Market Snapshot
| Dow | 37775.38 | +22.07 | (0.06%) | | Nasdaq | 15601.50 | -81.87 | (-0.52%) | | SP 500 | 5011.12 | -11.09 | (-0.22%) | | 10-yr Note | -26/32 | 4.65 |
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| | NYSE | Adv 1346 | Dec 1420 | Vol 894 mln | | Nasdaq | Adv 1940 | Dec 2224 | Vol 4.9 bln |
Industry Watch
| Strong: Communication Services, Utilities, Consumer Staples, Materials, Financials, Real Estate |
| | Weak: Information Technology, Consumer Discretionary, Industrials, Energy |
Moving the Market
-- True to form this week, early gains faded
-- Digesting latest batch of earnings news, which garnered mostly positive responses from investors
-- Reacting to economic data
-- Jump in Treasury yields
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Closing Summary
18-Apr-24 16:30 ET
Dow +22.07 at 37775.38, Nasdaq -81.87 at 15601.50, S&P -11.09 at 5011.12
[BRIEFING.COM] Today's session felt similar to other sessions this week on below average volume at the NYSE. That is to say that early gains faded due in part to a lack of conviction from buyers. There wasn't a lot of conviction from sellers either in today's trade. Decliners had a fractional lead over advancers at both the NYSE and at the Nasdaq.
The price action left the S&P 500 (-0.2%), Nasdaq Composite (-0.5%), and Russell 2000 (-0.1%) with a fifth consecutive loss. The Dow Jones Industrial Average eked out a 0.1% gain.
Weakness in some heavily-weighted components like Microsoft (MSFT 404.33, -7.51, -1.8%), Amazon.com (AMZN 179.17, -2.11, -1.2%), and Tesla (TSLA 149.90, -5.55, -3.6%), which hit a new 52-week low today, had a disproportionate influence on index performance.
Semiconductor shares also had a weak showing. The PHLX Semiconductor Index (SOX) dropped 1.7%, after TSMC (TSM 132.27, -6.76, -4.9%) reported better than expected earnings, but warned that the chip industry is enduring a more gradual recovery than expected.
Losses in some of the aforementioned names contributed to the underperformance of the S&P 500 information technology (-0.9%) and consumer discretionary (-0.7%) sectors. Meanwhile, the communication services sector saw the largest gain, up 0.7%.
Some mixed responses to earnings news since yesterday's close also contributed to the muted index level price action. Genuine Parts (GPC 160.23, +16.16, +11.2%) and Elevance Health (ELV 525.19, +16.22, +3.2%) were winning standouts after reporting earnings while Las Vegas Sands (LVS 45.88, -4.35, -8.9%) and Equifax (EFX 217.15, -20.17, -8.5%) logged the biggest declines among S&P 500 constituents after their quarterly results.
Rising market rates also acted as a limiting factor for stocks. The 10-yr note yield rose six basis points to 4.65% and the 2-yr note yield settled six basis points higher at 4.65%. This price action was partially in response to the release of the weekly jobless claims report, which showed no change from last week's level and a better-than-expected Philadelphia Fed survey for April.
- S&P 500:+5.1% YTD
- Nasdaq Composite: +3.9% YTD
- S&P Midcap 400: +1.6% YTD
- Dow Jones Industrial Average: +0.2% YTD
- Russell 2000: -4.2% YTD
Reviewing today's economic data:
- Weekly Initial Claims 212K (Briefing.com consensus 215K); Prior was revised to 212K from 211K; Weekly Continuing Claims 1.812 mln; Prior was revised to 1.810 mln from 1.817 mln
- The key takeaway from the report remains the low initial claims number (a leading indicator), which continues to be indicative of a solid labor market that portends good growth dynamics for the economy.
- April Philadelphia Fed Index 15.5 (Briefing.com consensus 0.0); Prior 3.2
- March Existing Home Sales 4.19 mln (Briefing.com consensus 4.20 mln); Prior 4.38 mln
- The key takeaway from the report is that sales activity was weak at the start of the spring selling season, as high prices, high mortgage rates, and low inventory got in the way of more robust selling activity.
- March Leading Indicators -0.3% (Briefing.com consensus -0.1%); Prior was revised to 0.2% from 0.1%
Separately, there is no US economic data of note tomorrow.
Treasuries settle with losses; stocks move sideways ahead of close
18-Apr-24 15:35 ET
Dow +72.45 at 37825.76, Nasdaq -48.77 at 15634.60, S&P -3.70 at 5018.51
[BRIEFING.COM] There hasn't been much up or down movement at the index level in recent action.
The 10-yr note yield rose six basis points to 4.65% and the 2-yr note yield settled six basis points higher at 4.65%. The U.S. Dollar Index climbed 0.2% to 106.15.
Separately, there is no US economic data of note tomorrow.
Stocks move mostly sideways near lows
18-Apr-24 15:05 ET
Dow +28.59 at 37781.90, Nasdaq -52.32 at 15631.05, S&P -8.00 at 5014.21
[BRIEFING.COM] The major indices are trading in a lateral flow near session lows. The Dow Jones Industrial Average is up 0.1% while the S&P 500 and Nasdaq Composite trade below prior closing levels.
The equal-weighted S&P 500 is trading down just 0.1%, reflecting a lack of strong conviction from sellers.
Netflix (NLFX), PPG Industries (PPG), Intuitive Surgical (ISRG), Western Alliance Bancorp (WAL), and others report earnings after the close.
Looking ahead, Procter & Gamble (PG), American Express (AXP), SLB (SLB), and others report earnings in front of Friday's open.
HCA weaker on analyst commentary; Estee Lauder gains in S&P 500 after peer's results
18-Apr-24 14:25 ET
Dow +48.27 at 37801.58, Nasdaq -40.14 at 15643.23, S&P -3.29 at 5018.92
[BRIEFING.COM] The S&P 500 (-0.07%) is familiarly in second place among the major averages, bouncing a bit in the last half hour though still down about 3 points.
Elsewhere, S&P 500 constituents HCA (HCA 296.58, -14.45, -4.65%), Marathon Petroleum (MPC 194.80, -7.66, -3.78%), and NRG Energy (NRG 70.78, -2.64, -3.60%) pepper the bottom of the average. HCA is weaker following TD Cowen commentary in a March hospital survey, while MPC and NRG display losses coinciding with general weakness in the broader energy complex related to ongoing tensions between Iran and Israel.
Meanwhile, cosmetic product firm Estee Lauder (EL 143.75, +5.71, +4.14%) is among today's best performers following this afternoon's results from peer L'Oreal (LRLCY 95.18, +6.08, +6.82%).
Gold modestly higher on geopolitical tensions
18-Apr-24 14:00 ET
Dow -15.23 at 37738.08, Nasdaq -61.07 at 15622.30, S&P -10.37 at 5011.84
[BRIEFING.COM] The Nasdaq Composite (-0.39%) is today's top lagging major average, down about 61 points as we approach two hours left in the session.
Gold futures settled $9.60 higher (+0.4%) to $2,398.00/oz, gains aided by ongoing geopolitical tensions.
Meanwhile, the U.S. Dollar Index is up about +0.2% to $106.12.
Discover Financial Services' Q1 report accepted today; a good sign ahead of AXP's report (DFS)
Following a quick dip on Q1 results, Discover Financial Services (DFS +3%) shares are tracking higher today as investors ultimately accepted the credit card company's sufficient quarterly performance. Recall that DFS has agreed to be acquired by Capital One (COF) in late February in an all-stock transaction. It is still uncertain whether regulators will approve the merger. However, DFS has suspended repurchases through closing and agreed not to increase its dividend.
- Part of what drove an initial sell-the-news reaction was another uptick in the 30+ day delinquency rate for credit card loans, climbing by 107 bps yr/yr to 3.83%. The rate has increased on a yr/yr basis for eight consecutive quarters, reflecting persistent stress among customers. However, mirroring last quarter's trend, on a sequential basis, the delinquency rate for credit card loans continued to improve, down 4 bps. This trend reflects CFO John Greene's remarks in January that given real wage growth, delinquency formation will continue slowing throughout the year and into 2025.
- Another headline that had an immediate negative impact was a 68% plunge in DFS's net income yr/yr, due largely to a $799 mln increase to the company's card misclassification remediation reserve. Interim CEO Michael Shepherd discussed the misclassification issue, noting that the company took the proper action to advance the issue following internal reviews and talks with merchants and regulators.
- Provision for credit losses also spiked once again in Q1, jumping by 36% yr/yr to $1.50 bln. When combined with a 220 bp pop in DFS's total net charge-off rate, the company's bottom line was further placed under stress. However, the problem is less glaring on a sequential basis, particularly since the uptick in the allowance for credit losses stemmed largely from seasonality. Additionally, DFS expects total company losses to peak in mid to late 2024, meaning its credit reserve rate is likely at or near peak levels as long as the macroeconomic environment does not worsen significantly.
- DFS's guidance helped brush white-out over many of its blemishes in the quarter. The company increased its loan growth forecast to a low-single-digit percentage yr/yr versus its previous flat prediction. Similarly, DFS increased its net interest margin to 10.7%-11.0% from 10.5-10.8%, which is supported by an expectation of two rate cuts this year compared to the previous forecast of four. Higher short-term interest rates often result in higher net interest margins, making fewer cuts more advantageous for DFS.
While there were a few rough patches in Q1, DFS's report showed meaningful improvements overall. The uncertainty surrounding whether regulators approve the DFS/COF merger could keep a lid on near-term share appreciation for DFS. However, the company's Q1 performance was encouraging and bodes well for its peers ahead of earnings season, including American Express (AXP), which reports tomorrow before the open, Visa (V), and Mastercard (MA).
D.R. Horton looking constructive as beat-and-raise report eases margin concerns (DHI)
The steady bullish sentiment that has enveloped D.R. Horton (DHI) and other homebuilders showed some signs of cracking in the wake of last week's hotter-than-expected CPI report and Tuesday's disappointing March housing starts data that showed a 14.7% drop from February. Those two data points amplified concerns that momentum for the new housing market was beginning to slow as mortgage rates lift higher. Last night, however, DHI eased those worries by delivering a strong beat-and-raise Q2 earnings report, indicating that the spring selling season is off to a solid start.
- Recall that in Q1, DHI posted a rare EPS miss, driven by a 220 bps drop in gross profit margin on home sales to 22.9%. Like most of its competitors, DHI has ramped up incentives to address home affordability issues as mortgage rates increase, including mortgage rate buy-downs and price reductions. As a result, DHI's housing gross profit margin has been pressured.
- Heading into the Q2 report, there was an unease that DHI's gross profit margin and its outlook for this metric would soften further, as reflected in the stock's 11% drop since the end of March. While the company acknowledged during the earnings call that it expects incentives to remain at elevated levels in the near-term, it stated that it anticipates Q3 gross profit margin on home sales to be similar or slightly better than the 23.2% figure in Q2 -- which was up 30 bps from Q1.
- Declining construction costs are a key factor that are helping to offset the elevated incentives. Specifically, lumber prices are less than half of what they were during the peak in March 2022. Looking out beyond Q3, DHI commented that housing gross profit margin will be dependent upon the interest rate environment, but that it also feels pretty good about the situation since costs outside of incentives have generally flattened out on the construction side.
- On the demand side, the story hasn't changed much relative to recent history as housing supply remains constrained under this high mortgage rate environment. Homeowners are reluctant to sell their homes because they don't want to leave their current low mortgage rate for a much higher one. The favorable dynamics helped push DHI's home closings higher by 15% to 22,548 homes, comfortably beating its guidance of 20,000-20,500 homes.
- Despite the "higher rates for longer" expectation in the aftermath of last week's inflation report, DHI is still quite bullish about its prospects for the remainder of FY24. The company raised its FY24 revenue guidance to $36.7-$37.7 bln from $36.0-$37.0 bln, and boosted its home closings outlook higher to 89,000-91,000 from 87,000-90,000.
The main takeaway is that the rising interest rate environment didn't knock the wind out of DHI's sails, as many had feared, which is a bullish sign for other homebuilders as earnings season kicks into a higher gear.
Alcoa trades roughly flat despite EPS miss; revenue upside and improving markets were positives (AA)
Alcoa (AA) is trading roughly flat following its Q1 earnings report last night. As expected, the aluminum giant reported its seventh consecutive quarter of losses.
- Alcoa posted an adjusted loss of $(0.81), which was larger than expected. However, revenue was better than expected and Alcoa made some positive industry-related comments on the call. As we said in our preview, we felt that investors would focus more on the big picture outlook and that seems to be what they are doing.
- On the call, Alcoa said that near-term markets are showing signs of improvement and the long-term outlook remains very positive for both Alumina and Aluminum. Alumina prices recently reached a two-year high, while demand has remained steady, near-term supply concerns have continued. Specifically, Chinese refineries have curtailed capacity due to bauxite shortages and environmental issues. Also, Australian alumina supply has become less certain. Long-term alumina demand is expected to grow alongside aluminum.
- On the aluminum side, Alcoa says demand is looking up. Demand in the automotive and electrical sectors have remained strong and it's seeing signs of recovery in packaging. Construction remains the most challenged end market, but it is showing signs of stabilization, especially in North America. The big news last week was the US and UK govts announcing sanctions on Russian aluminum. The impact was to establish an import ban into the US and the UK. Alcoa agrees with the decision.
- Turning to the Q1 results, Alcoa says the overall outlook is positive. It is seeing further improvement in purchase prices for key raw materials. Alcoa also noted that the restart of one potline at Warrick is complete and the company remains optimistic that it will see additional IRA funding decided by the US govt sometime this year. Taken together, Alcoa expects to see resulting EBITDA improvement in Q3.
Overall, we are seeing a fairly muted reaction to Alcoa's Q1 results. The loss was larger than expected but the revenue upside was encouraging. Also, its comments about its markets improving was nice to hear as well. Looking ahead, Alcoa is likely to break its string of quarterly losses soon. Consensus calls for breakeven results in Q2 and a profit in Q3, which coincides with Alcoa seeing EBITDA increase in Q3. However, its results can be pretty volatile and it does not provide guidance, so there are no guarantees.
Taiwan Semiconductor Manufacturing drops despite upbeat Q1 numbers; warns of slow recovery (TSM)
Taiwan Semi (TSM -3%) exceeded top and bottom-line forecasts in Q1, projected Q2 revs ahead of consensus, and kept its FY24 revenue and CapEx targets unchanged. When looking at purely the headline numbers, the world's largest chip maker, supplying tech titans like NVIDIA (NVDA) and Advanced Micro (AMD), reported sound results. However, the situation becomes more clouded when peeling back the initial layers.
- While AI continues to power outsized gains for TSM, a relatively unsurprising development given the endless announcements from companies buying up chips, implementing the technology, and witnessing tight supply, management mentioned that the overall semiconductor market is enduring a more gradual recovery than previously expected.
- Seasonality tends to play a role as the smartphone market enters a lull period around this time. However, weakness within the chip industry extends beyond smartphones, which is seeing a tepid recovery. TSM mentioned that traditional server demand is lukewarm, internet-of-things (IoT) and consumer demand remains sluggish, and the automotive industry continues to suffer from excessive inventory. In fact, automotive was the end market where TSM noticed the sharpest pullback compared to Q4.
- As a result, TSM lowered its FY24 forecast for the overall semiconductor market, excluding memory, to increase by approximately 10% yr/yr instead of its prior remarks of over 10% growth. Additionally, TSM expects foundry industry growth in the mid-teens for the year, down from its previous prediction of approximately +20%.
- Furthermore, while TSM reaffirmed its FY24 CapEx guidance of $28-32 bln, it is observing the rate of increase in CapEx leveling off. Management anticipates CapEx to hover in the mid-30s for the rest of this year and the next several years. This is a noticeable shift compared to the over $40 bln of CapEx throughout the pandemic years. It is also an important metric as a higher level of CapEx correlates with a more robust growth outlook.
- Perhaps most frustrating is that even with AI demand surging, it is not making up for the shortfall -- compared to during the pandemic -- across other facets of the semiconductor industry.
Still, AI is generating a secular tailwind for TSM, one that it projects will enable a more than doubling in server AI revs this year to account for a low teens percent of total revenue and to support its reiterated FY24 sales forecast of low to mid +20% growth. Over the next five years, TSM anticipates AI to grow at a 50% CAGR, increasing to over a fifth of its overall revenue by 2028. To capitalize on this trend, TSM has been expanding its global manufacturing footprint, planning three fabs in Arizona and additional fabs in Japan and Germany.
Nevertheless, a deterioration in the broader semiconductor industry is setting off alarms today. The previous time TSM warned of a more comprehensive slowdown was in October, in front of underwhelming quarterly results from numerous tech firms. TSM's Q1 report could be a similar canary in the coal mine, especially for firms underexposed to AI.
ASML sinks to February levels as bookings fall short in Q1; puts pressure on the rest of FY24 (ASML)
ASML (ASML -8%), a Dutch-based photolithography machine manufacturer used to produce semiconductors, has its recent gains chipped away today despite exceeding Q1 earnings estimates. While several figures mirrored those from Q4, which kicked off a rapid rise, culminating in all-time highs in early March, there were some stark differences.
ASML missed revenue estimates in Q1, returning to its somber days from 2022 and early 2023. Meanwhile, even though Q2 revenue guidance fell short of analyst estimates -- the same occurrence as last quarter -- investors are more troubled by the downbeat forecast this time around, given that management discussed early signs of a recovery brewing during its Q4 call in January. Furthermore, and perhaps most glaring, was ASML's net bookings of €3.6 bln, a 5.3% drop yr/yr.
- Starting with the €3.6 bln bookings figure, management mentioned that its order flow can be lumpy. The company noted that an order rate slightly over €4.0 bln over the next three quarters would still provide full order coverage at the end of 2024 for a 2025 sales number reaching the midpoint of its 2022 Investor Day scenarios. Still, this did not mean ASML was guiding to the midpoint. Instead, management continues to anticipate a considerable recovery in 2025, which has kept the midpoint of its previous outlook intact.
- However, for orders to begin clearing €4.0 bln, ASML requires an uptick from some of its larger customers. Considering the lack of clarity regarding if and when this will occur, investors are taking risk off the table today.
- With orders down yr/yr, ASML's revenue of €5.29 bln, a 21.6% decline, fell short of analyst estimates. However, it did reach the midpoint of the company's €5.0-5.5 bln forecast. Still, this was not good enough, especially considering secular growth drivers within the semiconductor industry, such as energy transition, electrification, and AI.
- On the plus side, gross margins remained healthy at 51.0%, a 40 bp improvement yr/yr. At the same time, ASML's operating expenses were slightly lower than projected in the quarter, assisting ASML's third straight earnings beat.
- ASML also reaffirmed its FY24 revenue forecast, anticipating revs similar to the €27.6 bln delivered in FY23. The second half of this year should still outpace the first half, meaning one more quarter of lukewarm results, evidenced by downbeat Q2 revenue guidance of €5.7-6.2 bln. Meanwhile, an industry recovery remains poised for 2025.
After one more potentially tumultuous quarter, ASML is confident in a firm ramp to close out FY24, providing upward momentum heading into a widely anticipated industry rebound in FY25. Nevertheless, ASML is navigating a fluid demand backdrop, especially in its Logic business, where customers continue digesting substantial capacity additions made over the past year. This backdrop is an alarming sign ahead of Q1 reports scheduled for the next few weeks from peers Lam Research (LRCX), KLA Corp (KLAC), and Applied Materials (AMAT).
Still, while economic volatility could keep selling pressure elevated over the near term, ASML remains amid several longer-term growth drivers, mainly as many new fabs are under construction globally, all of which will likely require ASML's technology.
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