Market Snapshot
| Dow | 42025.19 | +522.09 | (1.26%) | | Nasdaq | 18013.96 | +440.68 | (2.51%) | | SP 500 | 5713.64 | +95.38 | (1.70%) | | 10-yr Note | -2/32 | 3.73 |
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| | NYSE | Adv 2195 | Dec 565 | Vol 1.0 bln | | Nasdaq | Adv 3149 | Dec 1061 | Vol 5.5 bln |
Industry Watch
| Strong: Information Technology, Consumer Discretionary, Communication Services, Materials, Industrials, Energy |
| | Weak: Utilities, Real Estate, Consumer Staples |
Moving the Market
-- Reacting to aggressive Fed rate cut
-- Strength in mega caps and chipmakers
-- Optimism that economy is headed for soft landing
-- Fear of missing out on further gains
| Closing Summary
19-Sep-24 16:25 ET
Dow +522.09 at 42025.19, Nasdaq +440.68 at 18013.96, S&P +95.38 at 5713.64
[BRIEFING.COM] The stock market had a decidedly strong showing. The S&P 500 (+1.7%) and Dow Jones Industrial Average (+1.3%) reached fresh all-time highs and the Nasdaq Composite climbed 2.5%.
The rally was in response to yesterday's decision by the FOMC to cut the target rate for the fed funds rate by 50 basis points to 4.75-5.00%. Today's gains also reflected a belief that the economy is in good shape and the Fed will cut rates as needed to maintain a solid economic backdrop. This morning's data supported this optimistic view.
Weekly jobless claims remain steady below recession-like levels, the Philadelphia Fed Index tipped back into expansion (i.e. above 0.0 reading) in September, and existing home sales were slightly below expectations in August, but still reflected a tight market.
Just about everything came along for the upside ride, boosted by a fear of missing out on further gains, along with strength in the mega caps and chipmakers. The Vanguard Mega Cap Growth ETF (MGK) rose 2.5% and the PHLX Semiconductor Index (SOX) jumped 4.3%.
Apple (AAPL 228.87, +8.18, +3.7%), which traded up after T-Mobile's (TMUS 199.64, +2.96, +1.5%) CEO indicated iPhone 16 sales in the first week were better than last year's models, was a winning standout from the space.
This price action led the S&P 500 information technology sector to close 3.1% higher. The consumer discretionary (+2.2%), communication services (+1.9%), and industrials (+1.8%) sectors were the next best performers.
Meanwhile, defensive-oriented sectors like utilities (-0.6%) and consumer staples (-0.6%) underperformed today, reflecting a more risk-on vibe in the market.
The 10-yr yield settled five basis points higher at 3.73% and the 2-yr yield settled unchanged at 3.60%.
- Nasdaq Composite: +20.0% YTD
- S&P 500: +19.8% YTD
- S&P Midcap 400: +12.3% YTD
- Dow Jones Industrial Average: +11.5% YTD
- Russell 2000: +11.1% YTD
Reviewing today's economic data:
- Weekly Initial Claims 219K (Briefing.com consensus 232K); Prior was revised to 231K from 230K, Weekly Continuing Claims 1.829 mln; Prior was revised to 1.843 mln from 1.850 mln
- The key takeaway from the report is that there is nothing in the low initial claims reading that, as Fed Chair Powell might agree, suggests the likelihood of a recession, or downturn in the economy, is elevated.
- Q2 Current Account Balance -$266.8 bln; Prior was revised to -$241.0 bln from -$237.6 bln
- September Philadelphia Fed Index 1.7 (Briefing.com consensus 3.0); Prior -7.0
- August Existing Home Sales 3.86 mln (Briefing.com consensus 3.90 mln); Prior was revised to 3.96 mln from 3.95 mln
- The key takeaway from the report is that more inventory is becoming available with mortgage rates dropping, yet it is still a tight market, evidenced by the ongoing increase in the median home price.
- August Leading Homes Sales -0.2% (Briefing.com consensus -0.3%); Prior -0.6%
Looking ahead, there is no US economic data of note on Friday.
Treasuries settled mostly
19-Sep-24 15:35 ET
Dow +516.78 at 42019.88, Nasdaq +461.09 at 18034.37, S&P +98.99 at 5717.25
[BRIEFING.COM] There hasn't been much up or down movement at the index level in recent action.
The 10-yr yield settled five basis points higher at 3.73% and the 2-yr yield settled unchanged at 3.60%.
Looking ahead, there is no US economic data of note on Friday.
LEN, FDX, MLKN report earnings after the close
19-Sep-24 15:05 ET
Dow +578.89 at 42081.99, Nasdaq +479.80 at 18053.08, S&P +103.90 at 5722.16
[BRIEFING.COM] The major indices have traded in fairly narrow ranges near session highs through the afternoon so far.
FedEx (FDX 302.73, +4.65, +1.6%), Lennar (LEN 191.30, +2.93, +1.6%), and MillerKnoll (MLKN 27.59, -0.09, -0.3%) report earnings after the close.
UPS (UPS 132.62, +1.97, +1.5%) also trades higher in front of FDX results. Other homebuilder stocks outperform in front of LEN results, leading the SPDR S&P Homebuilder ETF (XHB) to trade 2.2% higher.
S&P 500 in second place
19-Sep-24 14:25 ET
Dow +531.50 at 42034.60, Nasdaq +472.10 at 18045.38, S&P +100.40 at 5718.66
[BRIEFING.COM] The S&P 500 (+1.79%) is in second place on Thursday afternoon, holding gains of about 100 points.
Elsewhere, S&P 500 constituents Tesla (TSLA 243.55, +16.35, +7.20%), Advanced Micro (AMD 158.29, +10.00, +6.74%), and PayPal (PYPL 77.62, +4.50, +6.15%) pepper the top of the standings. AMD is a beneficiary of the idiom that rising tides lifts all boats, where in this case the broader strength in the chip sector also boosts AMD, with PYPL getting a shot in the arm from favorable analyst comments.
Meanwhile, Iron Mountain (IRM 113.46, -2.99, -2.57%) is today's top laggard.
Gold ends higher on Thursday, boosted by Fed's rate cut
19-Sep-24 14:00 ET
Dow +645.47 at 42148.57, Nasdaq +521.60 at 18094.88, S&P +113.56 at 5731.82
[BRIEFING.COM] With about two hours to go on Thursday, the tech-heavy Nasdaq Composite (+2.97%) is hovering near gains of 3% on the day.
Gold futures settled $16 higher (+0.6%) to $2,614.60/oz, after the U.S. Federal Reserve yesterday cut interest rates by 50 basis points.
Meanwhile, the U.S. Dollar Index is up about +0.1% to $100.67.
Terex trades lower after guidance cut, but longer-term outlook remains constructive (TEX)
Industrial company Terex (TEX) is encountering some macroeconomic headwinds as its customers scale back on planned deliveries and adjust their inventory levels, causing the provider of aerial work platforms and materials processing machines to lower its FY24 EPS and revenue guidance. So far, the losses for TEX shares have been pretty manageable considering the magnitude of the guidance cut, especially for EPS ($5.80-$6.20 from $7.15-$7.45), and some of TEX's closest peers -- CNN Industrial (CNH), Manitowoc (MTW), and Astec Industries (ASTE) -- are trading higher despite the gloomy update.
We would mostly chalk this resiliency up to yesterday's 50-bps interest rate cut from the Federal Reserve and the general expectation that rates will continue to slide lower. TEX and its competitors are highly cyclical companies with heavy exposure to construction and infrastructure projects, making them sensitive to the interest rate environment. Therefore, some participants may already be looking beyond FY24 and into FY25, when lower rates should bolster construction activity.
- With that said, the downturn that TEX has recently experienced is both sudden and considerable. Recall that when TEX reported Q2 results on July 30, it raised its FY24 EPS guidance to $7.15-$7.45, up from its prior outlook of $6.95-$7.35, while only nudging its revenue outlook slightly lower to $5.10-$5.30 bln versus its previous guidance of $5.20-$5.40 bln. In this morning's press release, TEX knocked its revenue outlook down to $4.85-$5.05 bln.
- During the Q2 earnings call, CEO Simon Meester offered a rather bright characterization of the U.S. economy, pointing to its resiliency, lower inflation, and healthy construction spending. Furthermore, he stated that TEX's U.S. rental customers are returning to more normalized ordering patterns and that he expects demand in the U.S. market to remain robust.
- Since then, conditions have clearly weakened, as reflected in TEX's guidance cut. From a longer-term perspective, though, the company is still positioned to capitalize on a number of mega trends, including the construction of data centers and EV manufacturing plants, as well as increased construction activity from road, bridge, airport, and railway infrastructure projects.
- Additionally, TEX is on track to close on its acquisition of Dover's (DOV) Environmental Solutions Group, or ESG, in early Q4. The $2.0 bln acquisition -- the largest in TEX's history -- not only will provide a major boost to the top-line (ESG is in line to generate $1.4 bln in revenue on a TTM basis), but it will also add a steady, non-cyclical North American business to the portfolio. ESG, a leader in the refuse collection and recycling markets, is also profitable and TEX expects ESG's EBITDA margins to add 130 bps of margin accretion.
The main takeaway is that while TEX's FY24 guidance cut is disappointing, especially since it comes on the heels of an encouraging Q2 report, the longer-term outlook still looks promising for the company as interest rates drift lower and as the company integrates the ESG acquisition.
Endava sinks on soft FY25 guidance; reflects continuously sluggish IT spending (DAVA)
Endava (DAVA -4%), a U.K.-based IT consulting services provider, heads lower today after running into similar obstacles that have weighed on growth throughout the past year in Q4 (Jun), leading to softer-than-expected revenue growth. Meanwhile, DAVA's Q1 (Sep) and FY25 sales projections were below expectations. In fact, the midpoint of its FY25 revenue guidance translates to a meager 8.8% lift yr/yr despite lapping a 6.8% drop. While this forecast implies sequential improvements over the next few quarters, given the buzz surrounding AI and the fact that the technology is being discussed across nearly every vertical, DAVA's guidance is disappointing.
- DAVA's Q4 performance and subsequent bearish guidance did not come as a total shock. Bloomberg ran a story earlier this week about how U.S.-based peer Accenture (ACN) would delay promotions by six months due to a sluggish IT consultancy industry. Still, given the length of DAVA's headwinds and the comments made over the past few months, including CEO John Cotterell noting in May that the company is seeing pent-up demand, investors were hoping for signs of improvement in Q4.
- AI has also been at the forefront of organizations' digital transformation plans. DAVA remarked today that it remains excited about the outsized opportunities AI presents. However, shifting toward AI is not straightforward. DAVA mentioned that its clients are encountering challenges in the process, including understanding how the technology can mesh with operations. As a result, businesses are hesitant to spend until the path regarding AI becomes clearer.
- However, this does not mean that growth cannot manifest over time. For instance, ACN stated in June that the benefits of Gen AI are becoming more apparent, and clients understand that it is a critical technology but are not ready to spend on it yet. Perhaps with the Federal Reserve loosening its monetary policy, businesses will be more willing to allocate additional resources toward implementing AI on a larger scale.
- Nevertheless, in the interim, DAVA will continue dealing with macroeconomic headwinds that are driving dampened IT spending. To contend with this climate, DAVA is diversifying its geographical presence. As of Q4, 17% of its clients were based in the APAC region compared to 9% in the year-ago period. DAVA has also invested in efficiency-enhancing tools that it believes will shift toward revenue-generating efforts, paving the way for margin expansion over time.
DAVA's Q4 report was gloomy, and its FY25 guidance left much to be desired. However, reenergized IT spending is becoming much more a matter of when than if, and following over a year of heightened budget scrutiny and a loss of appetite to spend, the "when" may finally be right around the corner. During its conference call, DAVA stressed that clients are constantly looking at how they can plug AI into their businesses, which will be relatively massive projects supporting healthy pipeline activity. This encouraging development could result in a meaningful rebound in DAVA's quarterly performance over the near term, helping pull its stock out of the doldrums.
Mobileye drives higher after Intel reaffirms majority stake, but China-based headwinds linger (MBLY)
Intel (INTC) may be ready to make some major changes in order to hasten a turnaround that has faltered under its foundry-based strategy, but selling off part of its Mobileye (MBLY) stake isn't one of those changes that's in the cards.
On September 5, Bloomberg reported that INTC was considering selling off a portion of its 88% ownership stake in MBLY, sending shares of the ADAS chip maker spiraling lower to trade with a year-to-date loss of 76% by September 12. Earlier this morning, however, INTC released a statement, saying that it has no plans to divest a majority interest in the company and that it's excited about the future of autonomous driving and of MBLY. The news has MBLY spiking sharply higher and erasing those losses from early September.
- The commitment from INTC is certainly good news for MBLY, but the road ahead is still very bumpy. MBLY is coming off a very discouraging Q1 earnings report in which it slashed its FY24 revenue guidance to $1.60-$1.68 bln from its prior outlook of $1.83-$1.96 bln, and its adjusted operating income forecast to $152-$201 mln from $270-$360 mln.
- While the excess inventory situation at MBLY's tier one customers in North America and Europe is mostly in the rearview mirror, the company is now facing significant headwinds in China. During the Q1 earnings call, MBLY disclosed that it has seen a decline in orders for 2H24 from Chinese OEMs and that its core customers are experiencing continued share losses in China.
- From a product standpoint, second half volumes for SuperVision -- an ADAS that combines multiple sensors, cameras, radar, computer vision, and machine learning -- are expected to be lower than originally projected due to increased U.S. and European tariffs on Chinese-produced vehicles. After previously guiding for FY24 SuperVision volume of 175,000-195,000 units, MBLY is now expecting units of 110,000-130,000.
- Given MBLY's current struggles and depressed stock price, it makes sense that INTC wouldn't want to sell now. It's worth noting that Bloomberg also reported that INTC is weighing options for its Network and Edge (NEX) business. That business, which makes processors, SoCs, network adapters, and wireless connectivity devices, would likely draw stronger interest than MBLY. In Q2, NEX's revenue was essentially flat yr/yr at $1.34 bln while operating income increased by 117% yr/yr to $139 mln.
The main takeaway is that INTC's commitment to retaining its majority stake comes as a relief to MBLY's shareholders, but the current fundamental picture for MBLY remains clouded by a substantial downturn in the Chinese market.
Steelcase sells off after projecting soft Q3 sales growth; expects orders to recover in 2H25 (SCS)
Steelcase (SCS -7%) is in the hot seat today despite exceeding Q2 (Aug) earnings estimates. The global commercial furniture manufacturer with ties to the office, hospital, and educational markets did come up just short of analyst revenue estimates. However, that is not what is primarily igniting a sell-off today. Instead, investors are disappointed in SCS's downbeat Q3 (Nov) revenue guidance. While management was confident that yr/yr order growth from its largest customers would return during the second half of FY25 (Feb), investors are skeptical, given the turbulence projected over the next three months.
- Turning to Q2 results, SCS enjoyed several bright spots. Adjusted EPS expanded by 25.8% yr/yr to $0.39, SCS's best bottom-line performance since 2020. Propping up earnings was SCS's ninth consecutive quarter of yr/yr gross margin improvement, reflecting continuous success surrounding cost reduction initiatives, including moving production lines and closing a distribution center.
- Revenue may have edged just 0.1% higher yr/yr to $855.8 mln, landing modestly below the midpoint of SCS's $850-875 mln forecast. However, in SCS's core Americas region, order growth climbed by 3% yr/yr, marking the fourth straight quarter of growth. Management cited robust demand from its education segment as the underlying factor. Its Smith System business, which supports U.S. K-12 customers, grew by 18% yr/yr as many school districts issue bonds for new construction or modernization.
- So, what ultimately dragged down revs and led to a bearish Q3 forecast? Soft large customer orders clipped growth in Q2 and are seeping into the next quarter. SCS noted that the decline in orders from its more prominent corporate customers followed several quarters of strong yr/yr growth, signaling a potentially short-lived hurdle as order growth cools down shortly before accelerating. Meanwhile, SCS's International business remains weak, registering an 11% drop in orders yr/yr in Q2. Most of its overseas markets outside of India exhibited weaknesses.
- Against this backdrop, SCS was prudent in its Q3 revenue outlook, projecting $785-810 mln, translating to +1-5% organic growth yr/yr. Expected adjusted EPS of $0.21-0.25 also represents a yr/yr contraction. For FY25, SCS reiterated its adjusted earnings guidance of $0.85-1.00, underscoring continuing benefits from cost reduction actions.
SCS's Q2 report was decent, but its Q3 revenue estimate was concerning. When asked what provides confidence in a bounce in orders from larger customers over the next two quarters, SCS stated that orders expected during Q2 did not come in on schedule but were pushed out toward the back half of the year. This is not as troubling as customers outright cancelling their orders. However, delays create uncertainty and a stock that has added over +55% since September 2023 ahead of Q2 results was ripe for a significant pullback on an injection of uncertainty.
Lastly, keep an eye on peers MillerKnoll (MLKN), which reports AugQ results today after the close, and HNI (HNI), which is scheduled to report SepQ results next month.
Darden Restaurants trades higher despite EPS miss as Uber deal excites investors (DRI)
Darden Restaurants (DRI +7.4%) is making a strong move following its Q1 (Aug) earnings report this morning. This operator of several restaurant chains (Olive Garden, LongHorn Steakhouse, Ruth's Chris, and soon to own Chuy's) missed pretty big on EPS while revenue was generally in-line. In addition to earnings, Darden announced an exclusive multi-year delivery partnership with Uber (UBER), set to begin with Olive Garden in late 2024.
- Let's start with earnings. The company was surprised by a significant step down in traffic during July, which led to Q1 EPS being lower than expected. However, sales trends rebounded in August, resulting in flat comps for the month. The first three weeks of September have further improved, resulting in positive comps quarter-to-date for Q2 (Nov). Considering this recovery as well as planned initiatives, Darden reaffirmed FY25 EPS guidance at $9.40-9.60.
- Despite the sales softness in Q1, DRI says it delivered industry-leading margins and generated more adjusted EBITDA than the prior year, highlighting the durability and cash generation of its business model. Also, DRI outperformed the industry again this quarter with comps that were 140 bps better than the industry. Its gap relative to the industry improved from Q4, driven by the outperformance of Longhorn.
- Turning to comps, DRI posted Q1 consolidated comps of -1.1% (OG -2.9%, LS +3.7%, Fine Dining -6.0%), which was softer than Q4's flat comps (OG -1.5%, LS +4.0%, Fine Dining -2.6%). Darden said it is reaffirming all aspects of its FY25 guidance, which we read to mean it's also reaffirming FY25 comp guidance at +1-2%.
- Turning to the Uber deal, it will enable customers to order on-demand delivery via Darden restaurant channels, with delivery handled by Uber Direct. An initial pilot will begin in late 2024 with national expansion at Olive Garden expected to be complete by May 2025. DRI says customers have been asking for home delivery and have said they are willing to pay for the convenience. DRI is currently focusing on Olive Garden, but may expand to other brands.
- Quickly on the pending Chuy's (CHUY) deal, DRI is currently on track to close in mid-October, assuming approval from Chuy's shareholders. DRI has secured financing to support the closing and the team that successfully led the Ruth's Chris integration is ready to bring their expertise and lessons learned to the Chuy's integration. DRI continues to expect the deal will be neutral to adjusted EPS for this fiscal year.
Overall, we are a bit surprised to see the stock up so much despite the EPS miss. We suspect the deal with Uber is more than offsetting concern about the miss. Also, it sounds like the miss was caused by one bad month in July, which is being seen as a blip. Sales have recovered nicely in Aug/Sep. It seems investors are not overly worried. Also, DRI reaffirmed full year guidance, which appears to have eased investor concerns. Nevertheless, this report makes us a bit nervous for other sit down restaurant stocks set to report when earnings season kicks off next month, including BJRI, BLMN, CAKE, EAT, TXRH.
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