Market Snapshot
briefing.com
| Dow | 33925.54 | +39.16 | (0.12%) | | Nasdaq | 12124.03 | +0.58 | (0.00%) | | SP 500 | 4142.27 | +3.36 | (0.08%) | | 10-yr Note | -6/32 | 3.59 |
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| | NYSE | Adv 1762 | Dec 1149 | Vol 812 mln | | Nasdaq | Adv 2684 | Dec 1777 | Vol 4.7 bln |
Industry Watch
| Strong: Real Estate, Industrials, Consumer Staples, Utilities, Financials |
| | Weak: Communication Services, Health Care, Energy |
Moving the Market
-- Lacking conviction ahead of a heavy batch of earnings news this week
-- Weakness in chip equipment stocks on talk Taiwan Semi may soon announce cut to FY23 capex budget
-- Rising Treasury yields
-- Afternoon rebound effort coincided with a CNN reporter tweeting that House Speaker McCarthy said he thinks he has the 218 votes needed in the House to raise the debt ceiling
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Closing Summary
17-Apr-23 16:30 ET
Dow +100.71 at 33987.09, Nasdaq +34.26 at 12157.71, S&P +13.68 at 4152.59
[BRIEFING.COM] The stock market spent most of the session oscillating in a narrow range that included modest losses for the Dow, Nasdaq, and S&P 500. Investors were lacking conviction ahead of a slate of earnings news this week. Earnings results so far have been better than expected/feared, which helped limit selling interest, but valuation concerns kept the market from moving noticeably higher.
The market was able to log modest gains, though, thanks to a late afternoon rebound effort. The upside move coincided with a CNN reporter tweeting that House Speaker McCarthy said he thinks he has the 218 votes needed in the House to raise the debt ceiling. The sentiment shift may have been overdone, however, when considering that House Speaker McCarthy told CNBC earlier that a "no strings attached" debt ceiling increase will not pass the House. A proposal with strings attached (e.g., spending cuts in exchange for raising the debt ceiling) is unlikely to pass the Senate.
Still, the major indices all finished at their best levels of the day, leaving the S&P 500 just above 4,150. Even semiconductor equipment makers, which had been a notable pocket of weakness, came along for the afternoon rebound. The PHLX Semiconductor Index (SOX) was down as much as 1.5%, but closed with a modest 0.1% loss.
Weakness in the SOX was stemming from a Bloomberg report that Taiwan Semiconductor Manufacturing Co. (TSM 87.99, +0.79, +0.9%) may soon announce a cut in its FY23 capex budget to $28-32 billion from $32-36 billion.
Notably, Alphabet (GOOG 106.42, -3.04, -2.8%) still logged a sizable decline today despite the broader market improving before the close. This followed a New York Times piece that suggested Samsung is considering using Microsoft's (MSFT 288.80, +2.66, +0.9%) Bing as the default search engine on its devices as opposed to Google.
Most of the S&P 500 sectors were able to close with a gain led by real estate (+2.2%) and financials (+1.1%). Meanwhile, the energy (-1.3%) and communication services (-1.3%) sectors were the worst performers by a wide margin.
Separately, Treasuries settled with losses across the curve as the specter of the Fed raising rates again in May and then not pivoting to a rate-cut cycle anytime soon, along with a stronger-than-expected New York Empire State Manufacturing Survey for April, prompted some selling interest. The 2-yr note yield rose eight basis points to 4.18% and the 10-yr note yield rose seven basis points to 3.59%, unmoved in large part by the aforementioned tweet related to the debt ceiling conversation.
- Nasdaq Composite: +16.2% YTD
- S&P 500: +8.1% YTD
- Russell 2000: +3.2% YTD
- Dow Jones Industrial Average: +2.5% YTD
- S&P Midcap 400: +2.4% YTD
Reviewing today's economic data:
- April Empire State Manufacturing 10.8 (Briefing.com consensus -19.0); Prior -24.6
- April NAHB Housing Market Index 45 (Briefing.com consensus 45); Prior 44
Looking ahead to Tuesday, market participants will receive the following economic data:
- 8:30 ET: March Housing Starts (Briefing.com consensus 1.458 mln; prior 1.450 mln) and Building Permits (Briefing.com consensus 1.407 mln; prior 1.524 mln)
Market continues to climb
17-Apr-23 15:40 ET
Dow +46.74 at 33933.12, Nasdaq +17.54 at 12140.99, S&P +6.32 at 4145.23
[BRIEFING.COM] The rebound effort has continued into the close.
The upside moves coincided with a CNN reporter tweeting that House Speaker McCarthy said he thinks he has the 218 votes needed in the House to raise the debt ceiling.
Treasuries settled the session with losses across the curve. The 2-yr note yield rose eight basis points to 4.18% and the 10-yr note yield rose seven basis points to 3.59%.
Looking ahead to Tuesday, market participants will receive the following economic data:
- 8:30 ET: March Housing Starts (Briefing.com consensus 1.458 mln; prior 1.450 mln) and Building Permits (Briefing.com consensus 1.407 mln; prior 1.524 mln)
Small cap stocks outperform
17-Apr-23 15:00 ET
Dow +39.16 at 33925.54, Nasdaq +0.58 at 12124.03, S&P +3.36 at 4142.27
[BRIEFING.COM] The market continued to climbed off session lows in the last half hour.
Small cap stocks have maintained a performance edge over the broader market. The Russell 2000 is up 0.7% while the Dow, S&P 500, and Nasdaq oscillate around their flat lines.
Energy complex futures settled mixed. WTI crude oil futures fell 1.9% to $81.01/bbl and natural gas futures rose 6.8% to $2.28/mmbtu.
Enphase Energy, HP Inc. outperforming after upgrades
17-Apr-23 14:30 ET
Dow -50.58 at 33835.80, Nasdaq -42.03 at 12081.42, S&P -10.38 at 4128.53
[BRIEFING.COM] The S&P 500 (-0.25%) is in second place, per usual, on Monday afternoon. The S&P is now about +0.47% month-to-date.
S&P 500 constituents Enphase Energy (ENPH 222.34, +13.44, +6.43%), Digital Realty Trust (DLR 94.68, +4.90, +5.46%), and HP Inc. (HPQ 30.73, +0.91, +3.05%) pepper the top of the index. ENPH and HPQ both caught morning upgrades to Overweight (Piper Sandler and JP Morgan, respectively), while DLR outperforms alongside broader gains in the REIT space.
Meanwhile, Massachusetts-based biotech firm Moderna (MRNA 145.56, -11.54, -7.35%) is underperforming; chatter on the Street is that consensus may be too optimistic, and market may be wrongly anticipating an early Melanoma cancer vaccine launch.
Gold notches back-to-back losses
17-Apr-23 14:00 ET
Dow -62.65 at 33823.73, Nasdaq -43.16 at 12080.29, S&P -11.64 at 4127.27
[BRIEFING.COM] With about two hours to go on Monday the tech-heavy Nasdaq Composite (-0.36%) is down about 43 points, making it the worst performing major average.
Gold futures settled $8.80 lower (-0.4%) to $2,007.00/oz, pressured by gains in both yields and the dollar.
Meanwhile, the U.S. Dollar Index is up about +0.6% to $102.13.
Eager to hear corporate earnings guidance
The first quarter earnings reporting period will get flowing this week with the financial sector leading the action. It won't be all about the financials, however.
Companies like Johnson & Johnson (JNJ), Lockheed Martin (LMT), Netflix (NFLX), United Airlines (UAL), Abbott Labs (ABT), ASML (ASML), IBM (IBM), Las Vegas Sands (LVS), Tesla (TSLA), AT&T (T), Nucor (NUE), Taiwan Semiconductor Manufacturing (TSM), Union Pacific (UNP), and PPG Industries (PPG) will also be reporting their results.
Naturally, there is a lot of interest in what these companies have to say, not only about the March quarter, but more importantly about the quarter and year ahead. That guidance will be key in determining if the market can break out of an 11-month trading range.
The market enters the week trading near the upper bounds of that range after posting a modest gain last week. Strikingly, the market failed to advance on Friday after a round of generally pleasing earnings results from some of the nation's largest banks.
Those results weren't enough to move things forward, however, since they were tempered by economic outlooks that envisioned some softening in activity. JPMorgan Chase (JPM) for its part sees an increased probability of a moderate recession due to tightening financial conditions.
That word -- recession -- is hanging over the market, not like a death sentence at this point but more so like a chronic illness, which is to say the market is having difficulty escaping from it.
It is the question that gets asked daily. Will there be a recession? If so, will it be a shallow one or a deep one? Would you categorize it as a soft landing or a hard landing? Might there be no landing at all and instead just an extended period of below-average growth?
These are questions that need answers. Time will provide those answers but the earnings guidance will provide, well, guidance on the path the economy is on. That's why it matters greatly now with a market trading at 18.3x forward 12-month earnings versus a 10-yr average of 17.3x, according to FactSet.
There was some better than expected economic data this morning that will fall into the soft landing/no landing bucket. The New York Empire State Manufacturing Survey for April jumped to 10.8 (Briefing.com consensus -19.0) from -24.6 in March. A number above 0.0 is indicative of expansion in manufacturing activity.
The equity futures market was largely unmoved by the report, though, knowing that it is a minor release in the realm of manufacturing data. There was a bit of knee-jerk selling in the Treasury market after the release, but yields for the 2-yr note (4.15%) and 10-yr note (3.56%) are only up slightly from where they were trading prior to the release.
Separately, keep an eye on the chip equipment stocks today. They are showing some outsized weakness in pre-market action following a Bloomberg report that suggests Taiwan Semiconductor Manufacturing Company (TSM) may announce a cut in its FY23 capex budget soon to $28-32 billion from $32-36 billion.
Another notable laggard is Alphabet (GOOG). It is getting hit on a New York Times piece that suggests Samsung is considering using Microsoft's (MSFT) Bing as the default search engine on its devices as opposed to Google. Shares of GOOG are down 3.5% while MSFT is up 1.6% in pre-market trading.
The index equity futures themselves aren't doing much, however. The S&P 500 futures are flat and are trading in-line with fair value, the Nasdaq 100 futures are down four points and are trading in-line with fair value, and the Dow Jones Industrial Average futures are up 30 points and are trading 0.1% above fair value.
That's a setup for a flattish start to begin a big week of earnings reporting (and guidance).
-- Patrick J. O'Hare, Briefing.com
Alphabet sinks on a New York Times report that Samsung may replace Google Search with Bing (GOOG)
Alphabet (GOOG -3%) is sinking toward its 20-day moving average (105.07) today on a New York Times report that tech giant Samsung (SSNLF) may replace Google Search with Microsoft (MSFT) Bing as the default search engine across its devices. The news definitely comes as a shock given GOOG's stronghold in the search engine space, being synonymous with the word "search." The NYT reported that an estimated $3 bln in annual revenue is on the line with its deal with Samsung. A possible domino effect would be even more worrisome, as Samsung's move could encourage Apple (AAPL) to do the same. The NYT noted that the contract between AAPL and GOOG, worth $20 bln, is up for renewal this year.
- Samsung's move would be more than a monetary blow to GOOG. By potentially switching from Google to Bing, Samsung is signaling MSFT's lead in the AI race. Bing recently incorporated artificial intelligence (AI), using OpenAI's technology (the same that powers ChatGPT) to give users a chatbot to answer queries in a conversational style in an effort to provide better results to more complicated questions.
- GOOG is not relying on its rich history to remain competitive. However, its AI chatbot, Bard, did not get off to a good start. In February, GOOG's new chatbot provided inaccurate information during a promo video, causing shares to plummet, declining by roughly 12% in the two days following. That event sparked worry amongst investors that GOOG was losing its dominant positioning within the online search industry to MSFT.
- Although shares recovered over the next couple of months, today's news illustrates that the wind may have already shifted. Many competitors are popping up within the AI space, jeopardizing GOOG's decades-long dominance among online search engines. However, the real blow would occur if AAPL decided not to renew its contract.
Despite today's report sparking some fear regarding GOOG's competitive positioning, we do not see GOOG giving up much market share even if Samsung makes Bing its default search engine. Before 2009, when GOOG launched its Android OS, which is used on Samsung's mobile devices, its search engine market share hovered around 60%, crushing Bing's estimated ~9%. Additionally, the Bard setback notwithstanding, GOOG is emphasizing AI development, making it the underlying driver behind its top long-term priorities: Search, ads, YouTube, Cloud, and Pixel.
Therefore, although MSFT's AI developments may be beating GOOG to the punch, its current focus and history suggest that it is not too far behind and could quickly surpass MSFT. Since shares are still trading close to YTD highs, the market is also not overly concerned.
Merck looks to bolster immunology portfolio with buyout of Prometheus Biosciences (MRK)
After losing out to Pfizer (PFE) in its attempt to acquire oncology focused Seagen (SGEN) last year, pharmaceutical giant Merck (MRK) has returned to the M&A market in a big way with its bid to acquire Prometheus Biosciences (RXDX) for $200/share in cash. The ofer price represents a sizable 75% premium over last Friday's closing price, while valuing RXDX at approximately $10.8 bln. Multi-billion-dollar deals have become somewhat commonplace in the healthcare sector recently as companies look to expand and diversify their drug portfolios, especially in the areas of oncology and immunology -- a field that RXDX specializes in.
- More specifically, RXDX is a clinical-stage company that's developing PRA023 for the treatment of immune-mediated diseases such as ulcerative colitis (UC) and Crohn's Disease (CD). Last December, the company caught the attention of many investors and participants in the healthcare space -- including MRK's -- when it reported positive results from its Phase 2 clinical trials for PRA023.
- In the ARTEMIS clinical study, which evaluated the efficacy and safety of PRA023 in patients with moderate-to-severe UC, the drug met the primary endpoint with 26.5% of patients experiencing remission compared to 1.5% for placebo. Additionally, all secondary endpoints were met, and no serious safety or tolerability issues were flagged.
- Similarly, the APOLLO clinical trial for CD yielded promising results as 26% of patients on PR023 achieved endoscopic response compared to 12% for the historical placebo rate while 49.1% of patients achieved clinical remission.
- Based on the positive outcomes from the trials, RXDX advanced the drug into Phase 3 studies for both UC and CD, sending the stock by 165% on December 8.
PR023 is the crown jewel of this proposed acquisition for MRK.
- Should the drug gain regulatory approval in the U.S., it would likely become a multi-billion-dollar revenue generator for MRK. For some perspective, Stelara, which is owned by Johnson & Johnson's (JNJ) pharmaceutical subsidiary Janssen, registered worldwide sales of $9.7 bln in FY22. Stelera is approved for CD, UC, plaque psoriasis, and psoriatic arthritis.
The addition of PRA023 would also diversify and instantly bolster MRK's immunology drug portfolio.
- Currently, MRK leans heavily on its oncology and vaccine programs through its Keytruda and Gardasil products. In FY22, Keytruda and Gardasil generated sales of $20.9 bln and $6.9 bln, representing 40% and 13% of total sales, respectively.
- Importantly, Keytruda is on track to lose its patent protection in 2028, paving the way for generic competitors to enter the market. With this proposed acquisition, MRK is looking to mitigate the impact of that patent expiration by building its immunology business.
Although MRK is paying a hefty price for RXDX, this looks like a compelling addition that should move the needle on the top-line, assuming PRA023 receives regulatory approval. The fact that MRK is financing the acquisition with cash, rather than through a stock issuance, is another positive that's preventing the stock from falling sharply today following a 33% swing higher since last October.
State Street under pressure following rare EPS miss (STT)
State Street (STT -12%) is under pressure today after missing on Q1 EPS, although revenue was generally in-line. Financial stocks have gotten off to a pretty good start this earnings season. Some big names have reported strong upside, most notably JPM and C on Friday. In fact, shares of STT climbed about 2% following those strong reports.
- As such, investors appear to be disappointed with STT's EPS miss this morning. In fairness, Boston-based State Street is a little different because it primarily focuses on providing financial services to institutional investors. Its big areas are investment servicing, investment management and investment research and trading. It does not have a lot of retail/consumer banking exposure. The other banks noted that the consumer has held up pretty well, so STT is not really benefitting from that.
- The vast majority of STT's revenue (75%) comes from fee revenue and that fell 9% yr/yr and 1% sequentially to $2.34 bln. STT cited lower average market levels on servicing and management fees, lower FX trading services and lower front office software and data revenue. The biggest culprits were servicing fees falling 11%, management fees falling 12% and software and processing fees dropping 18%.
- The other 25% of revenue comes from net interest income (NII), which actually increased 50% yr/yr to $766 mln. STT cited higher short-term market rates, an increase in long-term rates, and balance sheet positioning. Taken all together, total revenue inched up 0.6% yr/yr to $3.10 bln. On the cost side, compensation and employee benefits increased 5% yr/yr, primarily driven by wage inflation and higher headcount. That hurt the EPS number.
- On the call, STT said investors are having to contend with significant market movements and volatility, driven by persistent inflation, rate hikes and the recent disruption to certain segments of the banking industry. STT said January produced a very strong start to the year, but investors remain cautious. All of this drove negative market sentiment, contributing to large inflows into money market funds. That impacted STT's fee revenue.
- STT also addressed the regional bank issues. Average deposits declined 3% sequentially, but that was seasonally expected. STT explained that the regional bank issue primarily affected consumer and corporate depositors rather than the institutional asset manager and asset owners that STT serves. In contrast, STT saw some risk off deposit inflows at the end of the quarter.
Overall, investors are clearly disappointed by the EPS miss, which is a rare occurrence for State Street. It generally reports pretty big upside and has reported eight consecutive beats. As such, to see a double digit EPS miss was a letdown, especially after the large beats we saw on Friday from some big financial service names. The stock is now down at levels not seen since October, but we'd be cautious on STT in the near term.
Taiwan Semi trades flat as an analyst upgrade is measured against reports of a FY23 CapEx cut (TSM)
Taiwan Semi (TSM) is trading relatively flat today following an upgrade at Susquehanna to "Positive" from "Neutral." After numerous red days over the past few weeks, shares of TSM flirted with previous support around the $86 mark. Although today's move is minor, it could signal a higher low.
Briefing.com notes that today's positive analyst rating comes amid several unpleasant developments from TSM and the semiconductor space. Last week, TSM issued disappointing Q1 guidance, noting revenue fell by 15.4% yr/yr, below consensus. The next day, Warren Buffett (BRK.B) disclosed that he sold nearly all of his TSM stake earlier this year, citing geopolitical tensions. Today, reports indicate that TSM may lower its FY23 capital expenditures to $28-32 bln, significantly below its initial forecast of $32-36 bln.
- After TSM's underwhelming Q1 forecast, we cautioned that tech firms utilizing TSM to manufacture its chips, which include market movers like Apple (AAPL) and Qualcomm (QCOM), may run into some troubles ahead of earnings season. TSM's Smartphone revenue already reversed its positive momentum in Q4 after experiencing sequential growth in the previous two quarters.
- Rival Samsung's (SSNLF) weak guidance last week increases the likeliness of turbulence within the semiconductor industry, at least for the first part of FY23.
- Coinciding with softening demand dynamics are geopolitical concerns. TSM's two most prominent regions in terms of revenue and physical presence are China and the U.S. There are numerous reports regarding China/Taiwan relations and how tensions may be heating up. This uncertainty can bring higher volatility surrounding shares of TSM, especially on any nerve-racking headlines.
- TSM's CapEx is spent in anticipation of future growth. However, growth has been decelerating over the past few quarters, illustrated by CapEx in FY22 coming in at just over $36 bln, well below its forecast six months prior of approximately $40 bln. The additional cut signals further weakness and makes management's comments last quarter that demand may have started stabilizing less concrete.
- The news also adversely impacts semiconductor equipment firms like Lam Research (LRCX), ASML (ASML), and KLA Corp (KLAC), all of which are down meaningfully today.
Although recent developments signal a tough road ahead, conditions may not be as gloomy as they appear. TSM, as well as many of its peers like Micron (MU), have discussed the possibility of a recovery toward the second half of the year, meaning that a bottom could occur within the next couple of quarters. Meanwhile, although geopolitical risks are real, TSM has been bolstering its U.S. presence, building a second chip plant in Arizona. Also, there would be no benefit to destroying TSM's factories if a worst-case scenario occurred, limiting some financial risk to TSM.
Bottom line, near-term macroeconomic conditions could bring turbulence for TSM. However, the move toward a fabless business model across the tech industry keeps TSM's long-term positioning resilient. Finally, TSM reports Q1 earnings on April 20.
Hartford Financial had a stormy Q1 as P&C insurer sharply cuts EPS guidance (HIG)
Hartford Financial (HIG), a leading provider of property and casualty (P&C) insurance and group benefits, is trading sharply lower after guiding 1Q23 EPS well below expectations last night. The primary culprit for HIG's downside guidance is that current accident year catastrophe losses in its P&C business ballooned to $185 mln (before tax). For a point of comparison, catastrophe losses for this unit totaled $98 mln (net of reinsurance and taxes) in the year-earlier period.
- Major winter storms along the east and west coasts, in addition to severe tornado, wind, and hail weather events across several regions -- most notably in the southern states like Mississippi and Tennessee -- led to a substantial increase in catastrophe losses.
- HIG's weak EPS guidance is rippling across the P&C insurance industry with losses seen in stocks such as Allstate (ALL), Chubb (CB), The Hanover Insurance Group (THG), and American Financial Group (AFG). If HIG's catastrophe losses for Q1 were steeper than feared due to severe weather, then the concern is that earnings from its peers will also take a big hit this quarter.
Taking a closer look at HIG's guidance, the company reported that the combined ratio for the Personal Lines segment jumped to 106.1 compared to 90.4 in the year-ago period.
- The combined ratio measures the amount of money flowing out of an insurance company, relative to earned premiums. As a rule of thumb, a ratio below 100 indicates that the insurer is generating a profit, while a number above 100 indicates that it's paying out more in claims than it's earning in premiums. That doesn't necessarily mean that the company is unprofitable overall because the metric doesn't consider investment income. However, the higher the ratio is, the less efficient an insurer is with using its premiums to drive earnings growth.
Prior to the collapse of Signature Bank and SIVB Financial, HIG was a steady stock that performed quite well in a turbulent market.
- From the beginning of 2022 through the end of February 2023, the stock gained about 12% compared to a loss of nearly 17% for the S&P 500. Its healthy dividend, which is currently sporting a yield of 2.4%, and its long track record of profitability, are two qualities that work in its favor.
With shares falling by roughly 12% since early March, including today's drop, we think that HIG could land on the radars of more value and income-oriented investors. While Q1 shapes up to be a rough quarter for the company, the overall consistency of its business should eventually come back to the forefront.
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