Market Snapshot
briefing.com
| Dow | 33441.84 | -93.98 | (-0.28%) | | Nasdaq | 12649.02 | -39.99 | (-0.32%) | | SP 500 | 4192.47 | -6.85 | (-0.16%) | | 10-yr Note | -3/32 | 3.69 |
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| | NYSE | Adv 1093 | Dec 1749 | Vol 959 mln | | Nasdaq | Adv 1967 | Dec 2397 | Vol 3.9 bln |
Industry Watch
| Strong: Energy, Health Care |
| | Weak: Consumer Discretionary, Financials, Industrials, Real Estate, Communication Services |
Moving the Market
-- Punchbowl News reporting that debt ceiling talks have stalled and CNN reporting that Treasury Secretary Janet Yellen told bank CEOs that more mergers might be needed around the same time
-- Treasury yields moving lower in response to the debt ceiling and regional bank worries coming back into play
-- Relative weakness in some mega caps weighing on index levels
| Closing Summary
19-May-23 16:30 ET
Dow -109.28 at 33426.54, Nasdaq -30.94 at 12658.07, S&P -6.07 at 4193.25
[BRIEFING.COM] The stock market kicked off this options expiration day on an upbeat note, but rolled over fairly quickly. Opening gains had the S&P 500 back above the 4,200 level before the market turned lower around 11:00 a.m. ET when Fed Chair Powell began speaking at a panel discussion regarding perspectives on monetary policy.
Equities seemed to be responding to worries about the debt ceiling and regional banks, though, rather than Mr. Powell's comments. Briefly, Mr. Powell said that inflation is "far above" the Fed's objective, but also said that rates may not have to rise as much because of credit conditions. These views were comparable to what he shared during his press conference following the FOMC meeting earlier this month, so they weren't necessarily surprising.
What was surprising was a tweet from Punchbowl News reporter Jake Sherman that "debt limit talks between the White House and House Republicans have been paused, per multiple sources involved in the talks." Around the same time, CNN reported that Treasury Secretary Yellen told bank CEOs that more mergers might be needed. The latter news stirred some renewed angst in the banking space.
The SPDR S&P Regional Banking ETF (KRE) closed with a 1.8% loss. Still, regional bank stocks had a good showing this week and today's losses were not enough to offset a sizable gain in the KRE, which rose 7.8% on the week.
Ultimately, the major indices were able to climb somewhat off their lows to close with more modest losses; however, the S&P 500 remained pinned below 4,200 on a closing basis.
Most of the S&P 500 sectors closed with losses while energy (+0.7%) and health care (+0.5%) outperformed.
Despite a nice gain in Tesla (TSLA 180.14, +3.25, +1.8%), the S&P 500 consumer discretionary sector (-0.8%) closed at the bottom of the pack. A loss in Amazon.com (AMZN 116.25, -1.90, -1.6%) contributed to the sector's underperformance, but lagging retailers suffered the steepest declines. The SPDR S&P Retailer ETF (XRT) fell 3.6% today. Although it's not a sector component, retailers were trading down in sympathy with Foot Locker (FL 30.21, -11.31, -27.2%), which reported disappointing earnings results and issued dismal guidance.
The communication services (-0.5%) and financials (-0.5%) sectors were also top laggards today.
Treasuries saw some knee-jerk buying in response to the debt ceiling and regional bank worries coming back into play. The 2-yr note yield, at 4.35% before the news broke, plunged to 4.19% before settling the day unchanged at 4.27%. The 10-yr note yield, at 3.71% earlier, fell to 3.64% but settled up four basis points to 3.69%.
- Nasdaq Composite: +20.9% YTD
- S&P 500: +9.2% YTD
- S&P Midcap 400: +1.1% YTD
- Dow Jones Industrial Average: +0.8% YTD
- Russell 2000: +0.7% YTD
There was no notable U.S. economic data today.
There will be no notable U.S. economic data on Monday.
Treasury yields rise this week
19-May-23 15:35 ET
Dow -124.04 at 33411.78, Nasdaq -39.55 at 12649.46, S&P -8.48 at 4190.84
[BRIEFING.COM] The market is moving sideways ahead of the closing bell.
Small cap stocks are lagging their larger peers. The Russell 2000 is down 0.7%, pressured by weak regional bank stocks.
The 2-yr note yield settled the session unchanged at 4.27%, rising 29 basis points this week. The 10-yr note yield rose four basis points today, and 23 this week, to 3.69%. The U.S. Dollar Index rose 0.5% this week to 103.18.
Energy complex settles mixed
19-May-23 15:05 ET
Dow -93.98 at 33441.84, Nasdaq -39.99 at 12649.02, S&P -6.85 at 4192.47
[BRIEFING.COM] Things are little changed in the last half hour. The major indices have stuck to a narrow range near their lows.
WTI crude oil futures fell 0.1% today to $71.76/bbl. Natural gas futures settled flat at $2.72/mmbtu.
On an energy related note, the S&P 500 energy sector (+0.8%) sits atop the leaderboard for the 11 sectors.
VFC slips in S&P 500 on Foot Locker sympathy, Oppenheimer cuts ULTA tgt
19-May-23 14:30 ET
Dow -117.32 at 33418.50, Nasdaq -39.58 at 12649.43, S&P -9.21 at 4190.11
[BRIEFING.COM] The S&P 500 (-0.22%) is off afternoon lows from the previous half hour, down less than 10 points.
S&P 500 constituents V.F. Corp (VFC 19.00, -1.77, -8.52%), Ulta Beauty (ULTA 488.48, -25.13, -4.89%), and Etsy (ETSY 88.84, -3.55, -3.84%) pepper the bottom of the S&P. VFC falls in sympathy to Foot Locker's (FL 30.11, -11.41, -27.48%) report, ULTA caught an Oppenheimer tgt cut this morning, while ETSY makes six-month lows despite a dearth of corporate news.
Meanwhile, EPAM Systems (EPAM 246.96, +8.84, +3.71%) is near the top of today's standings.
Gold trims weekly losses on Friday
19-May-23 14:00 ET
Dow -135.15 at 33400.67, Nasdaq -39.37 at 12649.64, S&P -10.29 at 4189.03
[BRIEFING.COM] With about two hours remaining on Friday the tech-heavy Nasdaq Composite (-0.31%) is in second place, modestly off session lows from earlier in the afternoon.
Gold futures settled $21.80 higher (+1.1%) to $1,981.60/oz, settling the week down about -1.9%, pressured this week by a rise in the dollar and stronger treasury yields.
Meanwhile, the U.S. Dollar Index is down about -0.5% to $103.08.
S&P 500 knocking on the door of 4,200
It has been six weeks since the S&P 500 had a week when it was up, or down, more than 1.0%. That streak looks poised to come to an end this week, unless today doesn't go well.
The S&P 500 is up 1.8% for the week, so it has some cushion to work with to maintain that one-handle. Then again, the way the last few sessions have gone, it's possible the S&P 500 could close out the week with a two-handle in terms of its return.
Currently, the S&P 500 futures are up 12 points and are trading 0.3% above fair value, the Nasdaq 100 futures are up four points and are trading 0.1% above fair value, and the Dow Jones Industrial Average futures are up 93 points and are trading 0.3% above fair value on this options expiration day.
The mega-cap stocks, the semiconductor stocks, and the regional bank stocks have been the star performers this week. The Vanguard Mega-Cap Growth ETF (MGK) is up 3.2%, the Philadelphia Semiconductor Index is up 8.4%, and the SPDR S&P Regional Banking ETF (KRE) is up 9.8%.
The outperformance of the mega-cap stocks is no surprise given the way this year has gone; the outperformance of the semiconductor stocks is a hopeful surprise since they have leading-indicator status; and the outperformance of the regional bank stocks is a pleasant surprise given how things have gone since Silicon Valley Bank's failure in mid-March.
In any case, the collective outperformance of these stocks has put the S&P 500 on the cusp of breaking out above 4,200. It peaked its head above that level yesterday, but closed just shy of 4,200. Market participants are anxious to see a close above 4,200 knowing that it has been a stern area of resistance since last August.
Some optimistic feelings this week about the debt ceiling discussions have acted as a catalyst for the upside action. That optimism is still intact with President Biden and House Speaker McCarthy both touting a sense of progress in the debt ceiling discussions.
Of course, this itself stands as a near-term risk to the market if these discussions hit a roadblock. We will learn more over the weekend when President Biden returns Sunday from the G-7 Summit, where leaders have agreed to impose more sanctions on Russia for its invasion of Ukraine.
We will also learn more today about Fed Chair Powell's "perspective on monetary policy" when he participates in a panel discussion at 11:00 a.m. ET on that very topic. Should the topic of current monetary policy or future monetary policy arise, we suspect he will walk a neutral line that emphasizes the Fed being data dependent.
In other words, we don't expect him to be as declarative as Dallas Fed President Logan (FOMC voter) was yesterday in saying current data doesn't support the Fed pausing in June.
There are a few stocks of note that aren't pausing this morning. Deere (DE) is in forward gear, up 3.4% after reporting better-than-expected fiscal Q2 results, and Foot Locker (FL) is in reverse gear, plummeting 25% after posting weaker-than-expected fiscal Q1 results and issuing FY24 guidance well below analysts' consensus estimate.
-- Patrick J. O'Hare, Briefing.com
Foot Locker erases the past six months of gains after slashing its FY24 (Jan) outlook (FL)
Foot Locker (FL -26%) is erasing the past six months of gains today following its slashed FY24 (Jan) outlook as the footwear retailer faced significant macro headwinds during Q1 (Apr). FL was forced to take an aggressive promotional stance to spur demand and manage its inventory toward the end of the quarter and expects to keep promotional activity elevated throughout the year. Also, FL appointed a new CFO, but this likely has little relative impact on price today.
- When FL first issued its FY24 outlook in late March, it anticipated an uptick in growth during April, benefiting from a more favorable launch calendar. Unfortunately for FL, while it saw a minor benefit from this trend, it was not close to what the company projected, with the weakness persisting into May. The result was comparable store sales growth dropping by 9.1% in Q1, resulting in adjusted EPS of $0.70, missing FL's original expectations.
- FL already set expectations that FY24 would be a reset year as the company simplified its organization, closing certain banners while transitioning most of its Asia business to a licensed model. At the same time, FL would reset its relationship with brand partners (specifically NIKE), provide a broader range of brand assortment, and remodel storefronts. These initiatives were going to weigh on FL's financial performance during the year, leading to its initially downbeat FY24 guidance.
- Although investors brushed off the original tepid outlook, with shares holding up relatively well, they are unwilling to shrug off FL's updated predictions. The company expects EPS of $2.00-2.25, down from $3.35-3.65, and comps to fall 7.5-9.0%, worse than its initial negative 3.5-5.5% forecast.
Still, there were silver linings. FL reiterated its plans to return to growth in its NIKE business in 2024. In the meantime, other performance brands like On (ONON) and HOKA (DECK) continue enjoying robust sell-through, as did brands like New Balance, Puma, and ASICS, bringing FL's brand mix ahead of NIKE. Additionally, FL is progressing toward its target of off-mall sites and larger-format stores comprising over 50% and 20% of its locations by 2026. Also, overseas demand showed some signs of recovery, such as in Italy, Spain, and France, as well as in the Asia Pacific, where comps jumped 8.9%, helped by tourism returning to the region.
Nevertheless, the market is expressing disappointment regarding FL's reduced FY24 outlook. Even though we view FL's updated guidance as a potential worst-case scenario, it does not help that the economic landscape shows few signs of improvement, with inflation remaining sticky, barely budging month/month in April. Given the snail's pace at which inflation is easing, consumers are beginning to prioritize how they spend their dollars, shifting toward services and away from products, which will prove quite the challenge for FL this year.
Lastly, FL's results paint a gloomy picture ahead of earnings reports from footwear firms Deckers Outdoor (DECK; MarQ on May 25) and NIKE (NKE; MayQ on June 26), both of which are edging lower today. Other shoe companies like Adidas AG (ADDYY) and Sketchers (SKX) are also ticking down.
Applied Materials slides on temperate Q2 results and hesitation calling a 2H23 turnaround (AMAT)
Even though Applied Materials (AMAT -2%) topped earnings and sales estimates in Q2 (Apr), the stock is slipping today. The semiconductor equipment firm's Q2 report did not sway much from its peers' recent MarQ results, including Lam Research (LRCX), KLA Corp (KLAC), and ASML (ASML). Market demand was consistent with what we heard from AMAT's peers: consumer electronics consumption remains weak while the IoT, communications, automotive, and power and sensors (ICAPS) markets remain robust.
However, with shares climbing over 11% on the week and 18% since late April lows leading into AMAT's Q2 report, investors are using today's temperate results to take profits off the table. Also, concerns remain surrounding wafer fab equipment spending hitting its lowest level in over a decade. Additionally, in leading-edge foundry logic, AMAT's customers are cutting back their spending plans for the year. Due to the uncertainty regarding when these unfavorable dynamics will thoroughly shake out, AMAT did not predict a second-half turnaround like its peers.
- AMAT still delivered headline numbers toward the high end of its prior forecasts, registering adjusted EPS of $2.00 compared to its $1.66-2.02 estimate and revenue growth of 6.2% yr/yr to $6.63 bln versus its $6.0-6.8 bln prediction.
- Strength in the quarter stemmed from ICAPS customers focused on carving out leadership positions within the clean energy, electric vehicle, and industrial automation fields. This dynamic has remained unchanged over the past several years and is a significant reason why AMAT continues to be bullish in the long term.
- AMAT also pointed out that the regionalization of supply chains is occurring across multiple countries to avoid the constraints sparked by COVID-related shutdowns that have yet to fully normalize. AMAT is noticing around $400 bln of government incentives being deployed globally over the next five years, a considerable chunk flowing toward ICAPS markets, which could generate a long-lasting tailwind for the company.
- Still, AMAT's Q3 (Jul) outlook underscored pockets of weaknesses persisting throughout the global economy. The company anticipates adjusted EPS and revs to see sequential declines, projecting $1.56-1.92 and $5.75-6.55 bln, respectively.
- Also, AMAT could not confidently echo remarks from its peers regarding a second-half recovery. CFO Brice Hill stated that the company expects a similar dynamic from Q2 to continue in subsequent quarters and hesitates to call precisely when a rebound occurs because large memory and leading logic markets are meaningfully exposed to soft consumer-end markets. Mr. Hill added that the company needs more visibility into how quickly the consumer will rebound, possibly providing further details in Q4 (Oct).
Overall, AMAT's Q2 results were mostly consistent with what the market likely already priced in, given its competitors' recent MarQ reports. Also, management was not as confident in calling a second-half turnaround (AMAT's 4Q23 and 1Q24) as were many of its peers, including consumer-facing firms like Samsung (SSNLF) and Intel (INTC). As a result, investors are reducing their risk, taking money off the table, sending AMAT's shares modestly lower.
Deere plowing higher as strong farming fundamentals lead to another beat-and-raise report (DE)
Deere (DE) is plowing higher following another impressive beat-and-raise quarterly report in which the farming and construction equipment maker smashed Q2 EPS and revenue estimates. The company's strong results and outlook are a testament to its ability to capitalize on favorable farming business conditions and an improving supply chain situation. Those two positive factors pushed both volume and pricing higher in Q2, leading to robust revenue and profit growth.
- For the quarter, revenue climbed higher by 34% yr/yr to $16.08 bln, while EPS surged by 42% yr/yr to $9.65. With results coming in well above expectations, and with DE maintaining a bullish outlook on farming fundamentals for the remainder of the year, the company lifted its FY23 guidance for the second time.
- Specifically, DE is now forecasting net income of $9.25-$9.50 bln, up from its prior forecast of $8.75-$9.25 bln. Initially, the company guided for net income of $8.0-$8.5 bln when it issued Q4 results last November.
DE is almost firing on all cylinders as each of its main business units generated healthy growth and improved profitability.
- The only exception is the Financial Services segment, which saw net income plunge by 87% yr/yr to $28 mln. The issue there is two-fold. Less favorable financing spreads pinched margins, while DE took a larger provision for credit losses to account for an uncertain macroeconomic environment.
Other than that blemish, DE's performance was pretty spectacular.
- The Production & Precision Agriculture segment was the standout as revenue rocketed by 53% yr/yr to $7.8 bln (49% of total sales). Sales volumes of combines, mid-size tractors, and harvesters remained very healthy due to rising farming incomes. Additionally, the pricing actions that DE took last year and into this year to help mitigate inflationary pressures are taking hold. Consequently, operating margin expanded by 700 bps yr/yr to 27.7%.
- Perhaps most surprising was the solid performance from the Small Agriculture & Turf unit. Much more so than DE's other business lines, this segment is exposed to consumer spending trends. As we have seen from major retailers like Home Depot (HD) and Costco (COST), demand for big ticket items has softened considerably over the past couple of quarters. It would seem to follow that demand for riding mowers and small tractors would also taper off, but sales remained firm for this segment in Q2, increasing by 16% yr/yr to $4.1 bln.
- Lastly, DE's Construction & Forestry segment generated revenue growth of 23%, but operating margin did decline by 390 bps to 20.4%. Although the company has taken pricing actions, they weren't enough to offset higher production costs and increases in SA&G expenses.
The main takeaway is that higher commodity prices (soybeans, wheat, corn, dairy, etc.) are supporting healthy fundamentals in the farming industry, providing DE with a potent growth catalyst. From a company-specific perspective, the company's focus on expanding its lineup of more expensive smart equipment is driving margins and profits even higher.
Ross Stores lower following earnings as its core low income customer feels the inflation pinch(ROST)
Ross Stores (ROST -1.3%) is heading modestly lower following its Q1 (Apr) report last night. ROST beat handily on EPS, but the upside was notably smaller than the prior three quarters. Revenue and comps were generally in-line. The EPS guidance for Q2 (Jul) was well below analyst expectations, but ROST is known for being conservative with EPS guidance so we would not read too much into that. ROST also reaffirmed FY24 comp guidance of "relatively flat."
- On the call, ROST said it was not really satisfied with its Q1 results. However, it was pleased that sales were generally in-line despite continued inflationary pressures impacting its low to moderate income customers. Q1 comps were up +1% vs "relatively flat" prior guidance. Cosmetics and accessories were the strongest merchandise areas during Q1 with the Midwest being the top-performing region. Its dd's DISCOUNTS unit continues to trail Ross due to inflationary pressures on lower income households. ROST guided to Q2 comps of "relatively flat" which was a bit of a letdown considering ROST will lap easy -7% comps last year.
- Operating margin is another metric we watch. In Q1, operating margin dipped to 10.1% from 10.8% last year mostly due to higher incentive compensation. Also, there was some deleverage from the opening of its Houston distribution center. Merchandise margin was up 120 basis points, primarily due to lower ocean freight costs. Looking ahead to Q2, ROST is guiding to operating margin in the 9.8-10.1% range, down from 11.3% last year.
- Another positive metric was consolidated inventories being down 16% yr/yr. Many retailers had too much inventory in 2022 just as consumers pulled back on spending, so it is good to see progress there. Another positive sign was customer traffic being up yr/yr. However, ROST concedes that its low-end customer continues to be pressured, whether it's caused by inflation, a reduction in SNAP benefits as emergency pandemic allotments enacted by Congress expire, or lower tax refunds.
Overall, the stock is down only modestly, despite the downside EPS guidance and lackluster Q2 comp guidance. We think it's because the quarter generally came in as expected. ROST guides EPS lower most quarters then subsequently reports upside, so we are not overly worried about that. We would have liked to have seen better Q2 comp guidance, but it's a tough macro environment.
The reality is that lower income consumers are squeezed the most by inflation and that is ROST's core customer. It also hurts that ROST does not sell groceries, a category that has been booming and is helping TGT and WMT offset the decline in discretionary purchases. ROST focuses heavily on apparel and home goods, but with tight wallets, consumers can do without new outfits for now. Next week, we have other off-price retailers reporting, including Burlington (BURL May 25) and Big Lots (BIG May 26). Dollar stores reporting soon include Dollar Tree (DLTR May 25), Dollar General (DG Jun 1) and Five Below (FIVE Jun 1).
Take-Two soars to 52-week highs after projecting bookings to exceed $8.0 bln in FY25 (TTWO)
Take-Two (TTWO +12%), the video game publisher behind popular franchises like Grand Theft Auto and NBA 2K, is setting 52-week highs today following its remarks last night that FY25 (Mar) is shaping up to be a massive year. The company projected bookings to exceed $8.0 bln in FY25, a substantial leap from the $5.3 bln delivered in FY23. Management added that it expects the upward momentum from FY25 to carry into FY26. Given this forecast, we suspect that TTWO's most-anticipated release, Grand Theft Auto VI, will hit shelves sometime in 2024 or early 2025.
The excitement surrounding a possibly huge FY25 combined with decent Q4 (Mar) results is generating one of the largest single-day upward price moves in TTWO's recent history, returning shares to April 2022 highs.
- That is not to say TTWO did not encounter its share of headwinds in Q4. The company mentioned that the consumer backdrop remained challenging, consistent with what it faced throughout Q3 (Dec), as consumers continued to exercise restraint with their purchasing behaviors.
- Nevertheless, TTWO still registered net bookings of $1.39 bln in the quarter, above its $1.31-1.36 bln outlook. Recurring consumer spending growth also topped the company's expectations, driven primarily by Zynga (mobile games division) and Grand Theft Auto Online. Given the waning demand associated with mobile gaming in recent quarters, it was encouraging to see Zynga finish FY23 on a strong note, with in-app purchases surpassing management's expectations, sustaining this momentum through the Easter holiday.
- Grand Theft Auto V remained a critical driver of TTWO's upbeat Q4 numbers, boasting total units sold since its 2013 release of over 180 mln. Additionally, as supply chain constraints eased regarding new generation consoles from Sony (SONY) and Microsoft (MSFT), adoption of GTA V continued to climb, highlighting the additional upside TTWO can still tap into despite its most popular game's age.
- The continuously expanding popularity of Grand Theft Auto V is critical to note as it showcases the incredible potential its successor may have when it is possibly released within the next two years.
- Still, the unfavorable economic environment is likely to persist, reflected in TTWO's FY24 net bookings outlook of $5.45-5.55 bln, a mild 4% gain yr/yr at the midpoint. The development timelines of some of the company's titles were also lengthened, pushing net bookings out into the following year. However, on the bright side, TTWO expects to surpass its initial $50 mln annual savings target.
With the past year giving TTWO plenty of issues, from supply chain constraints limiting new console sales to souring consumer demand to extended-release timelines, the company's announcement of reaching over $8.0 bln in net bookings in FY25 is triggering an energized response today. Although development delays are common and could push releases past FY25, investors are nonetheless excited about the potential for a tremendous year ahead.
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