Market Snapshot
| Dow | 38111.48 | -330.06 | (-0.86%) | | Nasdaq | 16737.09 | -183.50 | (-1.08%) | | SP 500 | 5235.48 | -31.47 | (-0.60%) | | 10-yr Note | +5/32 | 4.55 |
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| | NYSE | Adv 2074 | Dec 657 | Vol 912 mln | | Nasdaq | Adv 2436 | Dec 1739 | Vol 6.6 bln |
Industry Watch
| Strong: Real Estate, Consumer Discretionary, Materials, Industrials, Energy |
| | Weak: Information Technology, Communication Services |
Moving the Market
-- Big loss in Salesforce (CRM) following disappointing guidance
-- Mixed responses to other earnings news
-- Drop in market rates providing a measure of support to equities
-- Losses in heavily-weighted names limiting index performance
-- Some hopeful anticipation in front of the PCE Price Indexes tomorrow, the Fed's preferred gauge on inflation
| Closing Summary
30-May-24 16:30 ET
Dow -330.06 at 38111.48, Nasdaq -183.50 at 16737.09, S&P -31.47 at 5235.48
[BRIEFING.COM] The major indices closed with solid losses despite an underlying positive bias today. The market-cap weighted S&P 500 fell 0.6% and the equal-weighted S&P 500 closed 0.5% higher. Selling in some of the weightiest stocks picked up in the last half hour of trading, driving the afternoon deterioration that left the major indices near their lows of the day.
NVIDIA (NVDA 1105.00, -43.25, -3.8%), which extended its early loss following a Bloomberg report that the US is slowing the issuing of Middle East licenses for AI chip makers, Microsoft (MSFT 414.67, -14.50, -3.4%), Alphabet (GOOG 173.56, -3.84, -2.2%), and Meta Platforms (META 467.05, -7.31, -1.5%) were losing standouts from the mega cap space.
Dow component Salesforce (CRM 218.01, -53.61, -19.7%) was another influential laggard, sliding 20% on disappointing guidance.
Losses in the aforementioned names led their respective S&P 500 sectors to close with solid declines. The information technology sector fell 2.5% and the communication services sector logged a 1.1% loss.
The remaining nine sectors closed with gains ranging from 0.1% to 1.5%. The only sectors to close more than 1.0% higher were the rate-sensitive real estate (+1.5%) and utilities (+1.4%) sectors, benefitting from a drop in market rates.
The movement in market rates contributed to the underlying upside bias in equities, along with some hopeful anticipation in front of the PCE Price Indexes tomorrow, which is the Fed's preferred gauge on inflation. The 2-yr note yield fell five basis points to 4.93% and the 10-yr note yield declined seven basis points to 4.55%.
The price action in Treasuries follows a slate of economic data this morning, including a downward revision to Q1 GDP, a widening in the goods deficit in April, an ugly 7.7% decline in pending home sales in April, and some otherwise decent initial jobless claims figures.
Market participants were also digesting some mixed earnings news from retailers. Best Buy (BBY 81.55, +9.65, +13.4%) and Foot Locker (FL 25.89, +3.37, +15.0%) were among the winners in that respect. Meanwhile, shares of Kohl's (KSS 21.02, -6.23, -22.9%) and Dollar General (DG 127.94, -11.34, -8.1%) slid after reporting quarterly results.
Separately, the CME Group index pricing for the Dow Jones Industrial Average and S&P 500 briefly froze around 10:41 ET, but began updating as usual around 12:00 ET.
- Nasdaq Composite: +11.5% YTD
- S&P 500:+9.8% YTD
- S&P Midcap 400: +6.0% YTD
- Russell 2000: +1.5% YTD
- Dow Jones Industrial Average: +1.1% YTD
Reviewing today's economic data:
- April Adv. Intl. Trade in Goods -$99.4 bln; Prior was revised to -$92.3 bln from -$91.8 bln
- April Adv. Retail Inventories 0.7%; Prior was revised to 0.1% from 0.3%
- April Adv. Wholesale Inventories 0.2%; Prior -0.4%
- Weekly Initial Claims 219K (Briefing.com consensus 219K); Prior was revised to 216K from 215K; Weekly Continuing Claims 1.791 mln; Prior was revised to 1.787 mln from 1.794 mln
- The key takeaway from the report is that there wasn't any notable change in initial jobless claims. They continue to comply with a generally solid labor market, the idea of which will comply with the market's soft landing outlook.
- Q1 GDP - Second Estimate 1.3% (Briefing.com consensus 1.3%); Prior 1.6%; Q1 GDP Deflator - Second Estimate 3.0% (Briefing.com consensus 3.1%); Prior 3.1%
- The key takeaway from the report is the weakening in consumer spending activity, yet it should be noted that the 2.0% growth was in-line with average for the prior eight quarters. In other words, spending was weaker than the fourth quarter, but not weak enough to alter the market's soft landing outlook.
- April Pending Home Sales -7.7% (Briefing.com consensus -0.5%); Prior was revised to 3.6% from 3.4%
Friday's economic calendar features:
- 8:30 ET: April Personal Income (Briefing.com consensus 0.3%; prior 0.5%), Personal Spending (Briefing.com consensus 0.3%; prior 0.8%), PCE Prices (Briefing.com consensus 0.3%; prior 0.3%), and Core PCE Prices (Briefing.com consensus 0.3%; prior 0.3%)
- 9:45 ET: May Chicago PMI (Briefing.com consensus 41.0; prior 37.9)
Mega caps extend losses, bringing indices to fresh lows
30-May-24 15:35 ET
Dow -348.56 at 38092.98, Nasdaq -173.50 at 16747.09, S&P -30.80 at 5236.15
[BRIEFING.COM] The major indices turned lower, reaching fresh session lows ahead of the close. The downside moves coincided with some mega cap names extending losses.
The Vanguard Mega Cap Growth ETF (MGK) is down 1.7% at its low of the day. Meanwhile, eight of the 11 S&P 500 sectors trade higher and market breadth is still positive.
Treasuries settled with gains across the curve. The 2-yr note yield fell five basis points to 4.93% and the 10-yr note yield declined seven basis points to 4.55%.
Growth stocks underperform, weighing down indices
30-May-24 15:00 ET
Dow -291.26 at 38150.28, Nasdaq -114.40 at 16806.19, S&P -18.50 at 5248.45
[BRIEFING.COM] There hasn't been much up or down action at the index level in recent trading.
The equal-weighted S&P 500 trades up 0.5% near its high of the day while the market-cap weighted S&P 500 shows a 0.3% decline, trading below its best level of the day.
Weakness in growth stocks has contributed to the index-level losses. The Russell 3000 Growth Index is down 0.9%.
Corning jump aided by JP Morgan upgrade; ServiceNow dips in S&P 500 on CRM sympathy
30-May-24 14:30 ET
Dow -316.44 at 38125.10, Nasdaq -102.37 at 16818.22, S&P -18.71 at 5248.24
[BRIEFING.COM] The S&P 500 (-0.36%) is today's shallowest declining major average, down about 19 points.
Elsewhere, S&P 500 constituents Warner Bros. Discovery (WBD 8.01, +0.35, +4.57%), Walgreens Boots Alliance (WBA 15.46, +0.57, +3.83%), and Corning (GLW 36.80, +1.25, +3.52%) pepper the top of today's standings. WBD and WBA move higher despite a dearth of corporate news, while GLW caught a JP Morgan upgrade to Overweight this morning ahead of tomorrow's ex-dividend date.
Meanwhile, ServiceNow (NOW 645.53, -85.59, -11.71%) is near the bottom of the average, lower in sympathy to Salesforce's (CRM 213.11, -58.51, -21.54%) post-earnings losses.
Gold bounces as yields, dollar trip
30-May-24 14:00 ET
Dow -275.68 at 38165.86, Nasdaq -77.41 at 16843.18, S&P -12.51 at 5254.44
[BRIEFING.COM] The tech-heavy Nasdaq Composite (-0.46%) is in second place as the markets have just two hours left of trading on Thursday.
Gold futures settled $25.30 higher (+1.1%) to $2,366.50/oz, aided in part by today's slip in yields and the weakness in the greenback.
Meanwhile, the U.S. Dollar Index is down about -0.4% to $104.67.
UiPath plunges as a measured buying climate and internal struggles lead to reduced guidance (PATH)
A combination of internal and external headwinds in Q1 (Apr) sent UiPath (PATH -33%) down the wrong path, leading to its steady pace of growth during the front half of the quarter to come to an abrupt halt during the back half. As a result, while the robotic process automation software developer did exceed analyst earnings and sales forecasts in the quarter, it is staring at lackluster growth for the remainder of the year, projecting downbeat Q2 (Jul) revenue estimates and slashing its FY25 (Jan) sales outlook significantly. An accompanying CEO departure, as Rob Enslin is replaced by founder Daniel Dines, is only adding fuel to today's fire sale.
What happened?
- Several factors knocked PATH down considerably in Q1. The bulk of headwinds began around March and carried over into April, including a challenging macroeconomic environment that severely hurt PATH's mid-market customer base, a carryover from last quarter. At the same time, customer behavior shifted, especially surrounding large multi-year deals. Uncertainty clouds companies' longer time horizons, forcing them to be more prudent around longer-term contracts. As a result, several large expansion opportunities closed with a reduced size.
- This buying environment resembles the dynamic Salesforce (CRM) endured in AprQ, with momentum from the previous quarter waning, leading to ongoing elongated deal cycles, deal compression, and increased budget scrutiny.
- While external factors are hard to manage, PATH's report was particularly frustrating because of its internal setbacks. Management conceded that execution is something it can control, and it failed to execute on large contracts and some sales compensation changes, areas the company stated it was working to rectify.
- Furthermore, while PATH's growth products produced positive results in Q1, they were not appropriately scaled, leaving plenty of potential up for grabs. Also, PATH's investments to reaccelerate growth have not met expectations, compressing margins and weighing down its ability to stay agile to better meet customer needs. As a result, PATH's Q1 adjusted EPS of $0.13 exceeded analyst forecasts by the narrowest margin since going public in 2021.
- The culmination of these headwinds was disappointing guidance. PATH projected Q2 revs of $300-305 mln, translating to a meager 5.3% improvement yr/yr, well below the 15.7% jump to $335.11 mln PATH experienced in Q1. Meanwhile, the company lowered its FY25 revenue guidance by around $150 mln to $1.405-1.410 bln, a roughly 7.8% bump yr/yr, a substantial slowdown from the +23.6% jump in FY24.
As shares sink to their lowest level since January 2023, the question is, where does PATH go from here? The company has plenty of upside potential as its automation software meshes well with a secular AI tailwind. PATH also recently inked an expanded partnership with Microsoft (MSFT), integrating with its AI Copilot. The company's founder is also back in the leadership role, which could produce a rallying effect among employees. However, after today's shocking report, it could take time before investors warm back up to PATH, waiting to see when the measured buying climate begins to turn.
Best Buy still facing soft sales trends, but guidance and improving laptop sales bring hope (BBY)
The long-awaited rebound in demand for consumer electronics and appliances hasn't quite materialized yet as Best Buy's (BBY) Q1 revenue and comparable sales fell short of expectations, but the company still managed to comfortably beat EPS estimates once again. Similar to Q4, BBY relied on solid cost containment measures and growth in its higher margin membership services to exceed earnings expectations -- a feat that it has done in every quarter of the past five years.
- Encouragingly, despite the Q1 net sales and comparable sales declines of 6.5% and 6.1%, respectively, BBY reaffirmed its FY25 outlook for those metrics. CFO Matt Bilunas stated that the company continues to expect sequential improvement in its comp sales performance. Furthermore, even at the midpoint of its comp guidance range of -3.0% to 0.0%, BBY believes that it would deliver profitability at the high end of its non-GAAP operating income rate forecast, which stands at 3.9% to 4.1%.
- The hope for BBY, though, is that sales trends will begin to show more meaningful improvement in the back half of 2024, including around the back-to-school shopping season. There is reason to be hopeful, too, as laptop and computer sales are gaining some momentum.
- In Q1, the computing and mobile phone category outperformed all the other categories with comps down by only 2.2%. In comparison, appliances plunged by 18.5%, while entertainment and consumer electronics saw declines of 11.3% and 8.3%, respectively.
- CEO Carie Barry has been predicting an upgrade cycle to emerge for the computing segment for several quarters and it appears that it's starting to unfold. New technologies, especially relating to AI-powered functionalities, should add some fuel to that fire as employees and students look to replace the devices purchased during the pandemic boom period for laptops, tablets, and PCs.
- For the appliances and home theater product categories, a more active housing market will likely be needed before sales in those areas begin to really strengthen. Therefore, BBY would certainly benefit from interest rate cuts, but the prospects of the Fed sharply cutting rates anytime soon has dimmed with inflation staying hotter than the Fed wants.
Overall, BBY continues to execute well in a challenging environment. While the sales and comp misses were disappointing, the fact that BBY reaffirmed its FY25 outlook indicates that it remains upbeat about an upswing in demand later this year. On that note, the laptop category is already showing signs of a recovery.
Salesforce posts rare top line miss, weak guidance; continues to see measured buying (CRM)
Salesforce (CRM -21%) is under pressure today following its Q1 (Apr) results last night. CRM beat on EPS, but revenue was light. Granted, it was a very small top line miss but it was CRM's first miss in the past five years. Another concern was CRM guiding Q2 (Jul) below analyst expectations for both EPS and revs. The silver lining was CRM raising FY25 EPS guidance while reaffirming FY25 revenue.
- Revenue was impacted by continued pressures on professional services, some license revenue volatility and a continued measured buying environment. Americas revenue grew +11%, EMEA grew +10% or +9% in constant currency (CC), and APAC grew +14% or +21% CC. CRM saw strong new business growth in Japan, India and Canada, while parts of LatAm and EMEA were constrained. Public sector and financial services performed well, while high tech and retail and consumer goods were more constrained.
- In addition to EPS and revenue, investors pay close attention to Current Remaining Performance Obligation (CRPO), which represents all future revenue under contract. CRPO in Q1 came in at $26.4 bln, which was +10% yr/yr and +10% CC. This was below prior guidance of +11% yr/yr and +12% CC. It was also below Q4's +12% and +13% CC. We think this CRPO metric is spooking investors and is helping to weigh on shares today. Q2 CRPO guidance of +9% and +10% CC was not great either, which reflects ongoing headwinds from professional services.
- CRM explained that it continues to see measured buying behavior, similar to what it has experienced over the past two years with the exception of Q4 where it saw stronger bookings. The momentum it saw in Q4 moderated in Q1 and CRM saw elongated deal cycles, deal compression and high levels of budget scrutiny. In addition, in Q1, as part of its ongoing transformation, CRM made some intentional changes in its go-to-market organization, which also played a role in the softer bookings.
- On the positive side, CRM is seeing strong momentum in various parts of its business, particularly Data Cloud. Also, Industries performed well as half of its top 10 deals included one of its industry clouds. CRM is seeing great momentum with Slack, which again was included in nearly half of its top 50 deals in Q1. It also launched Slack AI in February. Also, multi-cloud deals were a highlight in Q1 with 6 of its top 10 deals including 6+ clouds.
- Looking ahead to the balance of FY25, CRM continues to expect its professional services business to be a headwind to revenue with deal compression and customers delaying or slowing projects. However, CRM also continues to see strong demand for Data Cloud and multi-cloud adoption. CRM is also seeing benefits from recent pricing and packaging changes, and it is seeing strong industries adoption.
Overall, investors were spooked by several factors: the Q1 revenue miss, the Q1 CRPO shortfall and the Q2 guidance (EPS, revs, CPRO). Also, CRM has talked about measured buying behavior for some time, but we think Q4's strong bookings number maybe lulled some investors to think the tide was turning. However, Q1's CPRO and Q2 guidance indicate that measured buying behavior continues.
HP Inc. hits one-year highs after delivering upbeat Q2 results and reiterating a 2H24 recovery (HPQ)
Investors' prints are all over HP Inc. (HPQ +13%) today after the PC and printer maker squeaked out top and bottom-line beats in Q2 (Apr). HPQ also projected Q3 (Jul) earnings consistent with analyst expectations while narrowing its FY24 (Oct) earnings outlook. Perhaps most appealing were the company's remarks during its conference call, reiterating a market recovery during the back half of FY24 (Oct) reinforced by healthy demand for AI PCs and progress across initiatives within its Print segment.
- Even though HPQ's upside in Q1 was mild, barely edging past analysts' earnings forecasts by delivering $0.82 per share and revenue estimates by keeping its yr/yr decline at a modest 0.8% to $12.8 bln, it shined against a history of mixed quarterly results. HPQ had not registered an earnings beat for three straight quarters leading into its Q1 report. Meanwhile, it missed revenue expectations five out of the past eight quarters.
- Furthermore, HPQ's revenue decline in Q2 slowed dramatically from the -4.4% drop in Q1 (Jan) and -6.5% in Q4 (Oct), reflecting ongoing stabilization.
- HPQ's Personal Systems (PS) revenue returned to positive yr/yr growth for the first time in two years in Q2, inching 3% higher to $8.4 bln, driven by market growth and early signs of a demand recovery on the commercial side. The long-awaited return to growth in PS also underscored further demand stabilization dynamics.
- In Print, revenue still contracted, slipping by 8% yr/yr to $4.4 bln, highlighting stubbornly challenging demand conditions, with notable softness in China and certain parts of Europe. Competitive pressures remain an issue in Print. However, management was upbeat about its progress in regaining profitable market share, expanding its slice of the market sequentially in the home and office.
- Print's troubles are primarily keeping HPQ from issuing more uplifting FY24 guidance, narrowing its adjusted EPS outlook to $3.30-3.60 from $3.25-3.65. Nevertheless, management remained excited over a second-half recovery as its eagerness over upcoming AI PCs mounts, helping to accelerate demand well beyond the anticipated PC refresh cycle and Windows 11 rollout.
HPQ is betting on AI PCs to stir up demand over the next two quarters, potentially leading to positive momentum heading into the holiday shopping season. While it is unclear how much an average PC user will leverage AI, which will push PC prices relatively higher, if it can bring noticeable battery life, productivity, and efficiency improvements, it may nudge consumers toward upgrading or opting for these higher-priced models. Meanwhile, an AI PC may see significant demand in the commercial space, given the assistance it could provide IT departments and business users. Still, in many cases, HPQ remains at the behest of the software running on its hardware, making it critical for Microsoft (MSFT) to unleash AI across its operating system in a way compelling enough to trigger a meaningful wave of demand.
ConocoPhillips next up to make major M&A move in the oil patch by acquiring Marathon Oil (COP)
After Exxon Mobil (XOM) and Chevron (CVX) struck huge deals, acquiring Pioneer Natural Resources (PXD) and Hess (HES), respectively, it was ConocoPhillips (COP) turn to make a big splash in the oil patch. This morning, COP announced its intention to acquire Marathon Oil (MRO) in an all-stock transaction valued at $22.5 bln, inclusive of $5.4 bln in net debt. The blockbuster deal represents the latest big bet that demand for oil and gas isn't going to evaporate anytime soon as energy companies continue to capitalize on the massive cash flows generated over the past few years.
- Reflecting the risks of financing this transaction through new stock, shares of COP are trading sharply lower on the news. MRO shareholders will receive 0.225 shares of COP common stock for each share of MRO, equating to a 14.7% premium to yesterday's closing price for MRO. That full premium isn't being priced into MRO shares today, though, due to uncertainties whether this acquisition will be cleared by regulators.
- However, it's notable that on May 2, the U.S. Federal Trade Commission (FTC) did conditionally approve the merger between XOM and PXD. That condition was that PXD co-founder Scott Sheffield, who the FTC alleges colluded with OPEC to boost oil prices, must be excluded from the new company's Board of Directors. Mr. Sheffield is fighting back against those allegations, asking that the FTC remove this stipulation, but the deal between XOM and PXD has been allowed to go through. That approval should provide COP and MRO with some leverage as it argues for the merits of its merger.
- For COP, those merits include an immediately accretive transaction that it expects will add to its earnings, cash flow from operations, and free cash flow. Those gains will mainly be achieved through $500 mln in cost savings and capital synergies within the first year following the closing, driven by reduced SG&A costs and improved capital efficiencies.
- Additionally, to mitigate the impact of financing this transaction with equity, COP plans to repurchase over $7.0 bln in shares in the first year, up from its previous expectation of over $5.0 bln as a standalone company.
- From a strategic standpoint, the addition of MRO will bolster COP's assets in the Eagle Ford and Bakken shale basins in North Dakota. MRO's total production in Q1 was 189,000 net bop/d. For some context, in Q1, COP's "lower 48" production totaled 1.046 million boe/d, with Permian Basin production averaging 736,000 boe/d, Eagle Ford producing 176,000 boe/d, and Bakken Shale contributing 96,000 boe/d.
Lastly, COP seems to be paying a reasonable price for MRO. Based on MRO's FY23 adjusted net income of $1.58 bln, COP is paying roughly 14x last year's earnings for the company. Overall, this move will help COP keep pace with XOM and CVX as the oil and gas industry continues to consolidate.
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