| | | Market Snapshot
| Dow | 39558.11 | +126.60 | (0.32%) | | Nasdaq | 16511.18 | +122.94 | (0.75%) | | SP 500 | 5246.68 | +25.26 | (0.48%) | | 10-yr Note | +3/32 | 4.45 |
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| | NYSE | Adv 1860 | Dec 920 | Vol 1.0 bln | | Nasdaq | Adv 2784 | Dec 1443 | Vol 7.3 bln |
Industry Watch
| Strong: Real Estate, Information Technology, Consumer Discretionary, Communication Services, Financials |
| | Weak: Energy, Consumer Staples |
Moving the Market
-- Shares of Alphabet (GOOG) moving higher after introducing new AI features at its developers conference, coinciding with stock shifting into rally-mode
-- Turnaround in some mega caps benefitting index performance
-- S&P 500 approaching all-time closing high (5,254) and Nasdaq Composite reaching fresh all-time closing high today
-- Reacting to the April PPI report
-- Treasury yields lower after the PPI report, acting as support for equities
-- Meme stocks continue surge that began yesterday
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Closing Summary
14-May-24 16:25 ET
Dow +126.60 at 39558.11, Nasdaq +122.94 at 16511.18, S&P +25.26 at 5246.68
[BRIEFING.COM] The stock market ended the session on an upbeat note. The major indices all settled at or near session highs, which marked a fresh all-time closing high for the Nasdaq Composite. The S&P 500 settled within ten points of its all-time high close.
The Russell 2000 continued its recent outperformance, gaining 1.2% today, with some added help from another meme stock rally that saw the likes of GameStop (GME 48.75, +18.30, +60.1%) and AMC Entertainment (AMC 6.85, +1.66, +32.0%) trade up more than 100% at one point before succumbing to some profit-taking activity. The Russell 2000 is the best performing index this month, up 5.7% so far.
The major indices traded in mixed fashion for most of the session, however, as participants digested the April Producer Price Index (PPI). The headline inflation readings were hotter-than-expected, up 0.5% month-over-month for total PPI and core PPI versus an expected 0.3% and 0.2%, respectively, but the sizable downward revisions to last month's readings kept the market response more mixed rather than negative.
Fed Chair Powell called the data "quite mixed" in a moderated discussion at the Foreign Bankers' Association's annual meeting.
The Treasury market faced immediate selling pressure following the release of the PPI report, but price action quickly shifted and the bond market settled with gains in front of the Consumer Price Index tomorrow at 8:30 ET. The 10-yr note yield was at 4.48% before the data, jumped to 4.52% immediately after the release, and settled the session at 4.45%.
Stocks shifted into rally-mode in the afternoon trade, coinciding with shares of Alphabet (GOOG 171.93, +1.03, +0.6%) making a sharp turn higher. This was in response to GOOG introducing new AI features at its developers conference. Other mega cap stocks traded up alongside Alphabet, boosting the broader market.
In other corporate news, Dow component Home Depot (HD 340.50, -0.46, -0.1%) received a negative response to its earnings report that stemmed from disappointing sales activity at the home improvement retailer.
Eight of the 11 S&P 500 sectors settled with gains led by information technology (+0.9%) and real estate (+0.7%). The consumer staples sector was the worst performer, logging a 0.2% gain.
- S&P 500:+10.0% YTD
- Nasdaq Composite: +10.0% YTD
- S&P Midcap 400: +8.6% YTD
- Dow Jones Industrial Average: +5.0% YTD
- Russell 2000: +2.9% YTD
Reviewing today's economic data:
- April NFIB Small Business Optimism 89.7 (Briefing.com consensus 88.9); Prior 88.5
- April PPI 0.5% (Briefing.com consensus 0.3%); Prior was revised to -0.1% from 0.2%; April Core PPI 0.5% (Briefing.com consensus 0.2%); Prior was revised to -0.1% from 0.2%
- The key takeaway from the report is that nearly three quarters of the increase in final demand prices was due to a 0.6% increase in the index for final demand services, something that will detract from the Fed's confidence that inflation is on a sustainable path to its 2% target.
Wednesday's economic calendar features:
- 7:00 ET: Weekly MBA Mortgage Index (prior 2.6%)
- 8:30 ET: April CPI (Briefing.com consensus 0.4%; prior 0.4%), Core CPI (Briefing.com consensus 0.3%; prior 0.4%), April Retail Sales (Briefing.com consensus 0.4%; prior 0.7%), Retail Sales ex-auto (Briefing.com consensus 0.2%; prior 1.1%), and May Empire State Manufacturing Index (Briefing.com consensus -9.0; prior -14.3)
- 10:00 ET: March Business Inventories (Briefing.com consensus 0.0%; prior 0.4%) and May NAHB Housing Market Index (Briefing.com consensus 51; prior 51)
- 10:30 ET: Weekly crude oil inventories (prior -1.36 mln)
- 16:00 ET: March net long-term TIC flows (prior $71.5 bln)
S&P 500 and Nasdaq near all-time highs ahead of close
14-May-24 15:35 ET
Dow +128.73 at 39560.24, Nasdaq +123.10 at 16511.34, S&P +24.13 at 5245.55
[BRIEFING.COM] The S&P 500 and Nasdaq Composite are near all-time highs heading in to the close.
Looking ahead, market participants will receive the April Consumer Price Index tomorrow at 8:30 ET. Other data tomorrow include:
- 7:00 ET: Weekly MBA Mortgage Index (prior 2.6%)
- 8:30 ET: April Retail Sales (Briefing.com consensus 0.4%; prior 0.7%), Retail Sales ex-auto (Briefing.com consensus 0.2%; prior 1.1%), and May Empire State Manufacturing Index (Briefing.com consensus -9.0; prior -14.3)
- 10:00 ET: March Business Inventories (Briefing.com consensus 0.0%; prior 0.4%) and May NAHB Housing Market Index (Briefing.com consensus 51; prior 51)
- 10:30 ET: Weekly crude oil inventories (prior -1.36 mln)
- 16:00 ET: March net long-term TIC flows (prior $71.5 bln)
Stocks continue to climb
14-May-24 15:05 ET
Dow +116.30 at 39547.81, Nasdaq +112.00 at 16500.24, S&P +21.65 at 5243.07
[BRIEFING.COM] Stocks continue to climb. The S&P 500 is up 0.5%, or about 23 points.
Super Micro Computer (SMCI 825.11, +42.24, +5.4%) is among the top performers in the S&P 500 while Paramount Global (PARA 12.40, -0.61, -4.7%) shows the biggest decline following news that the likelihood of bid for the entire company seems to be fading, according to CNBC.
Separately, the 10-yr note yield is down four basis points at 4.45%.
Mega caps boost index performance
14-May-24 14:35 ET
Dow +91.56 at 39523.07, Nasdaq +101.22 at 16489.46, S&P +17.78 at 5239.20
[BRIEFING.COM] The three major indices are back at session highs thanks to recent up moves in mega cap stocks. The S&P 500 is approaching its all-time high close at 5,254.
Even with the recent index-level improvement, the movement in S&P 500 sectors has been limited. None of the sectors are more than 0.8% away from prior closing levels.
Only three sectors remain in the red, the energy (-0.5%), consumer staples (-0.4%), and industrials (-0.04%).
Mega caps drive upside moves
14-May-24 14:10 ET
Dow +7.97 at 39439.48, Nasdaq +68.15 at 16456.39, S&P +7.89 at 5229.31
[BRIEFING.COM] The Nasdaq Composite is trading 0.4% higher after moving up in recent action.
Some mega cap stocks extended their gains, boosting index performance. The Vanguard Mega Cap Growth ETF (MGK) is up 0.1%.
Alphabet (GOOG 171.76, +0.86, +0.5%) is a standout in that respect, moving up after introducing Project Astra, which will be its new multimodal AI project.
On sprints out of the gate today following sustained robust demand in Q1 (ONON)
On (ONON +18%) is starting FY24 off on the right foot, delivering sizeable earnings and sales beats in Q1 and raising its FY24 revenue outlook. The premium footwear and apparel manufacturer, focused on running and athletics, was coming off an ugly Q4 report plagued by FX headwinds, leading to bearish Q1 and FY24 guidance. However, we mentioned at the time that investors were getting too caught up in the weeds, missing the bigger picture: demand remained healthy.
In Q1, with FX headwinds easing and demand only growing more robust, ONON crushed its revenue forecast, achieving a significant milestone by registering its first quarter of CHF 0.5 bln. At the same time, margins stayed attractive, allowing management to reiterate its FY24 gross margin guidance of 60% and adjusted EBITDA margins of 16.0-16.5%.
- Running is ONON's core focus, an area rival NIKE (NKE) gravitated away from, only recently announcing aggressive initiatives to bolster its running portfolio. With one of ONON's primary competitors lagging in its core business, the company was positioned to pounce on frustrated NKE consumers in the quarter. This dynamic set the stage for ONON's 20.9% jump in total revenue yr/yr -- a 29.2% pop on a constant currency basis -- to CHF 508.2 mln.
- Most of ONON's growth stemmed from its direct-to-consumer (DTC) channel, underscored by a 500 bp mix shift toward DTC yr/yr to comprise 37.5% of total revs. DTC sales depend on a user-friendly online experience. ONON has placed heightened attention in this area, launching its first commercial app during the quarter. Membership is also crucial to steady DTC growth. On that note, ONON tripled its membership count in each of the past two years.
- ONON's wholesale channel lagged, expanding sales by 12.2% yr/yr (+19.8% FXN). However, this was expected following management's remarks last quarter, as it closed several non-strategic doors, shifting focus toward the premium aspect of its brand.
- Geographically, ONON enjoyed broad-based growth. In EMEA, sales edged 6.1% higher yr/yr (over +10% FXN), aided by the continued strength of the company's DTC business. ONON's Americas business, which started the quarter strong, posted a 22.0% spike in revenue (+30.4% FXN), supported by increasing brand awareness. In Asia Pacific, growth exploded, soaring by 68.6%, or 90.7%, when backing out FX impacts. Japan was a notable highlight, with ONON's Tokyo store doubling net sales yr/yr.
- Upward momentum from Q1 is trickling into subsequent quarters. ONON expects FY24 revs of CHF 2.29 bln, up from its CHF 2.25 bln outlook last quarter, helped by the solid start to the year and less troublesome FX headwinds.
ONON's Q1 report underscored sustained consumer appetite for something different regarding performance footwear. In a market where traditionally dominant players, including NKE and Under Amour (UAA), brands from ONON and Deckers Outdoor (DECK) are capitalizing on stale designs and consumers' willingness to spend more when it comes to physical activities. As a result, we continue to like ONON for the long term, especially as it fortifies its higher-margin DTC channel and further penetrates lucrative global markets.
Jack In The Box springing higher as burger chain cooks up better-than-feared results (JACK)
After getting grilled to the tune of a 35% year-to-date loss, burger chain Jack in the Box (JACK) is serving up some nice gains today following a Q2 earnings report that can be characterized as better-than-feared. The fast casual restaurant owner, which is a staple in California with more than 40% of its locations in that state, is more impacted than most of its peers by California's new law requiring fast food chains to raise their minimum hourly wage to $20.
- That law, which took effect in April, is causing JACK and other fast-food companies to raise their menu prices at a time when lower-income consumers are already cutting back on discretionary spending due to stubbornly high inflation.
- Not helping matters was that JACK also had to delay the re-launch of its wildly popular Smashed Jack -- a quarter pound smash burger that sold out in January, two weeks after its initial launch. The company couldn't source enough patties, so it had to wait until mid-March to put the specialized burger back on the menu.
- Against this difficult backdrop, JACK's same-store sales decreased by 0.6%, including a 2.5% decline for Jack in the Box restaurants and a 1.4% drop for Del Taco. However, in the earnings press release, CEO Darin Harris stated that sales have improved since mid-March and that the company has a clear plan to regain same store sales traction. Although the company did lower its FY24 same store sales guidance to flat-to-low single digits from its prior forecast of low-to-mid single digits for both Jack in the Box and Del Taco, the downward revision is relatively mild.
- Furthermore, while labor costs are rising significantly, JACK is seeing some relief in terms of commodity prices. Menu price increases, combined with commodity deflation, drove Restaurant-Level Margin higher by 220 bps yr/yr to 23.6%. These stronger margins are helping to offset the sales headwinds, as illustrated by JACK's Q2 EPS of $1.46 remaining virtually flat on a yr/yr basis.
- The company's FY24 EPS guidance of $6.25-$6.40 also barely budged from its prior forecast of $6.25-$6.50, relieving investors' fears that the minimum wage increase would lead to a major downward revision to its earnings outlook.
With shares trading at their lowest levels since the pandemic hit in the spring of 2020, it's clear that expectations were at rock-bottom levels heading into this earnings report. JACK's Q2 performance and outlook certainly didn't indicate that it's smooth sailing for the company, but its results and guidance showed that investors' worries were overblown and that sales trends are moving in the right direction.
Home Depot's sales ratcheted lower again by sluggish consumer spending, slow housing market (HD)
Already contending with sluggish demand for home renovation and repair projects, unfavorable weather added another challenge for Home Depot (HD) as total sales and comparable store sales fell a bit short of Q1 expectations. A pull forward in demand during and in the initial months following the pandemic set the stage for a "year of moderation" in 2023, according to CEO Ted Decker, and it now appears that 2024 will largely mirror last year.
- Stubbornly high inflation is not helping the cause, but the bigger issue for HD is that high interest rates continue to keep a lid on the housing market. In March, existing home sales decreased by 4.3% month/month to a seasonally adjusted annual rate of 4.19 mln, missing expectations. A slow housing market means that fewer people are taking on projects to prepare their homes to be listed for sale, and it also means that fewer people are purchasing items as they move into new homes.
- This is reflected in HD's comps, which decreased by 2.8% in Q1, following last quarter's drop of 3.5%. Both the number of transactions and the average ticket size were down in Q1, declining by 1.0% and 1.3%, respectively.
- Similar to the past several quarters, HD experienced softness in certain big-ticket discretionary categories, which could include products like grills, outdoor furniture, appliances, and power tools. In the earnings press release, Mr. Decker also called out weather as a negative factor, stating that the quarter was impacted by a delayed start to the spring season.
- However, he also commented that HD gained market share in the category and the company's $18.25 bln acquisition of SRS Distribution on March 28 should expand its leadership position in the Pro business. Rival Lowe's (LOW), which reports Q1 earnings on May 21, has been on a mission to grow its Pro business, and has had some success doing so, but HD will gain a competitive edge with the addition of SRS. More specifically, HD will become a go-to destination for contractors who work on more complex jobs, expanding HD's total addressable market by approximately $50 bln.
Overall, the quarter played out about as expected for HD. The fact that the company reaffirmed its FY25 EPS, revenue, and comp guidance offers some reassurance that it doesn't see sales trends further weakening, even as rates stay higher for longer. Growth figures to remain sluggish in the near-term, but HD remains well-positioned to capitalize on pent-up demand in the home improvement category once the housing market improves.
Alibaba remains a "show me" stock after profitability falls short in Q4 (BABA)
Alibaba (BABA -6%) missed earnings expectations for the second consecutive quarter in Q4 (Mar) despite aggressive repurchases and accelerating revenue growth, sparking profit-taking today. Shares of the China-based e-commerce and cloud computing giant received a favorable push yesterday following reports of the company carving out a leadership position in AI, particularly within the public sector. Yesterday's gap higher extended BABA's recent run to over +20% since tagging 2024 lows in April. It also incorporated relatively higher expectations in front of BABA's Q4 report, causing today's rapid pullback.
- What led to the earnings miss? Within BABA's domestic e-commerce business, which comprises Taobao and Tmall, customer management revenue (CMR) growth edged just 5% higher yr/yr, trailing gross merchandise volume (GMV), which jumped by double-digits. CMR is comprised of marketing and other services BABA offers to merchants, which carry appealing margins. By lagging GMV growth, BABA's profitability suffered in Q4.
- Part of why CMR is underperforming is that BABA is gradually rolling out its monetization products. As such, the new models offered to merchants carry low monetization. Management is confident it will see CMR growth catch up with GMV eventually. However, for the next few quarters, it will lag.
- Meanwhile, BABA has been heavily investing in making its e-commerce offerings more competitive, particularly overseas, where rival Pinduoduo (PDD) has done a tremendous job marketing Temu in certain Western markets. BABA continued to enhance AE Choice, its answer to Temu. Management noted that while an increasing proportion of orders from AliExpress switch over to AE Choice, it will take time for profit margins to catch up, creating a margin gap.
- It also did not help that BABA's Cloud Intelligence Group continues to endure weak revenue growth, climbing just 3% yr/yr in Q4, matching Q3's (Dec) growth rate, and inching just 1 pt higher from the +2% posted in Q2 (Sep). After halting its Cloud IPO ambitions late last year, BABA is increasing high-quality revs from public cloud adoption while reducing its exposure to low-margin project-based contracts.
- During Q4, BABA's core public cloud offerings generated double-digit revenue growth, illustrating how moving to this market should significantly boost Cloud Intelligence Group's revs down the road.
- While AI enjoyed robust demand in Q4, delivering triple-digit revenue growth yr/yr, it did not materially lift overall revenue. Still, BABA is observing a rapid increase in customer demand for AI, stimulating growth for traditional cloud computing needs and prompting BABA to actively invest in its cloud computing product suite, particularly in AI infrastructure.
- Looking ahead, BABA anticipates its Taobao and Tmall GMV will gradually return to more healthy growth in FY25. In overseas e-commerce, BABA remarked that its ongoing focus on investing will produce long-term demand. Lastly, BABA is confident that cloud revenue will return to double-digit growth during the back half of FY25.
BABA's constant investments and spending ate into its profitability in Q4. For a company that has had numerous setbacks, internal and external, investors are not quick to shrug off quarterly blemishes. As such, BABA remains a "show me" stock and could trade sideways until profitability improves and revenue growth reaccelerates.
Fortrea plunges after cutting FY24 guidance as struggles continue following spin-off (FTRE)
Fortrea (FTRE), a contract research organization (CRO) that was spun-off from LabCorp (LH) in July 2023, is plunging to its lowest levels of the year after reporting downside Q1 results and cutting its FY24 revenue and adjusted EBITDA guidance. This was the company's third earnings report since the spin-off, but it's the first time that it reported a yr/yr decline in revenue, which decreased by nearly 5% to $662.1 mln as revenue is returning more slowly than it anticipated following a disappointing Q4 performance.
- There are a lot of moving parts surrounding FTRE's story right now. Not only is FTRE still disentangling itself from LH and trying to build its own brand awareness, but the company is also working through the divestiture of its Enabling Services segment, which is called Endpoint Clinical. The reasoning for the divestiture is that FTRE wants to become a pure-play CRO, focusing on Phase 1 to 4 clinical services, and the deal to sell the business to Arsenal Capital Partners will also raise $345 mln in capital.
- However, it appears that FTRE's sales execution may be lagging a bit as the company navigates through these major changes. During the earnings call, FTRE stated that the drug development environment remains strong and that biotech funding in Q1 was healthy. Despite the favorable landscape, though, FTRE fell still short of its targeted book-to-bill of 1.2 for Q1 as a couple expected transactions didn't come through.
- FTRE also lowered its FY24 revenue guidance to $2.79-$2.86 bln from its prior forecast of $3.14-$3.21 bln. The company believes that the softer outlook is related to timing issues, while noting that its opportunity pipeline has grown relative to last quarter. More specifically, FTRE disclosed that the quantity of deals are up mid-single-digits and on a dollar value basis, the pipeline is up by solid double-digits.
- Beyond the revenue shortfall, the company said that its transformation is on track and that it expects to be past the complexities of the spin-off in 2025. One of those complexities is related to the transition service agreements (TSAs) that were put in place with LH following the spin-off.
- These TSAs, which provide FTRE with certain services such as HR, payroll, and finance following a spin-off or divestiture, are costly and are negatively impacting margins. FTRE has now exited about half of its TSA's with its former parent and it has plans to exit the majority of remaining TSAs around the end of 2024.
Overall, though, the story hasn't changed much since the end of last quarter. FTRE is still a company in transition, and it will likely take a couple more quarters before its business starts to normalize.
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