Market Snapshot
| Dow | 42801.41 | +222.64 | (0.52%) | | Nasdaq | 18196.23 | +126.97 | (0.70%) | | SP 500 | 5770.20 | +31.68 | (0.55%) | | 10-yr Note | -4/32 | 4.32 |
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| | NYSE | Adv 1500 | Dec 1135 | Vol 1.2 bln | | Nasdaq | Adv 2416 | Dec 1923 | Vol 8.1 bln |
Industry Watch
| Strong: Energy, Utilities |
| | Weak: Consumer Staples, Financials, Consumer Discretionary, Communication Services |
Moving the Market
-- Digesting the Employment Situation Report for February, which was just okay
-- Solid earnings from Broadcom (AVGO), boosting semiconductor stocks
-- Some buy-the-dip action after losses this week
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Closing Summary
07-Mar-25 16:35 ET
Dow +222.64 at 42801.41, Nasdaq +126.97 at 18196.23, S&P +31.68 at 5770.20
[BRIEFING.COM] The stock market closed a downbeat week with gains. The S&P 500 logged a 0.6% gain, the Dow Jones Industrial Average settled 0.5% higher, and the Nasdaq Composite jumped 0.7%.
The buying interest reflected buy-the-dip action after the sharp declines this week. There was also likely some technical factors in play after the S&P 500 dropped below its 200-day moving average (5,733) again today.
Strength in the semiconductor space was also a big help to the broader equity market. Broadcom (AVGO 194.96, +15.51, +8.6%) fueled buying in the space after reporting strong results and guidance. The PHLX Semiconductor Index (SOX) logged a 3.2% gain.
This morning's release of the February Employment Situation report wasn't great, but didn't deter buyers, either. Nonfarm payroll growth was a bit below estimates (151,000; Briefing.com consensus 159,000) and there was a sharp increase in the U6 unemployment rate (to 8.0% from 7.5%) to a level not seen since late 2021.
Market participants were also digesting Fed Chairman Powell's comments during a Q&A session that he was pleasantly surprised by improvements in productivity, which will result in higher potential output, and repeated that there is no rush to adjust policy at this time.
Also, President Trump said that reciprocal tariffs, which were slated to go into effect on April 2, could be implemented today.
- Dow Jones Industrial Average: -2.4% YTD
- S&P 500: -3.1% YTD
- S&P Midcap 400: -3.5% YTD
- Nasdaq Composite: -3.5%
- Russell 2000: -4.1% YTD
Reviewing today's economic data:
- February Nonfarm Payrolls 151K (Briefing.com consensus 159K); Prior was revised to 125K from 143K, February Nonfarm Private Payrolls 140K (Briefing.com consensus 145K); Prior was revised to 80K from 111K, February Avg. Hourly Earnings 0.3% (Briefing.com consensus 0.3%); Prior was revised to 0.4% from 0.5%, February Unemployment Rate 4.1% (Briefing.com consensus 4.0%); Prior 4.0%, February Average Workweek 34.1 (Briefing.com consensus 34.2); Prior 34.1
- The key takeaway from the report is that it was no better than just okay. It won't be enough to silence the growth concerns that have echoed in recent weeks through other data releases.
There is no US economic data of note Monday.
Consumer credit increases in Jan.
07-Mar-25 15:35 ET
Dow +231.52 at 42810.29, Nasdaq +124.55 at 18193.81, S&P +30.29 at 5768.81
[BRIEFING.COM] Things are little changed at the index level over the last half hour.
Consumer credit was $18.1 billion in January following a revised -$100 billion in December (from +$40.8 billion).
Equities and bonds didn't react much to the news. The 10-yr yield settled three basis points higher at 4.32%.
Major indices stick to session highs, still sharply lower on the week
07-Mar-25 14:55 ET
Dow +208.56 at 42787.33, Nasdaq +107.56 at 18176.82, S&P +26.42 at 5764.94
[BRIEFING.COM] The major indices are sticking to close to their highs for the day, but still show solid losses this week.
The Dow Jones Industrial Average is 0.5% higher, leaving its loss this week at 2.4%. The S&P 500 sits on a 0.4% gain today, which makes its loss for the week 3.2%. The Nasdaq Composite trades up 0.6%, down 3.6% from last Friday.
Separately, Treasury yields continue to climb, tracking toward their highs of the week. The 10-yr yield is at 4.32% and the 2-yr yield is at 4.01%.
S&P 500 up 0.70%, Skyworks, Dollar General lead; Cooper drops after earnings
07-Mar-25 14:30 ET
Dow +268.67 at 42847.44, Nasdaq +152.97 at 18222.23, S&P +40.37 at 5778.89
[BRIEFING.COM] The S&P 500 (+0.70%) is in second place on Friday afternoon.
Briefly, S&P 500 constituents Skyworks (SWKS 72.54, +5.61, +8.38%), Dollar General (DG 81.37, +5.13, +6.73%), and Paramount Global (PARA 12.51, +0.75, +6.38%) pepper the top of the standings despite a dearth of corporate news.
Meanwhile, California-based medtech firm Cooper (COO 85.66, -5.32, -5.85%) is one of today's worst performers following earnings.
Gold slips 0.5% but ends week strong amid trade war jitters, weaker dollar
07-Mar-25 13:55 ET
Dow +149.04 at 42727.81, Nasdaq +53.82 at 18123.08, S&P +17.54 at 5756.06
[BRIEFING.COM] With about two hours to go on Friday the tech-heavy Nasdaq Composite (+0.30%) is up about 50 points, clawing out of the red over the prior half hour.
Gold futures settled $12.50 lower (-0.5%) to $2,914.10/oz, though still higher by +2.4% on the week as the precious metal got more attractive owing to this week's trade war headlines as well as weakness in the greenback.
Currently, the U.S. Dollar Index is down about -0.3% to $103.89.
Gap surges on impressive Q4 results as turnaround momentum gains steam (GAP)
Apparel firm Gap (GAP +13%) is surging today on robust earnings and sales upside in Q4 (Jan). The company has been in turnaround mode for several quarters, appointing a new CEO in 2023, who outlined a comprehensive strategy to return to what can separate Gap from its peers. During its turnaround, Old Navy's comps flipped positive, becoming a main profit driver. At the same time, Gap delivered steady margin improvements. Now, after a year of fixing its fundamentals, Gap mentioned that it is ready to allocate its attention to continuous innovation, paving the way for long-lasting upward momentum.
- What stood out most from Gap's Q4 report was its +3% comparable sales growth, which surpassed estimates and accelerated from +1% in Q3 (Oct), helping the company close the year out with positive comps each quarter. This level of consistency supported Gap's eighth consecutive quarter of market share gains, a testament to management's ability to adapt to fashion trends and craft a marketing campaign that has resonated with consumers.
- Nearly every banner posted positive comp growth in Q4, a similar trend from last quarter. Old Navy, comprising over half of total sales, registered +3% comp growth, touting continued wins in active and denim categories. Gap, the company's second-largest banner, led the way with a +7% comp, illuminating its brand reinvigoration playbook; CEO Richard Dickson mentioned that the brand is back in the cultural conversation. Banana Republic and Athleta reversed roles in Q4, with the former registering +4% comps compared to a -1% drop last quarter and the latter delivering -2% comps versus a +5% jump in Q3.
- Management noted that there is still work to do to improve Athleta and position it for upward momentum. Conversely, at Banana Republic, the company enjoyed a notable improvement in its women's business while also building on its strength in men's.
- Gap is still traversing a dynamic economic landscape, evident by its relatively conservative FY26 revenue guidance, projecting growth of just +1-2% following a 1% increase in FY25. The company cautioned that the fluidity of the economy it endured last year will likely hold throughout 2025. However, regarding tariffs, Gap was not overly concerned, noting that during FY25, it sourced under 10% of its products from China and less than 1% from Canada and Mexico combined. The company's FY26 guidance already includes any expected margin impact, albeit small, from tariffs.
Like last quarter, Gap's Q4 results further reflected encouraging turnaround progress. The holiday season clearly provided positive momentum heading into 2025. Even though some banners could take longer than others to realize their full potential, including Banana Republic and Athleta, we like the moves CEO Richard Dickson has been making and view the stock as attractive even though today's pop places shares back in their previous trading range as continued momentum can begin to propel Gap above resistance around $25.00.
Costco ringing up sizable losses after EPS miss, but bigger concern rests with tariffs (COST)
For the first time since 1Q22, Costco (COST) missed EPS estimates last night, instigating a profit-taking pullback in a stock that was up by 12% on a year-to-date basis. However, the 2Q25 earnings miss was mainly driven by FX headwinds, which created a $0.13/share headwind. While COST's Canada and international businesses achieved record results on a constant currency basis, negative FX fluctuations caused comps for Canada and international markets to fall short of expectations.
- Considering that the EPS miss wasn't due to weaker-than-expected demand or operational issues, we believe that the stock's selloff is more likely tied to concerns that tariff-induced inflation will result in consumers pulling back on discretionary purchases. COST's more affluent customer base has been a key asset for the warehouse retailer amid this high interest rate and inflationary environment, as illustrated by strength in its non-food categories.
- On that note, the non-food category generated mid-teens comp growth in Q2, with gold and jewelry, toys, housewares, appliances, sporting goods, home furnishings, and small electronics all posting double digit increases. During the earnings call, CFO Gary Millerchip commented that customers are willing to spend but remain "very choiceful", adding that this dynamic is likely to intensify with the return of some inflation. The possibility of demand tapering off for non-food items is putting some pressure on the stock.
- Following COST's membership fee increase last September, participants have been keeping a close eye on membership fee income growth and signs of customer attrition. For the quarter, membership fee income grew by 7.4% to $1.193 bln, but the membership fee increase only contributed about 3% of the gain. Due to the impact of deferred accounting, most of the benefit from the membership fee increase will materialize over the next four quarters, with the largest contribution coming in 4Q25. Also, in a testament to COST's strong positioning in the retail space and its steady share gains, paid household members were up by nearly 7% and the worldwide renewal rate ticked higher by 10 bps qtr/qtr to 90.5%.
- Lastly, the company is managing expenses well as SG&A as a percentage of revenue improved by 8 bps yr/yr to 9.06%. COST did recently ratify a new employee agreement, though, that will take the average wage for U.S. and Canada employees to over$31/hour. The pay raise comes at a time of increasing uncertainty, which could be creating a little more anxiety for shareholders.
Overall, COST turned in another solid performance with adjusted comps of +9.1% and net income growth of over 8%. The EPS miss is disappointing, but it's a bit misleading since it was driven by FX headwinds. More concerning is the risk that tariffs pose, particularly for COST's non-food categories, but the company does have a track record of performing well during difficult economic conditions.
Hewlett Packard Enterprise under pressure on weak guidance and timing of AI system deals (HPE)
Hewlett Packard Ent (HPE -15%) is heading sharply lower following its Q1 (Jan) results last night. It was a rough report all the way around. HPE reported a slight EPS miss following eight consecutive beats. Revenue rose 16.3% yr/yr (+17% CC) to $7.85 bln, slightly better than expected. The bigger problem was the outlook as both Q2 (Apr) and FY25 guidance came in well below analyst expectations.
- HPE saw increased demand for servers, storage and networking products in Q1. Its +17% CC top line growth marked the fourth straight quarter of accelerated revenue growth. HPE posted double-digit growth in Server and Hybrid Cloud while Intelligent Edge also performed better than expected. However, HPE concedes it faced some challenges in the Server segment.
- Specifically, Server revenue was $4.3 bln (+30% CC). However, revenue fell sequentially primarily due to the timing of AI systems deals. In AI systems, HPE signed $1.6 bln in net orders and added enterprise and sovereign customers. However, most demand is still from model builders. HPE recognized roughly $900 mln of AI revenue, more than double last year, but down sequentially due to chip availability and customer readiness. HPE expects these factors will continue to affect its AI business.
- Margins were another problem area and helps explain the rare EPS miss. HPE saw yr/yr operating margin declines in both its Server and Intelligent Edge segments. Traditional servers were impacted by higher discounts due to aggressive pricing competition in the market. Server margins were further pressured by the higher-than-normal AI inventory caused by the rapid transition of demand to next-generation GPUs.
- HPE has already implemented aggressive actions to improve Server margins, including immediate actions to limit hiring, travel, and discretionary expenses. It also reduced its workforce to better align costs with demand. Nevertheless, HPE expects margin pressure to continue over the next 1-2 quarters.
- The company also provided an update on its pending acquisition of Juniper Networks (JNPR). As previously announced on Jan 30, the DOJ sued to block the deal. HPE believes the DOJ's analysis of the market is fundamentally flawed. The new information we got last night was that a trial date has been set for July 9. HPE believes it has a compelling case and expects to close the deal before the end of FY25.
Overall, this was a rough quarter for HPE. What really stood out was that the guidance was well below expectations. Specifically, we think investors are focusing on cautious comments relating to its AI systems. HPE cautioned that the AI systems business tends to be lumpy as large deals take time to convert. However, any weakness in AI is making people nervous. That was similar to what we heard from Marvell (MRVL) this week and fuels concerns that there may be an AI digestion problem this spring/summer. HPE expects significantly higher AI revenue conversion in 2H25, driven by the transition to Blackwell GPUs. However, investors are understandably nervous for now.
Broadcom's surging AI revs in Q1 fuels top and bottom-line beats; sees sustained demand in Q2 (AVGO)
Broadcom (AVGO +2%) soared past top and bottom-line estimates in Q1 (Jan) while crushing its previous AI revenue forecast, fueling solid gains today. The semiconductor and services giant also issued upbeat Q2 (Apr) revenue guidance, forecasting approximately $14.90 bln, supported by an expected 44% spike in AI revenue to $4.4 bln. With shares tumbling by over 20% since surging to all-time highs last quarter, tacking on additional losses yesterday following deflating AI-related revenue guidance from peer Marvell (MRVL), today's report and guidance alleviated plenty of concern over a potential mid-year AI digestive phase talked about by analysts recently.
- As expected, AVGO delivered a healthy earnings beat in Q1, supported by better-than-expected gross margins of 79.1% and a decently-sized revenue beat. AVGO grew its top line by 24.7% yr/yr to $14.92 bln, above its $14.6 bln outlook. AI and services fueled AVGO's outperformance.
- AI revenue rocketed by 77% yr/yr to $4.1 bln, ahead of its $3.8 bln forecast, as the company's three hyperscale partners remained aggressive in their AI investments. AVGO is acting similarly, stepping up its R&D investments on two fronts: creating the next generation of custom AI accelerators, i.e., XPUs, and the next generation of Ethernet switches, i.e., Tomahawk 6. AVGO also reiterated its view that these hyperscalers would generate a serviceable addressable market (SAM) of $60-90 bln in FY27 (Oct).
- Another exciting development in AI is that two additional hyperscalers selected AVGO to develop custom accelerators in Q1. Following last quarter's two new customers brings the total number of additional hyperscalers to four, which CEO Hock Tan noted should eventually generate a similarly-sized SAM. While Mr. Tan added that this journey could take at minimum 1.5 years, the demand for AVGO's XPUs showcases its technological advantage that can firmly cement a leadership position in AI over time.
- Services, which comprise a little under half of AVGO's total revenue, remained in high demand, registering a 47% jump in revs yr/yr, exaggerated slightly by deals slipping from Q4 into Q1. Still, AVGO is observing considerable growth in software, underpinned largely by its ability to enable entire data centers to be virtualized.
- AVGO forecasted software revenue to continue recording double-digit growth in Q2, targeting a 23% increase yr/yr.
- Not every concern was alleviated by AVGO's Q1 report. The recovery in non-AI semiconductors remained sluggish as revs fell by 9% sequentially. Still, a silver lining is that it appears the worst is over. After bottoming last quarter, AVGO's broadband business posted a double-digit sequential recovery in Q1, with similar growth expected in Q2. Server storage was down by single digits sequentially in Q1 but is projected to be up high single digits in Q2. Meanwhile, wireless, albeit down sequentially, was flat yr/yr and is expected to remain flat yr/yr in Q2.
- AVGO projects its non-AI revenue to be flattish sequentially in Q2 but is noticing that bookings continue to expand yr/yr.
While still not where it was to start March, AVGO's Q1 report is igniting a decent relief rally today. The demand for its XPUs highlights a competitive edge in an increasingly competitive AI atmosphere, boding well for AVGO over the long term. While economic uncertainty can create near-term volatility, we view current levels as attractive for buy-and-hold investors.
Zscaler scaling higher after delivering strong beat-and-raise performance (ZS)
While still operating under a challenging IT spending environment, cybersecurity company Zscaler (ZS) delivered a strong beat-and-raise Q2 earnings report with accelerating billings growth. The provider of Zero Trust products is capitalizing on its go-to-market investments and a corresponding improvement in sales productivity, leading to likely market shares against competitors such as Palo Alto Networks (PANW) and Microsoft (MSFT). While PANW no longer provides billings data, its billings growth was in the 9-10% range a couple of quarters ago, while ZS reported billings growth of 18% last night.
Even as ZS ramps up its marketing and sales investments, the company's profitability continues to increase. In Q2, operating profit margin expanded by two percentage points to nearly 22%, while free cash flow margin also hit a new record at 22%.
- The company saw double-digit growth in both the new and upsell businesses, reflecting the stronger sales execution. Moving ahead, ZS expects this higher sales productivity to continue due to the growing number of ramped sales reps and the launch of its new "Zero Trust Everywhere" marketing campaign.
- That marketing campaign centers on the idea that ZS's platform is now capable of securing much more than workforces' PCs, phones, and devices. For instance, its capabilities have expanded into IoT/OT devices and B2B systems.
- Bolstered by its expanded capabilities, ZS believes it's in good position to capitalize on an upcoming hardware refresh cycle that will prompt IT teams to reduce security risks tied to VPNs, SD-WANs, and firewalls.
- Another rising catalyst revolves around GenAI, particularly for data loss and protection with the launch of new apps like 365 Copilot, DeepSeek, and ChatGPT. With the launch of these technologies, the importance of data protection is only increasing, causing more ZS customers to purchase its products in order to gain visibility into public-AI apps.
- Taking into account the above factors, ZS raised its FY26 billings guidance by $24.0 mln to $3.153-$3.168 bln, implying growth of about 21%. Importantly, the healthy growth won't come at the expense of profitability with ZS issuing upside EPS guidance of $3.04-$3.09.
There is little to complain about here as ZS delivered solid, upside results in a difficult and competitive market. Looking ahead, the future looks bright for ZS as the proliferation of new AI technologies will necessitate more tools for data protection and loss.
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