| | | Market Snapshot
| Dow | 39671.04 | -201.95 | (-0.51%) | | Nasdaq | 16801.55 | -31.08 | (-0.18%) | | SP 500 | 5307.01 | -14.40 | (-0.27%) | | 10-yr Note | -1/32 | 4.43 |
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| | NYSE | Adv 785 | Dec 1956 | Vol 873 mln | | Nasdaq | Adv 1695 | Dec 2521 | Vol 7.3 bln |
Industry Watch
| Strong: Industrials, Health Care, Information Technology |
| | Weak: Energy, Materials, Utilities, Consumer Staples, Communication Services |
Moving the Market
-- Wait-and-see mindset in front of NVIDIA (NVDA) earnings
-- Target (TGT) earnings and outlook received negative response from investors
-- Treasuries not reacting much to the release of the FOMC Minutes from the April 30-May 1 meeting |
Closing Summary
22-May-24 16:30 ET
Dow -201.95 at 39671.04, Nasdaq -31.08 at 16801.55, S&P -14.40 at 5307.01
[BRIEFING.COM] The market exhibited mixed action again. The major indices traded in tight ranges through the morning trade before selling picked up in the afternoon. The Nasdaq Composite registered a 0.2% decline, the S&P 500 logged a 0.3% loss, and the Dow Jones Industrial Average closed 0.5% lower.
This morning's muted price action had a similar feel to other sessions this week. That is to say, a wait-and-see mindset in front of NVIDIA's (NVDA 949.50, -4.36, -0.5%) earnings after Wednesday's close kept the broader market in check.
Selling picked up, however, in response to the Minutes for the April 30-May 1 FOMC meeting. The minutes did not contain anything too surprising and largely echoed Fed commentary since the meeting. The minutes drew attention to asset valuations, which likely fueled some profit taking activity.
Downside moves were relatively modest in many stocks. Target (TGT 143.27, -12.51, -8.0%) was an exception, sliding 8.0% after disappointing earnings and outlook. Analog Devices (ADI 240.16, +23.52, +10.9%) and First Solar (FSLR 251.75, +39.64, +18.7%) were winning standouts today. The former reported earnings and the latter traded up on a Bloomberg report that China's solar industry body wants an end to the price war.
Only three S&P 500 sectors closed with gains while three sectors declined more than 1.0%.
The 10-yr note yield settled two basis points higher at 4.43% and the 2-yr note yield rose five basis points to 4.88%. This price action was in response to the minutes, but also a hotter-than-expected April CPI report from the U.K., a weaker-than-expected Existing Home Sales report for April.
- Nasdaq Composite: +11.9% YTD
- S&P 500:+11.3% YTD
- S&P Midcap 400: +7.5% YTD
- Dow Jones Industrial Average: +5.3% YTD
- Russell 2000: +2.7% YTD
Reviewing today's economic data:
- Weekly MBA Mortgage Applications Index 1.9%; Prior 0.5%
- April Existing Home Sales 4.14 mln (Briefing.com consensus 4.20 mln); Prior was revised to 4.22 mln from 4.19 mln
- The key takeaway from the report is that sales activity was much stronger in the upper-end of the market (homes priced $1 million or more), with inventory up 34% year-over-year and sales up 40% year-over-year, underscoring the idea that there is pent-up demand that can be unleashed when more inventory for lower-priced homes becomes available.
- Weekly EIA Crude Oil Inventories +1.83M; prior -2.51M
Thursday's economic calendar features:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 219,000; prior 222,000) and Continuing Claims (prior 1.794 mln)
- 9:45 ET: Flash May S&P Global U.S. Manufacturing PMI (prior 50.0) and flash May S&P Global U.S. Services PMI (prior 51.3)
- 10:00 ET: April New Home Sales (Briefing.com consensus 680,000; prior 693,000)
- 10:30 ET: Weekly natural gas inventories (prior +70 bcf)
Treasuries settle lower
22-May-24 15:35 ET
Dow -194.56 at 39678.43, Nasdaq -38.56 at 16794.07, S&P -15.00 at 5306.41
[BRIEFING.COM] The major indices are moving higher in front of the close. The S&P 500 showed a loss of 0.5% earlier, but trades down 0.3% now.
Treasuries settled mostly lower, reacting to hotter-than-expected April CPI report from the U.K., a weaker-than-expected Existing Home Sales report for April, and the Minutes from the April 30-May 1 FOMC meeting, which didn't contain anything too surprising. The 10-yr note yield settled two basis points higher at 4.43% and the 2-yr note yield rose five basis points to 4.88%.
NVIDIA (NVDA 947.67, -6.34, -0.7%) sports a decline in front of its earnings report after the close.
Mega caps impacting index losses
22-May-24 15:05 ET
Dow -233.56 at 39639.43, Nasdaq -78.12 at 16754.51, S&P -21.20 at 5300.21
[BRIEFING.COM] Stocks are trying to bounce off session lows, but still sport decent declines. The S&P 500 is down 0.5%.
Mega cap stocks are having an outsized impact on index performance. Names like Apple (AAPL 190.88, -1.46, -0.8%), Alphabet (GOOG 177.50, -2.04, -1.1%), NVIDIA (NVDA 941.23, -12.46, -1.3%), and Microsoft (MSFT 428.01, -1.08, -0.2%) all extended losses as the market declined.
Treasuries had a calm response to the Minutes, remaining near levels seen before the release. The 10-yr note yield is up one basis point to 4.43% and the 2-yr note yield is up four basis points to 4.87%.
Minutes show various FOMC members were willing to hike rates if needed
22-May-24 14:30 ET
Dow -240.80 at 39632.19, Nasdaq -86.65 at 16745.98, S&P -26.52 at 5294.89
[BRIEFING.COM] The minutes for the April 30-May 1 FOMC meeting were highlighted the Fed's worries on inflation. Recent trading has the S&P 500 (-0.50%) in first place, but not by much, as the markets took a modest step lower off already session-worst levels from the previous half hour. The minutes showed that the economic forecast prepared by the staff for the April--May meeting was similar to the March projection. The economy was expected to maintain its high rate of resource utilization over the next few years, with projected output growth roughly similar to the staff's estimate of potential growth. The unemployment rate was expected to edge down slightly over 2024 as labor market functioning improved further, and to remain roughly steady thereafter.
Further, participants noted that they continued to expect that inflation would return to 2 percent over the medium term. However, recent data had not increased their confidence in progress toward 2 percent and, accordingly, had suggested that the disinflation process would likely take longer than previously thought.
Notably, various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate. Participants noted disappointing readings on inflation over the first quarter and indicators pointing to strong economic momentum, and assessed that it would take longer than previously anticipated for them to gain greater confidence that inflation was moving sustainably toward 2 percent.
In recent trading the yield on the benchmark 10-yr treasury note is up about a single basis point at 4.430%.
Gold pressured ahead of FOMC minutes
22-May-24 13:55 ET
Dow -134.30 at 39738.69, Nasdaq -47.61 at 16785.02, S&P -13.44 at 5307.97
[BRIEFING.COM] With about two hours to go on Wednesday the major averages have fallen to lows, the Nasdaq Composite (-0.28%) in second place, down about 48 points.
Gold futures settled $33 lower (-1.4%) to $2,392.90/oz, pressured by modest gains in yields and the greenback ahead of the minutes from the FOMC's April 30-May 1 meeting.
Meanwhile, the U.S. Dollar Index is up about +0.1% to $104.80.
Williams-Sonoma succumbs to some profit-taking as lack of guidance increase disappoints (WSM)
After launching to new all-time highs following the release of its Q1 earnings report this morning, home furnishings and decor company Williams-Sonoma (WSM) has since surrendered those gains as investors continue to digest its results and outlook. At first glance, it's easy to see why the stock immediately shot higher with WSM blowing out EPS estimates and posting a better-than-expected comp of -4.9% compared to Q4's comp of -6.8%.
- Impressively, the company's namesake brand, Williams-Sonoma, delivered back-to-back positive comps in Q1 and Q4 at +0.9% and +1.6%, respectively. Considering the slow housing market and sluggish consumer spending trends for big-ticket items, like furniture, that is a notable accomplishment.
- The Williams-Sonoma banner is particularly benefiting from ongoing strength in the kitchen business, which posted a positive comp for the fourth consecutive quarter. In Q1, the company parlayed that strength by introducing new products in categories like bakeware and cutlery.
- More broadly, WSM also believes that it's gaining market share, even as it remains committed to not running extensive promotional campaigns to drive sales. The company is achieving this through a few key competitive advantages, including its strong in-house design capabilities, its digital marketing optimization capabilities that's backed by extensive first-party data collection tools, and its superior in-store customer service and improved in-stock inventory levels.
- Furthermore, WSM was able to reinvest the savings from limiting its out-of-market and multiple shipments, and from fewer returns and replacements, into increased marketing and ad spending. These investments drove new customer acquisition and market share gains.
- Still, WSM's results were far from perfect. Most notably, the Pottery Barn brand continues to struggle, posting a comp of -10.8% on the heels of last quarter's -9.6% mark. The softness in big-ticket furniture purchases is especially hurting Pottery Barn, but WSM did state that the brand experienced some qtr/qtr improvement in that category.
- We believe most of the disappointment, though, stems from the fact that WSM didn't raise its FY25 guidance, despite outperforming its expectations in Q1. Instead, it merely reaffirmed its comp outlook of -4.5% to +1.5% and its revenue outlook of -3% to +3%. With shares up by 55% on a year-to-date basis and trading near record highs heading into the report, investors may be looking for an excuse to lock in profits and the lack of a guidance increase may fit the bill.
That issue aside, WSM delivered solid results amid a difficult retail climate, showing yet again why it's considered to be a premier name in the home furnishings space.
TJX keeps rolling to a new all-time high; off-price retailer benefitting from trade down effect(TJX)
TJX Cos (TJX +6%) is trading nicely higher following another healthy EPS beat and in-line revenue for its Q1 (Apr) report this morning. Guidance for Q2 (Jul) EPS was below analyst expectations. However, this closeout retailer (TJ Maxx, Marshalls, HomeGoods) is known for being conservative with guidance, so investors are not worried about that. The strategy was evident when TJX raised FY25 EPS guidance this morning, but it was still below consensus. That tells us analysts know that TJX likes to lowball guidance.
- Total Q1 comps came in at +3%, at the high end of prior guidance of +2-3%, but below Q4's +5% comp. Importantly, and has been the case in recent quarters, comp growth was entirely driven by customer transactions. Comps in both its apparel and home categories increased with home outperforming apparel.
- TJX's largest segment is Marmaxx (US), which combines TJ Maxx and Marshalls. Segment comps came in at just +2%, but it was lapping a strong +5% comp last year. HomeGoods at +4% was the star of the show, however, it was lapping easy -7% comps last year. Other segments posted comps as follows: TJX Canada +4%; TJX Intl (Europe & Australia) +2%. TJX guided to Q2 comps of +2-3% and reaffirmed full year comps at +2-3%.
Overall, this was a very good quarter for TJX. Its exposure to discretionary items like apparel and home goods does not seem to be hampering it too much. In fact, TJX seems to be flourishing in this environment. TJX seems to be benefitting from a trade down effect where higher income consumers are shopping more at TJ Maxx, Marshalls and HomeGoods in order to stretch their budgets.
We think TJX's results bode well for other off-price retailers set to report soon: ROST (May 23 after the close), BURL (May 30 before the open), BIG (Jun 6 before the open). Finally, the stock has been in a slow and steady uptrend since late May 2023, recently eclipsing the $100 level. More recently, the stock had been in a $93-102 trading range since early January, but this report has propelled TJX to a new all-time high.
Toll Brothers mostly sheltered from high interest rates, but Q2 report sparks profit-taking (TOL)
There has been little relief for prospective homebuyers as a lack of inventory and persistently high interest rates have made for a challenging situation, but these dynamics continue to open the door for new homebuilders to fulfil that healthy demand. This was evidenced yet again last night when luxury homebuilder Toll Brothers (TOL) reported Q2 results and raised its FY24 EPS and home deliveries guidance to approximately $14.00 (from $13.25-$13.75) and 10,400-10,800 units (from 10,000-10,500), respectively.
- In Q2, TOL generated EPS of $4.55, although that number included a $1.17/share gain related to the sale of a parcel of land to a commercial developer. It's unclear, though, whether most analysts were incorporating that gain into their estimates. The company's outperformance across other key metrics does suggest that it likely outperformed on the bottom-line, too, although the stock isn't reflecting that so far.
- Home deliveries of 2,641 (+6% yr/yr) came in above TOL's guidance of 2,400-2,500 units as favorable demographics and the historically low levels of existing homes for sale on the market continued to drive demand for new homes.
- Additionally, adjusted home sales gross margin of 28.2% was ahead of its forecast of 27.6% as the average delivered price per home remained steady from last quarter at about $1.0 mln. Relative to most of its homebuilding peers, TOL has been less aggressive in terms of cutting prices or offering incentives, like buying down interest rates for customers. The company's more affluent customer base is more often able to pay with cash, or to at least put down a sizable down payment.
- Operating in the luxury home space of the market has been a key advantage for TOL, and the company has plans to expand its market share there. That strategy centers on widening its price points to include more affordable luxury homes and increasing the supply of spec homes in order to expand its customer base.
- The trade-off is that TOL's average selling prices will likely decrease -- the company is forecasting average delivered price per home of $960,000-$970,000 for FY24 -- but improved inventory turns, enhanced leverage on fixed costs, and stronger revenue growth should more than make up for the drop in selling prices.
- On that note, TOL's upwardly revised FY24 EPS guidance of $14.00 equates to estimated EPS growth of 13%.
The main takeaway is that TOL's EPS number was a little messier this quarter due to the gain on sale benefit, which could be amplifying a sell-the-news reaction in a stock that had already rallied by 15% over the past month. Overall, though, the story remains mostly the same as TOL's leadership position in the luxury home market continues to provide it with a key competitive advantage in a resilient homebuilding industry.
Target heads lower following rare EPS miss, but glimmers of hope on discretionary side (TGT)
Target (TGT -7%) is lower after reporting Q1 (Apr) results. Target broke its string of five consecutive quarters of reporting huge EPS beats by reporting a slight miss this time. Revenue fell 3.2% yr/yr to $24.14 bln, which was a bit light as well. The guidance was decent as Target guided Q2 (Jul) EPS in-line at $1.95-2.35, although the mid-point was below consensus. TGT reaffirmed FY25 EPS guidance at $8.60-9.60, which was encouraging to see after the Q1 shortfall.
- Same store comps for Q1 came in at -3.7% (in-store -4.8%; digital +1.4%), which was at the higher end of prior guidance of -5% to -3%. It was also better than Q4's -4.4% and Q3's -4.9% comp. However, it was still a far cry from Walmart's (WMT) US Q1 comp of +3.8% reported last week. As we have mentioned before, WMT has much higher exposure to groceries while TGT has more consumer discretionary exposure, which has been weaker.
- TGT said Q1 comps were impacted by continued softness in its Home and Hardlines categories and softening trends in frequency categories. However, Beauty continues to be a stand out category with a low single-digit comp, led by continued strength in Ulta Beauty at Target. Also, TGT is seeing a meaningful improvement in discretionary trends, most notably in Apparel.
- Target guided to Q2 comps of +0-2%. After several quarters of negative comps, it would be good to see Target get back into positive territory, assuming they meet expectations. Target also reaffirmed full year comp guidance at +0-2%, following a -3.7% comp decline in FY24. While the Q1 comp was a bit disappointing, the full year guidance tells us comps are expected to improve later in the year.
- Operating margin in Q1 improved to 5.3% from 5.2% a year ago, but down from 5.8% in Q4. TGT benefitted from favorable freight rates (as a side note, a lot of truckers are reporting pricing pressure, so this makes sense) and other cost savings which offset a higher promotional markdown rate. Also Q1 saw about a 20 bps benefit from category mix and a 20 bps benefit from improved inventory shrink. Speaking of shrink, which has been a big issue for retailers in recent quarters, TGT is pleased to see a growing focus on retail theft at the federal, state and local levels. TGT continues to believe shrink rates will plateau this year and Q1 was favorable vs internal expectations.
- Target's view on the consumer remains largely consistent with its last call, namely that consumers remain surprisingly resilient despite significantly elevated prices. However, TGT noted that consumer confidence took a meaningful dip in April, despite a strong job market and normalizing inflation. As such, TGT remains cautious on its near-term growth outlook. Notably, it expects discretionary trends will continue to remain pressured in the short-term but to normalize over time.
Overall, investors are disappointed with Target's Q1 results. After a series of huge EPS beats, it was a bit jarring to see an EPS miss. And the Q2 guidance was a bit lackluster as well. There were some positive as well, including TGT's comments about the resilient consumer. And what really stood out was TGT saying it's seeing a meaningful improvement in discretionary trends, this is really what TGT needs. Nonetheless, for now, Target continues to lag Walmart's performance but if discretionary spend improves, we expect TGT to narrow that gap.
Analog Devices sets record highs as Q3 guidance signals a potentially long-awaited bottom (ADI)
Analog Devices (ADI +7%) powers up today, setting record highs after Q2 (Apr) results surpassed consensus and Q3 (Jul) guidance signaled stabilizing end-market demand. The signal processing and power management semiconductor manufacturer remarked last quarter that customer inventory adjustments should subside during Q2, setting the stage for demand to finally bottom out after several periods of declining yr/yr and sequential sales growth. While investors likely anticipated this development aligning with management's expectations following upbeat guidance from peer Texas Instruments (TXN) last month, ADI's confirmation today relieves most lingering anxiety, providing the kindling needed to push its shares firmly higher.
- A lengthy inventory rebalancing across ADI's end markets can clearly be viewed through its headline numbers in Q2, as revs tumbled by 33.8% yr/yr to $2.16 bln, a deterioration from the -22.7% drop last quarter and -16.4% in 4Q23 (Oct). Likewise, adjusted EPS of $1.40 marked a 50.5% plunge from the year-ago period. On a sequential basis, ADI has not seen growth on its top or bottom line since 2Q23 (Apr).
- While shares have still been consistently on the rise over the past year despite the pronounced demand slowdown, aided by outsized enthusiasm surrounding AI, this context helps explain why investors are so thrilled over ADI's Q3 guidance today. The company projected adjusted earnings of $1.40-1.60 and revs of $2.17-2.37 bln, representing qtr/qtr expansion at their respective midpoints.
- Just as AI has helped maintain buying interest in ADI, it has supported management's excitement over the year ahead. AI workloads require substantially greater power than traditional workloads, benefiting ADI's portfolio of power management processors. Big tech firms, from Microsoft (MSFT) to Meta Platforms (META), have announced massive capital spending plans on constructing AI infrastructure, culminating in a potentially significant ramp-up in 2025.
- While this development will likely boost ADI's communications end market, given its data center exposure, more than its other end markets, AI has been finding itself across additional verticals, supporting growth in industrial, automotive, and consumer electronics.
- Still, like TXN, industrial and automotive end markets comprise the bulk of ADI's annual revenue, totaling 77% in Q2, making it critical that demand across these markets picks up meaningfully alongside an unwavering appetite for AI. On that note, TXN commented last month that customers are nearing the end of an inventory depletion cycle, but management was cautious about predicting a bottom. Conversely, automotive has run into some troubles lately, with demand cooling off; STMicroelectronics (STM) stated last month that the automotive industry is amid a deceleration phase.
Overall, after encouraging remarks from ADI last quarter, investors were ready for the company's first bullish quarterly outlook since early 2023, keeping shares roughly +10% higher on the year despite a few red flags from some prominent semiconductor companies, including ASML (ASML) and Taiwan Semi (TSM). We noted last quarter that ADI is well-positioned to capitalize on an uptick in demand, which was looking more and more likely to materialize in 2025. Following further affirmation of global demand progressing as expected, we continue to like ADI over the long term.
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