Market Snapshot
briefing.com
| Dow | 33114.86 | -233.65 | (-0.70%) | | Nasdaq | 12391.35 | +25.96 | (0.21%) | | SP 500 | 4125.98 | -11.57 | (-0.28%) | | 10-yr Note | -3/32 | 3.55 |
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| | NYSE | Adv 573 | Dec 2334 | Vol 812 mln | | Nasdaq | Adv 1304 | Dec 3105 | Vol 4.0 bln |
Industry Watch
| Strong: Information Technology, Communication Services, Consumer Discretionary |
| | Weak: Energy, Materials, Industrials, Real Estate |
Moving the Market
-- Strength in the mega cap space offering a measure of support
-- Disappointing fiscal Q1 sales and comp sales results from Dow component Home Depot along with disappointing FY24 sales, comp sales, and EPS guidance
-- Uncertainty around debt ceiling looming over the market
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Closing Summary
16-May-23 16:30 ET
Dow -336.46 at 33012.05, Nasdaq -22.16 at 12343.23, S&P -26.38 at 4111.17
[BRIEFING.COM] The day started out looking fairly similar to recent sessions. There was a slate of limiting factors keeping the market in check while gains from mega cap stocks offered some support.
The major indices closed near their worst levels of the day, though, after the S&P 500 and Dow Jones Industrial Average slipped to new session lows shortly after the news hit that President Biden will be cutting his G-7 trip short, skipping his Australia stop to return Sunday, according to NBC News.
There was no information about today's debt ceiling meeting between President Biden and congressional leaders before the close; however, House Speaker McCarthy said after the close that the two sides are still very far apart. Senate Majority Leader Schumer, meanwhile, said that everyone agreed that we need to be bipartisan and that having a bipartisan bill in both chambers is the only way we can avoid a default.
If not for gains in the mega cap space, losses would have been more pronounced by the close. The Invesco S&P 500 Equal Weight ETF (RSP) fell 1.4% while the Vanguard Mega Cap Growth ETF (MGK) logged a 0.1% gain.
The DJIA registered the steepest decline among the major indices, partially weighed down by Home Depot's (HD 282.33, -6.21, -2.2%) loss. Home Depot disappointed with its fiscal Q1 sales, comp sales, and FY24 guidance. This comes ahead of earnings reports from other retailers, most notably Target (TGT 156.91, -2.58, -1.6%) and TJX (TJX 78.22, -1.03, -1.3%), which will report before the open on Wednesday, and Walmart (WMT 149.78, -2.10, -1.4%), which will report before the open on Thursday.
On a related note, market participants received retail sales data for April this morning. That report featured a 0.4% increase in total retail sales for April, but retail sales are not adjusted for inflation. Total retail sales were basically flat after adjusting for inflation, suggesting weaker demand than the headline number might imply.
China also reported some weaker-than-expected retail sales, along with weaker-than-expected industrial production and fixed asset investment data for April, playing into lingering concerns about the pace of global growth.
Those concerns led to selling interest in commodity futures. WTI crude oil futures fell 0.6% to $70.70/bbl and copper futures fell 2.2% to $3.67/lb.
Nine of the 11 S&P 500 sectors closed with losses. The communication services (+0.6%) and information technology (+0.2%) sectors were alone in the green while the real estate (-2.6%) and energy (-2.5%) sectors suffered the largest declines.
Separately, the FTC filed a lawsuit to block Amgen's (AMGN 277.88, -5.65, -2.4%) acquisition of Horizon Therapeutics (HZNP 96.34, -15.91, -14.2%), which was a big drag on that stock and added another headwind for equities today.
Treasuries started the session with gains, but settled with losses across the curve. The selling efforts were presumably driven by the notion that this morning's economic data was not weak enough for the Fed to think about cutting rates soon. The 2-yr note yield, at 3.99% before the data, rose seven basis points to 4.07%. The 10-yr note yield, at 3.49% before the data, rose four basis points to 3.55%.
- Nasdaq Composite: +17.9% YTD
- S&P 500: +7.0% YTD
- Dow Jones Industrial Average: -0.4% YTD
- S&P Midcap 400: -0.6% YTD
- Russell 2000: -1.4% YTD
Reviewing today's economic data:
- April Retail Sales 0.4% (Briefing.com consensus 0.7%); Prior was revised to -0.7% from -1.0%; April Retail Sales ex-auto 0.4% (Briefing.com consensus 0.3%); Prior was revised to -0.5% from -0.8%
- Retail sales are not adjusted for inflation, so the key takeaway from the report is that total retail sales were up in April due primarily to price increases and not as much to increased demand.
- April Industrial Production 0.5% (Briefing.com consensus 0.0%); Prior was revised to 0.0% from 0.4%; April Capacity Utilization 79.7% (Briefing.com consensus 79.8%); Prior was revised to 79.4% from 79.8%
- The key takeaway from the report is that manufacturing output bounced back in April, paced by a strong gain in the output of motor vehicles and parts that still defies a hard-landing scenario for the economy.
- March Business Inventories -0.1% (Briefing.com consensus 0.0%); Prior was revised to 0.0% from 0.2%'
- May NAHB Housing Market Index 50 (Briefing.com consensus 45); Prior 45
Target (TGT) and TJX (TJX) are among the more notable companies reporting earnings ahead of tomorrow's open.
Looking ahead to Wednesday, market participants will receive the following economic data:
- 7:00 ET: Weekly MBA Mortgage Index (prior 6.3%)
- 8:30 ET: April Housing Starts (Briefing.com consensus 1.405 mln; prior 1.420 mln) and Building Permits (Briefing.com consensus 1.438 mln; prior 1.413 mln)
- 10:30 ET: Weekly crude oil inventories (prior +2.95 mln)
Main indices stick to narrow ranges ahead of the close
16-May-23 15:35 ET
Dow -267.56 at 33080.95, Nasdaq +23.65 at 12389.04, S&P -13.71 at 4123.84
[BRIEFING.COM] The Dow remains near its low of the day while the S&P 500 and Nasdaq cling to narrow ranges off their lows.
After the close, Keysight (KEYS) will headline the earnings reports.
Target (TGT) and TJX (TJX) are among the more notable companies reporting earnings ahead of tomorrow's open.
Looking ahead to Wednesday, market participants will receive the following economic data:
- 7:00 ET: Weekly MBA Mortgage Index (prior 6.3%)
- 8:30 ET: April Housing Starts (Briefing.com consensus 1.405 mln; prior 1.420 mln) and Building Permits (Briefing.com consensus 1.438 mln; prior 1.413 mln)
- 10:30 ET: Weekly crude oil inventories (prior +2.95 mln)
Mega caps continue to rally
16-May-23 15:05 ET
Dow -233.65 at 33114.86, Nasdaq +25.96 at 12391.35, S&P -11.57 at 4125.98
[BRIEFING.COM] The major indices are mostly little changed over the last half hour.
Mega caps as a group continue to build up strength while the broader market deteriorates. The Vanguard Mega Cap Growth ETF (MGK) is up 0.5% while the Invesco S&P 500 Equal Weight ETF (RSP) is down 1.1%, near its low for the day.
Separately, WTI crude oil futures fell 0.6% to $70.70/bbl and natural gas futures fell 1.0% to $2.51/mmbtu.
GE HealthCare jumps after Outperform rating at Oppenheimer, Morgan Stanley tgt cut dents Etsy
16-May-23 14:30 ET
Dow -271.61 at 33076.90, Nasdaq +11.15 at 12376.54, S&P -15.72 at 4121.83
[BRIEFING.COM] The S&P 500 (-0.38%) is in second place once more on Tuesday, down now about 15 points.
S&P 500 constituents GE HealthCare (GEHC 77.96, +3.03, +4.04%), Capital One (COF 91.35, +2.23, +2.50%), and Gartner (IT 322.54, +7.43, +2.36%) dot the top of the standings. Oppenheimer started coverage on GEHC at Outperform, while Berkshire disclosed a new stake in COF, and IT is partaking in its Gartner CSO & Sales Leader Conference today.
Meanwhile, online marketplace Etsy (ETSY 92.22, -5.63, -5.75%) is today's top laggard after a Morgan Stanley tgt cut.
Gold settles lower, below $2K level
16-May-23 14:00 ET
Dow -222.01 at 33126.50, Nasdaq +29.12 at 12394.51, S&P -10.04 at 4127.51
[BRIEFING.COM] With about two hours to go on Tuesday the tech-heavy Nasdaq Composite (+0.24%) is alone in positive territory.
Gold futures settled $29.70 lower (-1.5%) to $1,993.00/oz, finishing below the $2K level for the first time in May.
Meanwhile, the U.S. Dollar Index is up about +0.1% to $102.57.
Respecting the trading range
You may have heard that the stock market has been stuck in a tightly-traded range for some time now. The shape of things this morning makes it seem as if that trading range is going to be respected again today.
Currently, the S&P 500 futures are down 10 points and are trading 0.3% below fair value, the Nasdaq 100 futures are down 30 points and are trading 0.3% below fair value, and the Dow Jones Industrial Average futures are down 90 points and are trading 0.3% below fair value.
The modestly negative leaning for the broader market follows yesterday's modestly positive leaning for the broader market.
There are some news forces weighing on the futures trade:
- Dow component Home Depot (HD) posted disappointing fiscal Q1 sales and comp sales results and issued disappointing FY24 sales, comp sales, and EPS guidance
- China posted retail sales, industrial production, and fixed asset investment data for April that was all weaker than expected
- Treasury Secretary Yellen noted again that extraordinary measures used to pay the nation's bills could be exhausted as early as June 1
The uncertainty surrounding the debt ceiling discussions continues to hang over the market. It will be discussed repeatedly today knowing that President Biden is expected to meet congressional leaders at 3:00 p.m. ET today to discuss the debt ceiling.
The timing of that meeting (i.e., before the market closes) could be important for today's close, especially if reports of progress on an agreement -- or ongoing partisan gridlock -- are communicated before the close.
Some anxiousness over what might be heard today could act as a limiting factor for the stock market during today's trade as buyers and sellers refrain from showing strong conviction in front of that meeting.
They aren't showing strong conviction now, yet sellers have the edge at the moment. A mixed Retail Sales Report for April has given them some edge, too, as it wasn't strong enough to mitigate worries about weakening consumer activity nor was it weak enough to make the Fed think it should entertain a rate cut anytime soon.
Total retail sales increased 0.4% month-over-month in April (Briefing.com consensus +0.7%) following an upwardly revised 0.7% decline (from -1.0%) in March. Excluding autos, retail sales were also up 0.4% month-over-month (Briefing.com consensus +0.3%) following an upwardly revised 0.5% decline (from -0.8%) in March.
Retail sales are not adjusted for inflation, so the key takeaway from the report is that total retail sales were up in April due primarily to price increases and not as much to increased demand.
The latter point notwithstanding, Treasury yields moved higher after the report as control sales, which also exclude sales from gas stations and building materials retailers, were up a more robust 0.7%.
The 2-yr note yield, at 3.99% before the release, is up to 4.03%, and the 10-yr note yield, at 3.49% before the release, is up to 3.53%.
-- Patrick J. O'Hare, Briefing.com
Horizon Pharma plunges as FTC files surprise injunction to block Amgen's buy out of company (HZNP)
When Amgen (AMGN) announced that it was acquiring rare disease drug company Horizon Pharma (HZNP) on December 12, 2022 for $116.50/share in cash, there wasn't much concern that the proposed deal would run into regulatory issues. This is reflected by the fact that HZNP only traded about 3% below the buyout price after the deal was announced. At the time, the thinking was that the lack of overlap between AMGN's and HZNP's drug portfolio would eliminate most of the competitive concerns surrounding this $27.8 bln acquisition.
As it turns out, though, the market underestimated the regulatory related risks involved as the Federal Trade Commission (FTC) announced plans to file a lawsuit in order to block the transaction. Consequently, shares of HZNP have plunged lower, essentially wiping out the gains the stock made on December 12.
However, HZNP is still up by about 20% from November 29, 2022. After the close that day, HZNP first disclosed that it entered into preliminary discussions regarding potential offers to buy out the company from AMGN, Janssen Global Services (JNJ), and Sanofi (SNY). The fact that the stock hasn't given up those gains suggests that investors are still confident that a deal will ultimately get done.
- For AMGN's part, the company says that it intends to fight any litigation and that it still expects to complete the deal in 1H23. The next step in this process is for a federal judge to approve the FTC's action, which could happen in the next couple of days.
- At the core of the FTC's complaint is the premise that under AMGN's ownership, HZNP's primary medications -- Tepezza for thyroid eye disease and Krystexxa for chronic refractory gout -- could solidify a monopolistic position in the market. Currently, there is no direct competition for either drug, enabling HZNP to charge very high prices for them.
- The agency further alleged that AMGN could use its influence with insurance companies and pharmacy benefit managers to steer health providers towards Tepezza and Krystexxa. For example, the FTC says that AMGN could lower the prices for some of AMGN's more mature drugs on the market, such as Embrel or Otezla, as a way to offer an incentive to purchase Tepezza or Krystexxa.
AMGN argues that this scenario is completely speculative, that it doesn't reflect real-world competitive dynamics, and that it has already assured the FTC that it has no intention of bundling its products.
- Indeed, it does seem that the FTC is taking a very aggressive approach here, especially since there's considerable precedence in the pharmaceutical market of deals being approved for two companies with limited or no product overlap. For instance, in March 2022, Pfizer (PFE) completed a $6.7 bln acquisition of Arena Pharmaceuticals, a developer of therapies to treat immuno-inflammatory diseases. At that time, PFE already had an Inflammation and Immunology segment.
- Should this deal get shot down, it would be a significant blow to AMGN since the addition of HZNP was expected to boost its top-line by about $4.0 bln next year. For context, AMGN was expected to generate FY23 revenue of $27.2 bln, prior to this acquisition. AMGN also expected the acquisition to be accretive to earnings starting in 2024.
The bottom line is that this injunction by the FTC comes as a major surprise, casting an overhang on both stocks. Uncertainty regarding the outcome of this looming litigation could provide a headwind and distraction for AMGN and HZNP, but we do believe that a favorable court ruling is still very possible given the lack of overlap between the companies' drug portfolios.
Sea Limited's wide Q1 earnings miss sets off a barrage of selling today (SE)
By registering one of its widest earnings misses since its late-2017 IPO in Q1, Sea Limited (SE -18%) is being swallowed up by a barrage of sell orders today. Shares of the Asia Pacific e-commerce, gaming, and online payments giant are enduring their largest single-day drop of the past six months, nearly erasing the gains since the company's excellent Q4 report in early March.
- A factor in SE's adjusted EPS missing estimates in Q1 and growing revs just 4.9% yr/yr to $3.04 bln, only matching analyst expectations and marking a deceleration from the +7.1% delivered last quarter, was waning demand in its Digital Entertainment (video game) business, which saw bookings tumble 15.0% sequentially to $462.3 mln. Also, adjusted EBITDA slipped by 11.0% yr/yr. Management pointed out that monetization weakened from last quarter, primarily due to a lower paying user ratio.
- Nonetheless, the company still increased its quarterly active user base by 7 mln to 492 mln. At the same time, SE's most popular video game Free Fire achieved a new peak in monthly active users over the previous eight-month period in April, signaling a potential turnaround.
- Outside of SE's Digital Entertainment segment, its other businesses performed quite well in Q1. E-commerce (Shopee) sales climbed 36.3% yr/yr to $2.1 bln, an acceleration from the +31.8% gain last quarter. Adjusted EBITDA also improved its positive performance from last quarter, expanding to $207.7 mln from $196.1 mln in Q4 and $(742.8) in the year-ago period.
- Since last year, SE has been shifting its focus toward running its e-commerce arm profitably, cutting costs, improving efficiencies, and introducing more automation. Although management acknowledged that disruptions in the economies it serves will likely persist over the near term, it will continue to fortify its long-term structural advantages and grow its e-commerce business profitability.
- Within SE's Digital Financial Services division, revs outpaced all other segments, surging 75% yr/yr to $412.8 mln. Adjusted EBITDA continued to improve, climbing to $98.9 mln from $75.6 mln last quarter and $(124.9) mln last year.
- As has been the case with most tech-focused firms lately, AI was touched on extensively during SE's Q1 earnings call. The company noted it is deepening its AI capabilities, centering on advancing operational efficiency. Already, SE's chatbot has improved resolution rates and reduced wait times for Shopee. The company is also deploying AI across its Digital Entertainment and Digital Financial Services divisions, leveraging the technology to localize its game content and help better asses the fraud and credit risk of its payment users.
The main takeaway is that SE's earnings miss, coupled with lingering macro-uncertainty, sparked today's negative response. Management noted that industry e-commerce trends are consistent with its trends, as the economies in Southeast Asia have remained relatively resilient thus far. However, inflation is still widespread, and although this has yet to cause major disruptions, it generates uneasiness, especially given that most of SE's markets are export-driven, exposing them to risks in global economies as well. Still, SE is remaining focused on the long haul. Its quick pivot to generating a profit highlights its flexibility, a significant advantage in the currently highly dynamic global economy.
Home Depot can't patch up a steeper downturn in demand for home improvement goods (HD)
Following a boom period in 2020 and 2021 amid the pandemic, many anticipated that demand for home improvement products and services would significantly cool off, sending the growth rates of Home Depot (HD) and Lowe's (LOW) spiraling lower. While that prediction ultimately came to fruition -- as illustrated by HD's disappointing 1Q24 results and FY24 outlook -- the resilience of demand for improvement goods was also underestimated by many. Until this morning's earnings report, which included a 4.5% yr/yr decline in comps, that resilience is what best described HD's performance over the past several quarters.
Now, however, it's quite apparent that the slowdown in consumer spending is having a material impact on HD's business. In fact, CFO Richard McPhail admitted as much, stating that the company is currently seeing a more broad-based pullback in terms of discretionary spending among consumers.
That assertion is evident when looking at a few of HD's key metrics for Q1.
- For the first time in more than five years, HD's sales declined on a yr/yr basis, falling by 4.2% to $37.3 bln. That figure also missed analysts' expectations by more than $1.0 bln. Although the sales decrease and miss are partly due to unfavorable weather on the west coast, HD also experienced softening demand for big ticket items like appliances and grills.
- Furthermore, the formerly strong Pro business, which accounts for nearly half of HD's revenue, slowed down as customers scaled back on the size of their repair and renovation projects.
- As a result, the average ticket size increased by only 0.2% yr/yr, representing a sizable deceleration from recent quarters. Last quarter, HD's average ticket was up by 5.8%, preceded by increases of 8.8% and 5.8% in Q3 and Q2, respectively.
- Unlike recent quarters, HD's average ticket growth wasn't nearly strong enough to offset a decrease in customer transactions in Q1. Specifically, transactions declined by 4.8% representing a steeper pullback in DIY demand, as well as a bearish data point for rival LOW, which is slated to report earnings on May 23.
Due to HD's sales coming in softer than the company had anticipated, and its expectation for the macro environment to remain uncertain in the near term, management sharply cut its guidance for FY24.
- After initially forecasting a mid-single-digit decline for EPS and for revenue to remain roughly flat yr/yr, HD now sees EPS falling by 7-13% and revenue and comps both dropping by 2-5% yr/yr. Each of those projections are far below analysts' expectations.
On the positive side, the company still managed to edge past Q1 EPS estimates, even after announcing last quarter that it will invest approximately $1.0 bln in annualized compensation for frontline, hourly associates. Despite the inflationary environment, gross margin stayed relatively even with last year at 33.7%.
Overall, though, this was a rough quarter for HD as the long-anticipated slowdown in demand for home improvement products is now taking hold in a more pronounced fashion.
Baidu up modestly as upbeat comments differ slightly from China's underwhelming economic data (BIDU)
After initially spiking +5% higher on upbeat Q1 earnings results, shares of Baidu (BIDU +1%) have pared back their gains, seeing only modest appreciation today. There were not too many glaring weak points from the China-based search giant, with management feeling quite upbeat regarding the Chinese economy. Instead, investors are likely fixated on underwhelming economic data out of China this morning, with retail sales and industrial production figures missing analyst estimates, raising concerns about the region's recovery pace.
- Management commented that after the Chinese New Year ended in early February, the country experienced a speedy recovery, lifting many of BIDU's advertisers in offline sectors, such as travel, health care, and financial and local services. As a result, BIDU's earnings jumped 43% yr/yr to RMB 16.10, while its revs tacked on a decent 10% gain to RMB 31.14 bln. At the same time, ad revenue climbed 6% yr/yr to RMB 16.6 bln, a solid reversal from the 6% drop last quarter and marking a return to positive growth for the first time since 4Q21.
- AI is becoming the central component of BIDU's strategic growth plans. As such, seeing the company's AI Cloud business achieve non-GAAP profitability in Q1 was uplifting, showcasing its healthy progress in optimizing operations and standardizing applications. Furthermore, the profitability milestone reflected management's success in phasing out low-margin businesses and projects for AI Cloud it has embarked on since 2Q22.
- Consistent with its remarks last quarter, BIDU is also rapidly working to integrate its ERNIE bot (similar to ChatGPT) -- introduced in March -- across all its businesses, which it believes will result in significant market share gains across all sectors.
- Intelligent driving, BIDU's Apollo Go service, also contained many positives in Q1, expanding the number of rides in the quarter over threefold yr/yr to nearly 660,000. Since BIDU was just granted Beijing's first permits on March 17, the company did not have much data on the driverless ride-hailing service in this region. However, since receiving a permit in Wuhan in August, BIDU boasts over 135 driverless vehicles, with a third of paid rides occurring in a driverless car. Therefore, we suspect that its service in Beijing will see plenty of demand by next quarter.
- A few other bright spots from Q1 stemmed from the Baidu App's monthly active users (MAUs) reaching 657 mln, a 4% bump yr/yr, and iQIYI (similar to Netflix) expanding its average daily number of subs by 28% to 129 mln.
Bottom line, while economic data out of China was disappointing, BIDU's Q1 results were uplifting, generating a rather mild response today. The company's comments surrounding China's economic activity also differed slightly from the numbers, creating uncertainty regarding how quickly China is actually recovering since hitting a peak in COVID cases in December. Further clarification will likely be required before investors will be more willing to pile into BIDU shares.
Seagate Tech offers decent exposure to AI trends and carries a solid dividend yield (STX)
AI has stirred up quite the buzz lately, with companies seemingly attaching the word to their earnings reports to propel their shares higher. However, at the same time, AI could end up being incredibly disruptive, with use cases extending across numerous industries. Given this uncertainty surrounding AI, we wanted to highlight a company that is not overcommitting itself to AI but still has decent exposure to the technology.
Seagate Tech (STX), a mainstay in our Yield Leaders Rankings, may be operating in a challenging environment due to the pronounced softness regarding consumer electronics demand. However, its leadership position within the hard disk drive (HDD) market gives it a sturdy base to capitalize on current AI trends.
- Storage is the foundation from which AI can be built, as AI applications require large amounts of data. Solid-state drive (SSD) provider Pure Storage (PSTG) wants to lead this front, developing flash storage specifically oriented for AI workloads. However, STX rival Western Digital (WDC) stated earlier this month that with HDDs commanding the lion's share of cloud storage, it expects the more significant AI-induced lift would occur in HDD instead of SSD, benefiting STX.
- AI is opening the door for an increasing number of connected devices, accelerating the need for more storage. The primary reason a company opts for HDDs over SSDs, even though SSDs can read and write data faster, is price. HDDs carry a lower cost per byte, a critical factor for cloud companies focused less on user-facing, latency-sensitive applications and more on batch workloads and data archival. STX referenced a study that estimates the amount of data generated globally subject to data analysis will grow by a factor of 50 by 2025, stressing the importance of cheap, reliable storage.
Still, the near term remains cloudy. STX's large cloud customers' inventory digestion is adversely impacting its near-term business. Meanwhile, when combined with lower economic activity in China, STX has struggled over the past few months. However, STX is taking the proper steps to traverse this tough economy, extending the first phase of its restructuring efforts and scaling back new investments. As a result, in Q1, STX removed over $150 mln from its cost structure, lowered debt by 5% yr/yr, and reduced its manufacturing capacity meaningfully. The company is also targeting at least an additional $200 mln in annualized savings during the next phase of its restructuring actions.
Bottom line, given that AI's popularity is just now blossoming, it is unclear how firms will monetize the technology and what its primary use cases will be. Therefore we view STX as a solid choice to still gain exposure to the AI trend without being over-extended. Also, even though the company recently paused its buybacks, this was to preserve its dividend yield, which currently sits at a solid 4.9%.
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