Market Snapshot
briefing.com
| Dow | 32598.48 | -58.13 | (-0.18%) | | Nasdaq | 11371.85 | -83.69 | (-0.73%) | | SP 500 | 3947.56 | -22.59 | (-0.57%) | | 10-yr Note | -28/32 | 3.99 |
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| | NYSE | Adv 1286 | Dec 1655 | Vol 962 mln | | Nasdaq | Adv 1986 | Dec 2507 | Vol 4.8 bln |
Industry Watch
| Strong: Energy, Materials, Industrials |
| | Weak: Real Estate, Utilities, Consumer Staples, Consumer Discretionary, Information Technology |
Moving the Market
-- Weakness in many stocks that reported earnings results since yesterday's close
-- Downside leadership from the mega cap space
-- Rising Treasury yields, 10-yr note yield reaching 4.00% today
-- S&P 500 finding support at its 200-day moving average (3,940)
-- Comments from Minneapolis Fed President Kashkari (2023 FOMC voter) and Atlanta Fed President Bostic (2024 FOMC voter) stoking concerns about rate hikes
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Closing Summary
01-Mar-23 16:25 ET
Dow +5.14 at 32661.75, Nasdaq -76.06 at 11379.48, S&P -18.76 at 3951.39
[BRIEFING.COM] The new month started on a mostly downbeat note. The S&P 500 and Nasdaq closed with decent losses, weighed down by weakness in the mega cap space, while the Dow managed a slim gain. Downside momentum was somewhat limited, though, thanks to the S&P 500 finding support at its 200-day moving average (3,940) twice today.
Rising market rates were a big headwind for stocks today. The 10-yr note yield reached 4.00% earlier and settled up eight basis points at 3.99%. The 2-yr note yield rose ten basis points to 4.90%. These moves were mostly in response to the ISM Manufacturing Index this morning and comments from Fed officials.
Briefly, the ISM Manufacturing Index edged higher to 47.7% from 47.4% in January. A reading below 50% is indicative of a general contraction in manufacturing activity. The sticking point is that the Prices Index rose to 51.3% from 44.5%, marking the first price increase in four months. This price data, we would add, followed a higher-than-expected February CPI reading for Germany.
In addition, rate hike concerns were stoked by Minneapolis Fed President Kashkari (2023 FOMC voter) saying he is leaning toward raising rates further and pushing up his own policy path forecast and Atlanta Fed President Bostic (2024 FOMC voter) saying he thinks the Fed should get to 5.00-5.25% and hold there well into 2024, according to CNBC.
Negative reactions to disappointing earnings and/or guidance from the likes of Lowe's (LOW 194.31, -11.44, -5.6%), Rivian (RIVN 15.76, -3.54, -18.3%), Kohl's (KSS 27.51, -0.53, -1.9%), and Agilent Technologies (A 137.51, -4.46, -3.1%) acted as another headwind for stocks today.
Most of the S&P 500 sectors registered losses with the interest rate sensitive real estate (-1.5%) and utilities (-1.7%) sectors suffering the steepest declines. On the flip side, the energy (+1.9%), materials (+0.7%), and industrials (+0.4%) sectors were the lone standouts in positive territory, having been enthused somewhat by China reporting stronger-than-expected Manufacturing PMI and Non-Manufacturing readings for February.
Notably, small and mid cap stocks fared better than their larger peers today. The Russell 2000 (+0.1%) and S&P Mid Cap 400 (+0.3%) were among the best performers for the major indices.
- Nasdaq Composite: +8.7% YTD
- Russell 2000: +7.8% YTD
- S&P Midcap 400: +7.3% YTD
- S&P 500: +2.9% YTD
- Dow Jones Industrial Average: -1.5% YTD
Reviewing today's economic data:
- Weekly MBA Mortgage Applications Index -5.7%; Prior -13.3%
- February IHS Markit Manufacturing PMI - Final 47.3; Prior 47.8
- February ISM Manufacturing Index 47.7% (Briefing.com consensus 47.8%); Prior 47.4%
- The key takeaway from the report is that manufacturing activity continued to contract in February, albeit at a slightly slower pace, yet it did so against a backdrop of prices increasing for the first time in four months in a move that will keep the Fed with a tightening bias.
- January Construction Spending -0.1% (Briefing.com consensus 0.3%); Prior was revised to -0.7% from -0.4%
- The key takeaway from the report is that new single family construction continued to decline (-1.7%), clipped by higher interest rates that are making construction projects more expensive to finance at a time when broader economic activity is slowing due in part to the higher interest rates.
Ahead of tomorrow's open, Anheuser-Busch InBev (BUD), Best Buy (BBY), Big Lots (BIG), Burlington Stores (BURL), Kroger (KR), and Macy's (M) headline the earnings reports.
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 ET: Revised Q4 Productivity (Briefing.com consensus 2.5%; prior 3.0%) and Unit Labor Costs (Briefing.com consensus 1.4%; prior 1.1%), weekly Initial Claims (Briefing.com consensus 197,000; prior 192,000) and Continuing Claims (prior 1.654 mln)
- 10:30 ET: Weekly natural gas inventories (prior -71 bcf)
Market trying to recover somewhat ahead of close
01-Mar-23 15:35 ET
Dow -27.57 at 32629.04, Nasdaq -78.51 at 11377.03, S&P -19.57 at 3950.58
[BRIEFING.COM] The main indices have been trying to lift off recent lows heading into the close.
Box (BOX), Okta (OKTA), Salesforce (CRM), Snowflake (SNOW), and Splunk (SPLK) are among the notable companies reporting earnings after the close.
Ahead of tomorrow's open, Anheuser-Busch InBev (BUD), Best Buy (BBY), Big Lots (BIG), Burlington Stores (BURL), Kroger (KR), and Macy's (M) headline the earnings reports.
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 ET: Revised Q4 Productivity (Briefing.com consensus 2.5%; prior 3.0%) and Unit Labor Costs (Briefing.com consensus 1.4%; prior 1.1%), weekly Initial Claims (Briefing.com consensus 197,000; prior 192,000) and Continuing Claims (prior 1.654 mln)
- 10:30 ET: Weekly natural gas inventories (prior -71 bcf)
S&P 500 again finds support at 200-day moving average
01-Mar-23 15:05 ET
Dow -58.13 at 32598.48, Nasdaq -83.69 at 11371.85, S&P -22.59 at 3947.56
[BRIEFING.COM] The stock market continued to deteriorate in the last half hour as the 10-yr note yield hit 4.00% again. Downside momentum dissipated somewhat when the S&P 500 failed to break below its 200-day moving average (3,940).
Energy complex futures settled the session higher. WTI crude oil futures rose 0.9% to $77.69/bbl and natural gas futures rose 2.8% to $2.95/mmbtu. The S&P 500 energy sector (+1.8%) sits atop the leaderboard by a wide margin.
Notably, the CBOE Volatility Index is up 1.6% or 0.33 to 21.03.
Advance Auto, Target give back post-earnings gains and then some on Wednesday
01-Mar-23 14:30 ET
Dow -55.87 at 32600.74, Nasdaq -78.38 at 11377.16, S&P -21.22 at 3948.93
[BRIEFING.COM] The S&P 500 (-0.53%) is wedged firmly in second place to this point at midweek.
S&P 500 constituents Advance Auto (AAP 137.41, -7.55, -5.21%), Alexandria RE (ARE 143.43, -6.35, -4.24%), and Target (TGT 161.45, -7.05, -4.18%) pepper the bottom of the S&P. AAP and TGT give back all of yesterday's post-earnings rally, while ARE alongside REIT peers slump due in part to rising yields across the curve.
Meanwhile, First Solar (FSLR 192.48, +23.34, +13.80%) is atop the standings following last night's earnings beat, strong guidance.
Gold begins March on high note
01-Mar-23 14:00 ET
Dow -30.50 at 32626.11, Nasdaq -63.93 at 11391.61, S&P -17.12 at 3953.03
[BRIEFING.COM] With about two hours remaining on Wednesday the tech-heavy Nasdaq Composite (-0.56%) shows the steepest losses.
Gold futures settled $8.70 higher (+0.5%) to $1,845.40/oz, continuing to rebound nicely with a third straight positive session.
Meanwhile, the U.S. Dollar Index is down about -0.3% to $104.52.
Page One
Last Updated: 01-Mar-23 09:03 ET | Archive
Chill in the air to begin March
The weather lore of March is that it comes in like a lion and goes out like a lamb, meaning it is cold at the start of the month and warmer at the end of the month. Residing in Chicago, your author is apt to believe that axiom only applies south of the Mason-Dixon line. March starts cold here and it ends cold here.
In any case, the equity futures market is on the chilly side of things at this point on the first trading day of March, unable to hold onto earlier gains. The S&P 500 futures are down 10 points and are trading 0.2% below fair value, the Nasdaq 100 futures are down 25 points and are trading 0.1% below fair value, and the Dow Jones Industrial Average futures are down 74 points and are trading 0.2% below fair value.
That's not super cold, but it is the remnant of the chill that fell over the market in February. The weather front, though, is tough to predict because the air in the atmosphere is unstable.
Treasury yields have been climbing rapidly and are acting as if they still want to go higher; the Fed is making noise about taking its policy rate higher and keeping it higher for longer; geopolitical tension between the U.S. and China is thickening; key technical support levels are being challenged; inflation is looking sticky; economic growth continues to run above potential, yet earnings estimates are declining.
Accordingly, there are myriad attack angles for playing this market for bulls and bears alike.
Some individual stocks are under attack following their earnings reports. That includes names like Kohl's (KSS), Rivian Automotive (RIVN), Novavax (NVAX), Agilent Technologies (A), Ross Stores (ROST), and AMC Entertainment (AMC). However, others, like Sarepta Therapeutics (SRPT), Duolingo (DUOL), First Solar (FSLR), and HP, Inc. (HPQ), are on the offensive.
In brief, the earnings news since yesterday's close hasn't altered the prevailing weather pattern seen in February.
February closed, too, with the S&P 500 sliding below its 50-day moving average (3,980) in a late-day selloff. March, meanwhile, is beginning with Treasury yields pushing higher. The 2-yr note yield is up three basis points to 4.83%, the 10-yr note yield is up three basis points to 3.95%, and the 6-month T-bill yield is up a basis point to 5.14%.
March also began with some good economic news out of China, which registered its strongest manufacturing PMI reading in February (52.6) since 2012. The good news there, though, isn't what it used to be, as stronger than expected economic data is seen as a potential driver of sticky inflation pressures that will accentuate the need for tighter monetary policy.
We will see the release of the February ISM Manufacturing Index (Briefing.com consensus 47.8%; prior 47.4%) at 10:00 a.m. ET. This report has market-moving implications, but maybe not so much as Friday's ISM Services PMI will considering that the services sector accounts for the largest swath of U.S. economic activity and the Fed is keenly focused on services inflation.
That's a potential market-moving issue for another day. On this first day of March, a chill is still in the air ahead of the open.
-- Patrick J. O'Hare, Briefing.com
Rivian crashes as lingering supply chain issues and cooling demand hit production outlook (RIVN)
Upstart electric vehicle maker Rivian (RIVN) is driving in reverse following the release of its 4Q22 earnings report that put the lingering supply chain issues and mounting demand concerns back under the spotlight. The company did beat analysts' EPS estimates, but the primary focal points at this stage for RIVN include production, manufacturing efficiency, and orders. On those fronts, the news was discouraging, more than offsetting the bottom-line beat.
- In Q4, RIVN produced 10,200 vehicles, representing a 36% qtr/qtr increase. This was already known, though, because the company reported production numbers in early January. With the Q4 production number falling short of expectations, and with RIVN missing its 2022 target of 25K by about 650 vehicles, the stock started the year on a sour note after collapsing by over 80% last year. The disappointing production results showed that the stubborn supply chain disruptions and component shortages are not yet in the rearview mirror.
- Unfortunately, RIVN expects these issues to persist in 2023, as illustrated by its weaker-than-expected production forecast of 50K vehicles. There will be some downtime at its Normal, IL plant in Q4 this year to enhance its products and production process, but this was previously disclosed by the company. Therefore, the production guidance shortfall is a function of supply chain disruptions -- which CEO RJ Scaringe stated is still the main limiting factor for production -- and a possible softening of demand.
- In previous quarters, the company provided a net preorder number. For instance, last quarter, RIVN reported that net preorders in the U.S. and Canada for the R1 grew by 16K qtr/qtr for a total of 114K. This time around, however, the company didn't issue a specific net preorder number for the quarter, instead simply stating that its backlog of orders will last until 2024. This omittance is likely creating some angst, especially since Mr. Scaringe acknowledged that higher interest rates are indeed creating a headwind for demand.
- Ongoing supply chain issues, coupled with cooling demand, will have a ripple effect on gross margin and profitability. In fact, after posting a negative gross profit of $(1.0) bln in 2022, RIVN anticipates that 2023 will see another gross profit loss.
- On the positive side, gross margin losses should moderate as the year progresses as RIVN ramps production higher. Additionally, the company says it's making strides in bringing its commercial, engineering, and operational costs down. As a result, RIVN is projecting FY23 adjusted EBITDA to move in the right direction to ($4.3) bln from ($5.2) in FY22.
The main takeaway is that RIVN's production growth and accompanying manufacturing efficiency improvements are not moving along as quickly as hoped. Making matters worse, concerns about softening demand are now part of the mix of issues that are weighing on the stock.
Kohl's experiences elevated volatility after posting a substantial earnings miss in JanQ (KSS)
Following a substantial bottom-line miss in Q4 (Jan) and weak FY24 (Jan) earnings guidance, Kohl's (KSS) is enduring pronounced volatility today. The stock sold off by over 15% during pre-market trading, only to mount a roaring comeback to highs of +4% shortly after the opening bell. These significant price swings are nothing new to the department store chain, which has been on a rollercoaster over the past six months, bouncing between $24-34.
What is new to KSS was the sheer size of its earnings miss in Q4, marking one of its widest misses over the past five years. Adjusted EPS turned red after nine-straight quarters operating in the green, tumbling to $(2.49) from $2.20 in the year-ago period. Likewise, KSS registered a 7.2% decline in sales yr/yr, considerably worse than analysts predicted.
Newly appointed CEO Tom Kingsbury, formerly the interim CEO since December 2, commented that the company is refining its strategy, reestablishing merchandise disciplines, and putting the customer as the central focus. As a result of these actions, Mr. Kingsbury noted he was confident that financial performance would improve over the long haul.
- What happened during the holiday quarter? KSS took several proactive measures, namely markdowns, during Q4 to clear inventories, resulting in an approximately 750 bp hit to gross margins. Meanwhile, KSS faced higher shrink and freight expenses than it expected in the quarter, tacking on another unfavorable 200 bp impact. All in, gross margins contracted by over 1000 bps yr/yr to 23%, driving its dismal earnings figure.
- It is worth pointing out that inventory is now generally back in line with KSS's sales performance compared to 2019.
- KSS is focused on four priorities in FY24 to improve its results in subsequent quarters: enhance the customer experience, simplify value strategies, manage inventory and expenses, and strengthen its balance sheet.
- KSS is bolstering its partnership with Sephora (LVMH), targeting an additional 250 shops, bringing the total to 850.
- KSS is also looking to rely less on general promotions, shifting its attention to price-focused strategies.
- Expense management will center on increasing self-service capabilities in stores, marketing efficiency, and looking for areas to reduce spending across the organization.
- Regarding the balance sheet, KSS expects to manage its business at 2.5x leverage over the long term.
- Still, management conceded that the demand backdrop remains challenging, which, combined with the company's new priorities, resulted in a conservative FY24 outlook. KSS expects adjusted EPS of $2.10-2.70 this year, missing analyst expectations.
After peer Dillard's (DDS) sunk following underwhelming JanQ earnings last week, we noted that this raised some red flags for KSS ahead of its JanQ report. Although the company's new framework for returning to profitable growth is encouraging, we believe waiting until KSS demonstrates some success is best.
Ross Stores falls despite ringing up a solid holiday quarter as guidance weighs (ROST)
Ross Stores (ROST -2%) rang up a robust holiday quarter, beating top and bottom line estimates in Q4 (Jan) while delivering comp growth of +1%, nicely ahead of its forecast of flat to negative 2%. However, as we witnessed with TJX (TJX) and Walmart (WMT), a solid holiday shopping season was mostly priced in, shifting the emphasis to guidance. As a result, by following in its peers' footsteps and guiding FY24 earnings below consensus, ROST is experiencing selling pressure today.
CEO Barbara Rentler cautioned that due to a highly uncertain macroeconomic and geopolitical environment, the company felt it prudent to stay conservative in planning the business, echoing remarks made by TJX CEO Ernie Herrman last week. Mr. Herrman noted that it is being conservative in its plans but believes this is warranted given the current environment.
Furthermore, as we heard last quarter, ROST discussed inflation's adverse impacts on its primary low-to-moderate income customer base. This inflationary toll is continually putting pressure on same-store sales growth. After ending FY23 with -4% comps, ROST forecasted flat same-store sales growth in FY24. Although this is a notable improvement, it is not a meaningful positive development, especially since it also missed analyst predictions.
However, there were items from Q4 that highlighted encouraging developments that could assist ROST in successfully steering its way through the tumultuous economic backdrop ahead.
- Operating margins of 10.7%, a 90 bp jump yr/yr, topped ROST's prior outlook of 9.7-10.5%, fueled by easing freight and incentive costs. Likewise, merchandise margins grew 15 bps yr/yr. With apparel retailers like ROST having to implement higher-than-usual markdowns to clear excess inventory, the easing of some supply chain costs is a promising development that could help buoy margins in subsequent quarters.
- Management remarked that with ocean freights falling, it expects to realize a big benefit this year. ROST also expects freight pressures to ease over a longer horizon, which, coupled with wage costs growing slower than during the pandemic, will result in operating margin expansion over time.
- ROST also discussed that historically, when there is abundant merchandise in the market, as the industry is experiencing now, it has been able to drive sales and take market share.
Off-price retail has been a resilient industry during the inflationary environment, evidenced by upbeat comp growth from ROST and its peers over the past few quarters. However, this does not mean the sector is entirely immune to macroeconomic headwinds. ROST's conservative guidance is undoubtedly a concern. Still, by preparing its business for a worst-case scenario, ROST could surpass its low expectations, especially if more affluent consumers begin to trade down to hunt for better bargains as discretionary income continues to get squeezed.
On a side note, ROST's Q4 numbers lower expectations further ahead of JanQ earnings tomorrow from Burlington Stores (BURL) and Nordstrom (JWN), which owns an off-price banner.
HP Inc. trades roughly flat on Q1 results, sort of a mixed bag overall, Dell reports tomorrow (HPQ)
HP Inc. (HPQ) is trading roughly flat following its Q1 (Jan) earnings report last night. The PC and Print giant reported in-line EPS but missed on revs. However, we think investors were pleased to see HPQ issue in-line EPS guidance for Q2 (Apr) and reaffirm FY23 EPS after the company issued downside guidance last quarter. So it was sort of a mixed bag overall.
- On the Personal Systems (PS) side, revenue fell 24% yr/yr (or -20% constant currency) to $9.2 bln with 5.4% operating margin. as HPQ continues to see soft demand in Consumer and Commercial. It is also seeing pricing pressure given elevated channel inventory across the industry. In addition, corporate budget tightening began to affect large enterprise demand, which is leading to longer sales cycles in its Commercial business. Consumer revs dropped 36% while commercial was down 18%. Operating margin was better than the company had expected.
- On the Print side, revenue fell 5% yr/yr (-2% CC) to $4.6 bln with 18.9% operating margin. HPQ says current market conditions are more stable. The Consumer Print market continues to see demand softness and pricing pressure. In supplies, the situation in Q1 was better than expected. The Commercial Print market is being impacted by macro uncertainty, corporate budget tightening and the uneven pace of return to office.
- Looking ahead, HPQ reaffirmed what it said in November. Namely, that it's not expecting a significant economic recovery during FY23 and it expects its 2H performance will improve relative to 1H driven by cost-saving measures and improved channel inventory levels should create a more normalized pricing environment. The PC market in units may regress to pre-COVID levels in the short term, but HPQ expects it will remain at a structurally higher level with more premium and high-value mix.
- HPQ also provided an update on the cost cutting initiatives it announced last quarter. HPQ has been reducing spend and driving efficiencies. It delivered on its Q1 cost target and is on track to deliver at least 40% of its 3-year savings by the end of FY23. On the PS side, HPQ has been streamlining its portfolio and standardizing on fewer platforms to reduce component complexity. HPQ also is reducing structural costs, particularly in office Print and in its supplies supply chain.
Overall, it was a decent start to FY23. The Q1 numbers did not blow us away, but we think investors are breathing a sigh of relief to not see another guide down, which was a real possibility. Also, the Print side seems to be stabilizing and we liked to upside margins on the PS side. HPQ did moderate its share repurchase activity in Q1 as planned, so that was a modest letdown. Taken all together, we think this report was better than feared and perhaps a modest positive for Dell (DELL), which reports tomorrow after the close.
Lowe's heavier reliance on DIY customers takes a toll as home improvement spending slows (LOW)
In the wake of Home Depot's (HD) disappointing earnings report from last week, which included the company's first comparable sales decline in several years, expectations for Lowe's (LOW) Q4 results and outlook were lowered by a notch or two. As anticipated, LOWE's mixed earnings report reflected the same slowdown in consumer spending for home improvement projects as comps slipped by 1.5% yr/yr, missing analysts' estimates.
- It's apparent that customers are making fewer trips to both LOW and HD as demand for DIY projects wanes amid high inflation, rising rates, and a cooling housing market. For LOW, that's especially problematic since nearly 75% of its business comes from DIY customers, compared to about 50% for HD.
- Accordingly, LOW's FY24 comp guidance of flat to down 2% is a bit weaker than HD's forecast for flat comps. Additionally, LOW's FY24 revenue guidance of $88-$90 bln fell short of expectations, while HD's revenue outlook was essentially inline with analysts' estimates.
There were a couple silver linings within LOW's report.
- For instance, the company's pricing actions taken over the past year are paying dividends. Gross margin for Q4 remained firm at 32.3%, lower by just 60 bps on a yr/yr basis.
- Along with a 5% revenue increase, which was partly due to an extra week this quarter compared to the year-ago quarter, the steady gross margin helped push non-GAAP EPS higher by 28% to $2.28, which beat expectations.
- LOW also continues to make progress in its strategy to expand its Pro business. While Pro growth decelerated to 10% from the 19% seen last quarter, Q4 still marked the eleventh consecutive quarter of double-digit growth for Pro.
- Lastly, it's also worth keeping in mind that LOW authorized a new $15 bln stock repurchase program in December, providing the company with an EPS lever to pull in FY24.
Overall, though, LOW's results and guidance were unsurprisingly mediocre and added to the narrative that consumer spending is softening, including for the once red-hot home improvement space.
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