Market Snapshot
| Dow | 40287.53 | -377.49 | (-0.93%) | | Nasdaq | 17726.94 | -144.28 | (-0.81%) | | SP 500 | 5505.00 | -39.59 | (-0.71%) | | 10-yr Note | -3/32 | 4.24 |
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| | NYSE | Adv 1010 | Dec 1793 | Vol 1.19 bln | | Nasdaq | Adv 1473 | Dec 2664 | Vol 5.01 bln |
Industry Watch
| Strong: Utilities, Health Care |
| | Weak: Materials, Financials, Consumer Discretionary, Information Technology, Energy |
Moving the Market
--Business disruptions triggered globally by bug in CrowdStrike technical update
--Political uncertainty revolving around President Biden's bid to run again for president
--Expectations for ongoing consolidation activity
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Closing Stock Market Summary
19-Jul-24 16:20 ET
Dow -377.49 at 40287.53, Nasdaq -144.28 at 17726.94, S&P -39.59 at 5505.00
[BRIEFING.COM] A technical update by CrowdStrike (CRWD 304.96, -38.09, -11.1%) that had a flaw in it wreaked havoc around the globe today since it infiltrated Microsoft's (MSFT 437.11, -3.26, -0.7%) operating system and left IT managers scrambling to implement a fix that would get things running smoothly again after CrowdStrike identified the flaw and rolled back its update.
Reports indicated that there were major disruptions at airports around the world, that emergency management systems were not functioning properly, and that media companies, as well as many other businesses, had their normal business operations disrupted.
This upheaval set the tone for what was an otherwise underwhelming day for the stock market, which was saddled with negative responses to the earnings reports from Netflix (NFLX 633.34, -9.70, -1.5%), and Dow components American Express (AXP 242.52, -6.68, -2.7%) and Travelers (TRV 203.54, -17.06, -7.7%), along with a general sense that the stock market is in the midst of a consolidation period after its spirited run to record highs.
The latter has manifested itself in the mega-cap stocks, which were once again unable to hold a buy-the-dip trade today. The Vanguard Mega-Cap Growth ETF (MGK) had been up as much as 0.6% but finished with a 0.6% loss, leaving it down 4.0% for the week.
Similarly, the Philadelphia Semiconductor Index ran into more selling pressure. It declined 3.1% today, finishing at its lows, and was down 8.8% for the week.
Notwithstanding the losses registered by the major indices, there wasn't any concerted selling interest outside the semiconductor group and some individual stocks with news. The affliction for the market was that there wasn't any conviction on the part of buyers.
Decliners led advancers by a 9-to-5 margin at the NYSE and by a roughly 13-to-7 margin at the Nasdaq.
Nine of the 11 S&P 500 sectors finished lower with losses ranging from 0.1% (real estate) to 1.3% (information technology and energy). The health care sector (+0.5%) was a winning standout and the utilities sector (+0.1%) also qualified as a relative strength leader. The equal-weighted S&P 500 declined 0.7%, matching the loss for the market-cap weighted S&P 500, and the Russell 2000 fell 0.6%.
The 2-yr note yield increased five basis points to 4.51% and the 10-yr note yield increased five basis points to 4.24%. There was no U.S. economic data of note today.
- Nasdaq Composite:+18.1% YTD
- S&P 500: +15.4% YTD
- S&P Midcap 400: +8.4% YTD
- Russell 2000: +7.8% YTD
- Dow Jones Industrial Average: +7.0% YTD
A VIX spike
19-Jul-24 15:30 ET
Dow -299.66 at 40365.36, Nasdaq -87.39 at 17783.83, S&P -25.43 at 5519.16
[BRIEFING.COM] The test of 5,500 by the S&P 500 has attracted some late-day buying interest that has helped the indices move off their lows.
Overall, it has been a good week for the small-cap stocks. The Russell 2000 is up 1.9%, including today's losses. It has been an even better week, however, for the CBOE Volatility Index, otherwise referred to in abbreviated form as the VIX Index and euphemistically as the "fear gauge."
The VIX Index, which measures the implied volatility of the S&P 500 for the next 30 days, has surged 32% this week to 16.42. That spike has coincided with the pullback in the mega-cap stocks, which have been pacesetters for the S&P 500 this year.
Broad-based weakness
19-Jul-24 15:00 ET
Dow -380.83 at 40284.19, Nasdaq -134.94 at 17736.28, S&P -36.23 at 5508.36
[BRIEFING.COM] The major indices are pinned close to their lows for the session, which has the S&P 500 testing 5,500. Its 50-day moving average, though, doesn't come into play until closer to 5,400.
By and large, there has been a lack of buying conviction today. The CrowdStrike (CRWD 298.94, -44.11, -12.9%) issue has been a convenient excuse for that, but not an entirely sufficient excuse.
The more sufficient excuse is an abiding sense that the market is simply due for a pullback. That would include the small-cap stocks, which surged nearly 12% in just seven trading sessions. It certainly includes the mega-cap stocks, which have soared nearly 100% since their lows in early 2023 as measured by the Vanguard Mega-Cap Growth ETF (MGK).
The latter is down 0.7% today while the Russell 2000 is down 0.6%. The broad-based weakness extends to the equal-weighted S&P 500 (-0.8%), the market-cap weighted S&P 500 (-0.7%), the Nasdaq Composite (-0.8%), the S&P Midcap 400 (-0.8%), and the Dow Jones Industrial Average (-0.9%).
Halliburton falls following earnings, Huntington Banc near top of S&P 500 after earnings
19-Jul-24 14:30 ET
Dow -376.71 at 40288.31, Nasdaq -142.38 at 17728.84, S&P -37.21 at 5507.38
[BRIEFING.COM] The S&P 500 (-0.67%) is the shallowest declining major average this afternoon, down just 37 points.
Elsewhere, S&P 500 constituents W.R. Berkley (WRB 51.82, -4.39, -7.81%), Halliburton (HAL 34.60, -1.84, -5.05%), and Aptiv (APTV 68.35, -3.33, -4.65%) pepper the bottom of the average. HAL falls on earnings, while APTV is lower in sympathy to peer Autoliv's (ALV 96.92, -11.66, -10.74%) Q2 miss and guidance cut.
Meanwhile, Huntington Banc (HBAN 14.75, +0.45, +3.15%) is near the top of the standings following this morning's Q2 beat.
Gold falls into the weekend; Friday's gold losses turn weekly gains into declines
19-Jul-24 14:00 ET
Dow -406.23 at 40258.79, Nasdaq -154.36 at 17716.86, S&P -39.48 at 5505.11
[BRIEFING.COM] With about two hours to go on the week the tech-heavy Nasdaq Composite (-0.86%) holds onto second place, down just shy of 155 points.
Gold futures settled $57.30 lower (-2.3%) to $2,399.10/oz, down -0.9% on the week, as investors took profits after all-time highs in the yellow metal earlier in the week.
Meanwhile, the U.S. Dollar Index is up about +0.2% to $104.34.
PPG Industries' volumes comes up short in Q2 as global industrial activity remains subdued (PPG)
A frustrating demand environment in Europe combined with lighter-than-expected global auto OEM production painted PPG Industries (PPG -3%) into a corner in Q2, leading the paints and coating supplier to fall short of its volume growth projections. Despite a lackluster Q1 report in mid-April, PPG was optimistic about volumes finally turning positive in Q2. Several reasons underpinned its confidence, from improving demand characteristics across multiple regions to starting peak buying season. However, while these trends did unfold in Q2, they did not meet PPG's initial expectations, resulting in flat sales volume growth yr/yr and triggering a significant gap-down today.
- The European market has gradually recovered each quarter. Still, PPG was a tad too confident that the market's near-term rebound would be linear. Demand stayed uneven in terms of country and end-use. While yr/yr volume growth did continue to improve sequentially in Q2, it was still negative, ultimately pulling down overall volumes in the quarter.
- Sluggish global auto OEM production directly reflects the current macroeconomic picture. Elevated inflationary pressures and interest rates create an awful environment for automakers. PPG added that it was surprised by the extension of assembly plant downtime. However, when asked if this could be an early recessionary sign, CEO Tim Knavish remarked that it likely is more of a temporary adjustment given how some vehicles are selling under expectations.
- It was not all bad news. Volumes, albeit disappointing, did mark a notable improvement from the past couple of quarters, including negative 3% and 1% growth in Q1 and 4Q22, respectively. For perspective, PPG has not posted positive yr/yr volume growth since before 2022. Given this context, investors' patience may be wearing thin.
- Meanwhile, PPG drove further margin enhancement in the quarter, marking its seventh consecutive quarter of yr/yr segment margin expansion. Gross margins ticked 180 bps higher yr/yr to 43%, supported by record Performance Coatings margins and a healthy jump in Industrial Coatings margins.
- Furthermore, while PPG's bearish Q3 guidance and reduced FY24 outlook, projecting adjusted EPS of $8.15-8.30 from $8.34-8.59 and organic sales growth of flat to up low single digits from just up low single digits was concerning, PPG remained confident in activity picking up over the next two quarters. The company anticipates sustained growth in Mexico, recovery in demand in China, and modest improvements in Europe.
Even though PPG reiterated its FY24 outlook last quarter, its bearish Q2 outlook gave mixed signals. We were concerned that a bumpy quarter ahead made PPG's FY24 guidance flimsy, possibly resulting in a downward revision. Unfortunately for the company, this ultimately materialized. Given the recent events, we have doubts that the second half of the year will be as bright as PPG expects. Today's adverse reaction reflects investors' similar skepticism. It is also spurring some selling pressure across PPG's peer group, including Sherwin-Williams (SHW), Axalta Coating Systems (AXTA), and RPM Inc (RPM).
Netflix trades flat on Q2 results; EPS and margins were good but Q3 rev guidance light (NFLX)
Netflix (NFLX +1%) is trading slightly higher today following its Q2 earnings report. The stock initially traded sharply lower following the report but recovered during the call. NFLX reported a nice double-digit EPS beat with modest revenue upside. The Q3 guidance was mixed with upside EPS but revenue was a bit light. Netflix did tweak its FY24 revenue guidance slightly higher to +14-15% from +13-15%.
- Let's dig into it. Global streaming paid net adds in Q2 were a healthy +8.05 mln, which was above street estimates. A dip was expected from Q1's +9.33 mln. Netflix no longer provides specific net add guidance, but did say 3Q24 will be lower than 3Q23's +8.76 mln, which benefitted from being the first full quarter with paid sharing. In simple terms, Netflix started cracking down on password sharing last summer and that boosted net adds.
- Netflix had a wide variety of hit series in Q2, including Bridgerton S3, Baby Reindeer, Queen of Tears along with popular films like Under Paris, Atlas and Hit Man and The Roast of Tom Brady, which attracted its largest live audience yet. Of note, Netflix began testing a new, simpler and more intuitive TV homepage in June, which it believes will significantly improve the discovery experience on Netflix.
- Advertising was a bright spot in Q2. Netflix says it's making steady progress scaling its ads business. Ads tier membership grew 34% sequentially. Also, NFLX is building an in-house ad tech platform that it will test in Canada in 2024 and launch more broadly in 2025. NFLX says this will give advertisers new ways to buy, insights to leverage and ways to measure impact.
- NFLX says its ad revenue is becoming a more meaningful contributor to its business. However, building a business from scratch takes time. The company conceded that a near term challenge is that it's scaling faster than its ability to monetize its growing ad inventory. It is adding more sales and operations people to help.
- Another metric that stands out is operating margin, which we think will become a more important measuring stick as NFLX phases out reporting its net add metric in 1Q25. In Q2, it came in at 27.2% vs 26.6% prior guidance. It also raised its FY24 forecast to 26% from 25% and guided for Q3 at 28.1%. However, NFLX cautioned that margins could bounce around in any given year with FX and content spend, and other investment opportunities.
Overall, Netflix's Q2 report had some cross currents. It posted nice EPS and operating margin upside. Also, net adds were quite good. We had been bracing for some headwinds given that Q2 marked the third full quarter of cracking down on password sharing. The positive effect wears off over time. On the negative side, Q3 revenue guidance was a bit light and NFLX's comments about monetizing the ads business were a bit worrisome. Hence, the stock is trading roughly flat.
Intuitive Surgical's healthy progress on system placements in Q2 sends shares to new highs (ISRG)
Intuitive Surgical's (ISRG +6%) Q2 report was a cut above the rest, delivering its widest earnings beat since 2021 on sustained double-digit revenue growth. The robotic surgical equipment maker also accelerated global procedure growth in the quarter, which tracked at the high end of its FY24 guidance. Speaking of which, ISRG narrowed its FY24 procedure growth outlook, bumping up the low end while keeping the best-case scenario on the table. Rounding off the quarter was healthy progress on system placement, a development that has hit a few snags in recent months.
- The rollout of ISRG's da Vinci 5 system made considerable progress from Q1. ISRG placed 70 of these systems during Q2 versus a measly 8 last quarter, reflecting significantly improved supply constraints. Nevertheless, ISRG warned that supply will remain a headwind through at least 1H25.
- The challenges associated with da Vinci 5 are leaking into other areas of ISRG's business. Given the numerous enhancements the new system boasts, potential customers are continuing to moderately hold back on purchasing any da Vinci systems, reflected by a bump of 21 additional placements yr/yr in Q2 to 341. However, this mightily improved from just 1 additional placement last quarter.
- Despite the headwinds connected to da Vinci 5, ISRG still managed to deliver impressive headline results in Q2, including a return to double-digit bottom-line upside and a 14.5% jump in total revs yr/yr to $1.97 bln. Procedures grew nearly 17% yr/yr, a 1 pt jump from last quarter, despite lapping an uptick in patients following the pandemic.
- In the U.S., general surgery supported a 14% jump in procedures. In contrast, bariatric procedures turned negative, falling by mid-single digits yr/yr. The surging popularity of weight-loss drugs has moderated bariatric procedures for ISRG since last year. However, as has been the case throughout much of this period, other procedures more than made up for it.
- Overseas procedure volume continued to outpace the U.S., expanding by 22% yr/yr on top of a +28% jump in 2Q23, led by non-urology procedures. Europe was a highlight, as was Japan and India. Conversely, growth in China was stressed as ISRG battled emerging domestic robotic systems, which adversely impacted capital placements and, thus, procedure growth.
- Looking ahead to FY24, ISRG remained bullish, narrowing its previous +14.0-17.0% procedure growth outlook to +15.5%-17.0%. The low end assumes continued moderation in bariatric procedures with intensifying headwinds in Asia, albeit to a lesser degree than forecasted three months ago.
The overarching theme from ISRG's Q2 report was that sequential improvements squashed many lingering fears. Shares were slipping in recent trading only for Q2 numbers to reenergize the stock. There are still cracks worth keeping an eye on, such as ISRG's da Vinci 5 timeline encountering delays, competition in China heating up, and GLP-1 weight-loss drugs taking additional bariatric business. However, the market potential for further robotic surgery opportunities remains bright. Meanwhile, ISRG's da Vinci 5 rollout is progressing as planned. As such, ISRG may continue tacking on record highs.
D.R. Horton constructing big gains after upside Q3 results and $4 bln stock buyback program (DHI)
Homebuilder D.R. Horton (DHI) is soaring higher after delivering a top and bottom-line beat for Q3 as a lack of supply of available housing and favorable demographics once again buoyed demand for new home construction. The upside results were accompanied by a new $4.0 bln share repurchase program, which is adding some fuel to the fire today as the stock breaks out to all-time highs. DHI's strength is also carrying over to other homebuilder stocks, most notably including Lennar (LEN), Toll Brothers (TOL), and PulteGroup (PHM).
- Home affordability has been a focal point for DHI and other homebuilders as high mortgage rates and constrained monthly budgets have put home ownership nearly out of reach for many people. To help ease the burden, DHI and its peers have ramped up incentives, including mortgage rate buydowns and reduced home prices.
- Since DHI mostly caters to the first-time homebuyer, with an average sales price of about $379,000 in Q3 (-1% yr/yr), it's more sensitive than most homebuilders to these affordability issues.
- Due to this increase in incentives, homebuilding margins have fallen under the spotlight across the industry. In Q3, DHI pleasantly surprised investors and analysts as gross profit margin on home sales improved by 80 bps qtr/qtr to 24%, beating expectations, as incentive-related costs were down from a year ago.
- However, during the earnings call, the company stated that incentives are still elevated and that it doesn't anticipate a significant change in the near-term. As such, DHI expects Q4 homebuilding gross margin to be similar to Q3, which we view as a positive considering the environment.
- A slightly more glaring blemish is DHI's downside Q4 revenue guidance of $10.0-$10.4 bln, but since the company's narrowed FY24 revenue outlook remains in line with estimates, the sting of the downside guidance was mitigated.
- Furthermore, the company believes it's in good position to continue taking market share with 42,600 homes in its inventory and as its average construction cycle times have returned to normal levels. Should the Federal Reserve begin cutting interest rates, DHI will be poised to generate stronger margins on those homes in its inventory as they sell.
Overall, it was another strong quarter for DHI and its new $4.0 bln share repurchase authorization is a clear reflection of its confidence regarding the health of the new home construction market and its growth prospects within it.
Taiwan Semiconductor Manufacturing's initial pop fades today amid geopolitical concerns (TSM)
Taiwan Semi (TSM -3%) records a solid beat-and-raise in Q2, prompting an initial buy-the-dip mindset today following the stock's sell-off yesterday on further export restriction concerns. The world's largest semiconductor foundry, supplying chips for many prominent tech giants, including NVIDIA (NVDA) and Apple (AAPL), climbed to all-time highs last week before encountering some turbulence. Still, even after yesterday's sell-the-news reaction, shares were up roughly +35% since Q1 results in mid-April, reflecting exuberance over AI and a recovery year ahead.
Against this backdrop, expectations remained relatively high. With concerns over export restrictions to China still lingering, the combination of these two dynamics led to investors quickly fading TSM's initial pop out of the gate, pulling back from highs of +2%. Also lurking in the shadows are fears over China/Taiwan relations. If tensions worsen between the two nations, TSM could get caught in the crosshairs.
- Like clockwork, TSM beat analyst earnings and sales estimates in Q2, delivering a 34.6% jump in its to-line yr/yr and 10.3% sequentially to $20.82 bln. Margins did slip by 90 bps yr/yr but stayed virtually unchanged from Q1. Sequentially, high-performance computing (HPC) shined, leaping by 28%, underpinning an insatiable desire for AI.
- AI remains the bedrock of TSM's excitement over the short and long run. Management anticipates its business over the next quarter to be supported by solid smartphone and AI-related demand. Even though TSM kept its FY24 forecast for the overall semiconductor market, excluding memory, unchanged at +10%, it did raise its FY24 revenue outlook to $22.4-23.2 bln from $19.6-20.4 bln. Again, this underpins the high forecasted demand from AI-related businesses. TSM added that in just the past three months, it has observed even greater AI demand from its customers.
- Given these remarks, it would not be surprising if NVDA delivers another outstanding quarter next month. While TSM's post-quarterly responses have not had much correlation with reaction to NVDA's earnings, its AI comments still serve as good news for the state of AI, as GPU makers would not likely continue ordering more chips if their end demand was not robust.
- Further evidence that AI demand has gone nowhere was TSM's FY24 capital budget forecast -- the higher the level, the higher the growth opportunities. TSM kept the high end of its FY24 outlook unchanged at $32 bln but did increase the low end from $28 bln to $30 bln. Most of the budget will be allocated to advanced process technologies, many of which HPC products are based on.
Perhaps unsurprisingly, the tailwinds produced by AI remained alive and well in Q2, and TSM sees this remaining the case this year. However, the gains associated with AI are being dwarfed by geopolitical concerns. The Biden Administration announced yesterday that it was considering more restrictive export controls, possibly halting semiconductor equipment suppliers from providing China access to American technology. Meanwhile, Taiwan may not be guaranteed intervention by the U.S. amid an invasion by China. Until these alarm bells quiet down, TSM could continue enduring selling pressure.
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