- Regarding JBTH's lesser segments, Final Mile has been holding up well despite mild demand in its end markets. Conversely, Integrated Capacity Solutions and Truckload are facing the brunt of the market challenges. Nevertheless, the company is confident that scaling investments in technology can increase efficiency across both segments throughout the year.
While not much changed related to the freight environment in Q4, JBHT is optimistic that it can capitalize on numerous opportunities this year, particularly surrounding its Intermodal business. It is also encouraging that Final Mile and Dedicated Contract Services continue to demonstrate resilience to a challenging economic landscape. Lastly, JBHT's cautiously optimistic tone underpins what is developing across the U.S. economy, with several uplifting trends somewhat clouded by pockets of lingering weaknesses, potentially keeping volatility elevated this year.
Discover Financial Services gets declined as Q4 results spark outsized concerns today (DFS)
Investors decline Discover Financial Services' (DFS -10%) Q4 earnings miss, increasing delinquency rates, and a sharp uptick in its provision expense. Shares of the credit card company are erasing much of the past two months of gains. It is worth pointing out that Q4 marks the final quarter before incoming CEO Michael Rhodes replaces interim CEO John Owen.
- There were still several positives from Q4. DFS grew its top line by 13% yr/yr to $4.2 bln, reflecting a 15% jump in total loan growth partially offset by a 29 bp compression in net interest margin (NIM). Meanwhile, DFS's Card business increased by 13% yr/yr from the prior year's new account growth and about a 110 bp decline in the payment rate, now just 100 bps above 2019 levels. The declining payment rate also helped spur a 23% uptick in personal loans. Additionally, average deposits climbed by 21% yr/yr and 4% sequentially.
- What is generating such outsized concern today? The 30+ day delinquency rate across DFS's total loan portfolio increased again in Q4, moving 115 bps higher yr/yr and 39 bps sequentially to 3.45%, reflecting ongoing stress among customers.
- On the plus side, the sequential increase is below last quarter's, underpinning a slowing rate of delinquency formation. CFO John Greene commented that given real wage growth, he believes delinquency formation will continue to slow in 2024 and into 2025.
- Furthermore, the provision for credit losses surged by over $1.0 bln yr/yr to $1.92 bln. Combined with a continuously increasing total net charge-off rate of 198 bps yr/yr to 4.11% in Q4, this put outsized pressure on DFS's bottom line. The spike across both metrics could signal troubles ahead for DFS's competitors.
- DFS added that charge-offs may have spiked but were still at the lower end of its expected range.
- DFS's FY24 outlook was not very reassuring. The company expects flat loan growth yr/yr after a 15% jump in FY23, a slight downturn in its NIM to 10.5-10.8% from 11.1% in FY23, and net charge-offs to continue bubbling to 4.9-5.3% from 3.4% in FY23. Management anticipates four interest rate cuts of 25 bps this year, two more than it forecasted last month. While this can help loan growth, it does put further pressure on DFS's NIM.
Today's pessimistic response is almost exclusively targeted at DFS, with competitors Visa (V) and Mastercard (MA) holding around their flatlines, while American Express (AXP) edges modestly lower. DFS endured a similar sell-off following its Q3 earnings report in October, with action across its peer group resembling today's contrasting sentiment. At the time, we outlined several reasons why DFS's rivals were not mirroring its turn lower, including a more affluent client base for AXP and less internal strife across V and MA. Still, while DFS's Q4 report is triggering a wave of sellers in its shares today, it could have ripple effects ahead of its peers' Q4 reports slated for the next two weeks.
The Big Picture
Last Updated: 11-Jan-24 16:21 ET | Archive
Q4 earnings bar is low, but valuation hurdle is high
It is a new year, and a new year in the stock market always starts with a look back at the fourth quarter. That would be fourth quarter earnings, which are going to start trickling out in a steady fashion starting Friday, January 12, and continuing, yes, through March.
This earnings season gets dragged out with fiscal year-end reporting, so much so that the first quarter earnings season starts almost as soon as the fourth quarter reporting period ends.
For those of us covering the earnings announcements, that is our quantitative misfortune. For everyone else, though, it will be a fortune of fundamental news that will shape investment views. That's no small consideration for a market high on 2024 earnings prospects.
Looky Here
Every earnings reporting period is a look back, but the market is more interested in the look ahead.
A lot of companies don't provide guidance, but the market makes its inferences nonetheless from the qualitative remarks about business conditions and the tone CEOs and CFOs adopt on their earnings conference calls.
That will be true of the banks, which get things rolling in the early portion of the reporting season. Bank of America (BAC), BNY Mellon (BK), Citigroup (C), JPMorgan Chase (JPM) and Wells Fargo (WFC) will all report their results before the open on Friday, January 12.
These reports will have extra importance this period, because the market has a lot riding on the U.S. economy achieving a soft landing -- or no landing at all. The banks have a front row seat to economic activity. In fact, they do the driving in many respects as the issuers of credit, the purveyors of capital, and the stewards of assets.
There will be a lot of interest, then, in what these banks and other banks say about credit quality, deposit flows, asset values, regulatory constraints, and investment banking activity.
The focal point will likely be comments about credit quality since that will be looked at as a harbinger of economic conditions. If there is concerning commentary about a deterioration in credit quality, concerns will build about the economy possibly being headed for a hard landing. If the commentary sounds nonplussed about the credit situation, then market participants will continue to embrace the soft-landing view.
A sidebar to all of that is that the banks are expected to be the biggest drag on the financial sector's earnings in the fourth quarter. According to FactSet, the blended growth rate for the financials sector is -6.2%. The banks, however, have a blended growth rate of -29.3%.
A Disparate View
There isn't much earnings growth expected for the fourth quarter. The blended growth rate for the S&P 500 sits at just 0.4%, according to FactSet, down from 8.0% on September 30.
What this suggests is that analysts were slashing their earnings estimates during the quarter -- a quarter that saw stock prices surge amid expectations that inflation will continue to come down, that the economy will enjoy a soft landing, and that the Fed will soon be cutting rates.
Of course, when earnings estimates go down and stock prices go up, you get multiple expansion. The forward 12-month P/E ratio for the S&P 500 went from 18.0 on September 29 to 19.6 on December 29. The five-year average is 18.9 and the 10-year average is 17.6, according to FactSet.
That has created a disparate view in front of the reports: the earnings reporting bar has been lowered (a lot) while the valuation hurdle has gone up.
In other words, the companies reporting earnings need at least to get over the low bar with their reports, but to get over the high valuation hurdle, they need guidance (preferably quantitative, but qualitative will suffice in certain cases) that isn't disappointing or doesn't sound disappointing.
The current FactSet consensus estimate for the first quarter calls for year-over-year earnings growth of 5.6%. For calendar 2024, the bar is much higher at 11.8%.
The Blended View
Turning back to the fourth quarter, the communication services sector, where Alphabet (GOOG), Meta Platforms (META), and Netflix (NFLX) reside, has the highest projected growth rate at 41.3%. Next is the utilities sector (+32.7%) followed by consumer discretionary (+22.4%), information technology (+15.5%), and real estate (+3.6%).
That's it. The remaining sectors aren't expected to deliver any earnings growth.
The energy sector is expected to register a 30.4% year-over-year decline in earnings. The materials sector (-21.1%) and the health care (-21.0%) sectors are the next biggest drags followed by financials (-6.2%), industrials (-2.5%), and consumer staples (-0.1%).
These are blended growth estimates, which take into account actual results from companies that have reported and estimates for companies that have not reported. That means these growth estimates will be shifting as the earnings reporting period progresses.
If history is any indication, the shift in aggregate should be higher by at least two percentage points. When the reporting period is over, therefore, there should not be a zero in front of the decimal point as there is now.
Suffice to say, if there is -- or worse, if there is a minus sign in front of the first digit -- the fourth quarter reporting period can be deemed a true disappointment.
What It All Means
The stock market's road ahead is paved with good intentions. There is a good inflation outlook; there is a good economic outlook; and there is a great policy outlook in the market's mind that includes six rate cuts by the end of 2024.
The stock market's behavior at the end of 2023 certainly made it appear as if those rate cuts won't be happening for deleterious economic reasons that would undermine the current earnings outlook. No, they will presumably happen on the back of a smooth glide path for inflation driven by a further easing in supply chain pressures.
It is an optimistic view alright, and all anyone can hope for is that it is right. We'll soon have a line on that thinking when the fourth quarter earnings results trickle in and the quantitative and qualitative earnings guidance starts flowing out.
-- Patrick J. O'Hare, Briefing.com
(Editor's Note: the next installment of The Big Picture will be posted the week of January 22.)
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