Market Snapshot
briefing.com
| Dow | 32777.57 | -277.85 | (-0.84%) | | Nasdaq | 12450.88 | -109.54 | (-0.87%) | | SP 500 | 4110.31 | -36.54 | (-0.88%) | | 10-yr Note | -1/32 | 3.72 |
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| | NYSE | Adv 668 | Dec 2197 | Vol 826 mln | | Nasdaq | Adv 1367 | Dec 3075 | Vol 4.1 bln |
Industry Watch
| Strong: Energy |
| | Weak: Financials, Industrials, Materials, Health Care |
Moving the Market
-- Debt ceiling worries front of mind for market participants as the X-date approaches, possibly as early as June 1
-- Positive reactions to some earnings reports
-- Rising Treasury yields
-- Concerns over rate hikes after Fed Governor Waller (FOMC voter) hinted at the possibility of another rate hike in June
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Closing Summary
24-May-23 16:30 ET
Dow -255.59 at 32799.83, Nasdaq -76.08 at 12484.34, S&P -30.34 at 4116.51
[BRIEFING.COM] Debt ceiling uncertainty led to another weak showing for equities today, building on yesterday's losses. The X-date is quickly approaching, possibly as early as June 1, yet reports indicate that debt ceiling negotiations hit an impasse.
Those reports were somewhat corroborated by House Speaker McCarthy who told reporters that debt ceiling negotiations are still far apart on a number of issues, but that talks would continue today. He added that he's not giving up and is hoping for progress today.
Market participants were also contending with some lingering rate hike worries after Fed Governor Waller (FOMC voter) said in a speech on policy rate hikes that "we need to maintain flexibility on the best decision to take in June... fighting inflation continues to be my priority." The market also received the Minutes from the May 2-3 FOMC meeting today, which didn't contain anything too surprising.
Briefly, the minutes showed that participants agreed that inflation remains too high and that economic data through March showed inflation declining slower than they had expected. Participants also expressed uncertainty about how much more policy tightening would be appropriate.
Concerns about rate hikes took a back seat, though, to debt ceiling angst, which fueled a broad retreat. The major indices all closed in negative territory, albeit off their worst levels of the day. There was a somewhat short lived rebound in the late afternoon that saw the main indices approaching session highs. That move higher appeared to be driven by a buy program with all 11 S&P 500 sectors moving up in tandem and no other news to account for the improvement.
The major indices all pulled back again, however, ahead of the closing bell. Market breadth skewed negative with decliners leading advancers by a greater than 3-to-1 margin at the NYSE and a greater than 2-to-1 margin at the Nasdaq.
Ten of the 11 S&P 500 sectors declined with real estate (-2.2%) suffering the biggest loss by a decent margin. The financials (-1.3%) and industrials (-1.3%) sectors were also among the top laggards today.
The energy sector (+0.5%) was alone in positive territory by the close, climbing alongside oil prices ($74.26/bbl, +1.35, +1.9%) after the weekly EIA inventory report showed a 12.46 million barrel drawdown in crude stockpiles.
Meanwhile, the consumer discretionary sector (-0.2%) saw the slimmest decline today. The sector was partially supported by Amazon.com (AMZN 116.75, +1.76, +1.5%) along with outperforming homebuilder components. This came after Toll Brothers (TOL 65.09, +1.34, +2.1%), although not a sector component, reported earnings.
Other notable outperformers following pleasing earnings and/or guidance included retailers Urban Outfitters (URBN 31.35, +4.69, +17.6%), Abercrombie & Fitch (ANF 30.16, +7.15, +31.1%), and Kohl's (KSS 20.72, +1.45, +7.5%). On the flip side, Analog Devices (ADI 173.20, -14.72, -7.8%) was a top laggard following its disappointing guidance, dragging down other semiconductor stocks in sympathy. The PHLX Semiconductor Index fell 1.7%.
Treasuries had a volatile session, ultimately settling mostly lower. The 2-yr note yield was unchanged at 4.34% and the 10-yr note yield rose two basis points to 3.72%.
- Nasdaq Composite: +19.3% YTD
- S&P 500: +7.2% YTD
- Russell 2000: +0.3% YTD
- S&P Midcap 400: -0.4% YTD
- Dow Jones Industrial Average: -1.1% YTD
Reviewing today's economic data:
- The weekly MBA Mortgage Application Index dropped 4.6% with purchase applications falling 4.0% and refinance applications dropping 5.0%.
- The weekly EIA Crude Oil Inventories showed a draw of 12.46 million barrels versus a build of 5.04 million barrels last week.
Market participants will receive the following economic data on Thursday:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 247,000; prior 242,000), Continuing Claims (prior 1.799 mln), Q1 GDP -- second estimate (Briefing.com consensus 1.1%; prior 1.1%), and Q1 GDP Deflator -- second estimate (Briefing.com consensus 4.0%; prior 4.0%)
- 10:00 ET: April Pending Home Sales (Briefing.com consensus -2.9%; prior -5.2%)
- 10:30 ET: Weekly natural gas inventories (prior +99 bcf)
NetEase (NTES), Best Buy (BBY), Medtronic (MDT), Dollar Tree (DLTR), and Burlington Stores (BURL) are among the more notable companies reporting earnings ahead of the open tomorrow.
Market climbs toward best levels of the day
24-May-23 15:30 ET
Dow -141.98 at 32913.44, Nasdaq -37.22 at 12523.20, S&P -15.57 at 4131.28
[BRIEFING.COM] The S&P 500 is nearing its best level of the day on no news.
Market participants will receive the following economic data on Thursday:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 247,000; prior 242,000), Continuing Claims (prior 1.799 mln), Q1 GDP -- second estimate (Briefing.com consensus 1.1%; prior 1.1%), and Q1 GDP Deflator -- second estimate (Briefing.com consensus 4.0%; prior 4.0%)
- 10:00 ET: April Pending Home Sales (Briefing.com consensus -2.9%; prior -5.2%)
- 10:30 ET: Weekly natural gas inventories (prior +99 bcf)
NetEase (NTES), Best Buy (BBY), Medtronic (MDT), Dollar Tree (DLTR), and Burlington Stores (BURL) are among the more notable companies reporting earnings ahead of the open tomorrow.
Earnings after the close; energy complex settlement levels
24-May-23 15:00 ET
Dow -277.85 at 32777.57, Nasdaq -109.54 at 12450.88, S&P -36.54 at 4110.31
[BRIEFING.COM] Things are little changed over the last half hour.
Energy complex futures settled the session higher. WTI crude oil futures rose 1.9% to $74.26/bbl and natural gas futures rose 2.7% to $2.56/mmbtu.
On a related note, the S&P 500 energy sector (+0.1%) remains in positive territory with only a slim gain.
NVIDIA (NVDA) will headline the earnings reports after the close today. Other notable companies reporting earnings include American Eagle (AEO), Splunk (SPLK), Snowflake (SNOW), and UiPath (PATH).
Some Fed officials think further hikes may not be needed, inflation still unacceptably high
24-May-23 14:30 ET
Dow -275.21 at 32780.21, Nasdaq -106.91 at 12453.51, S&P -36.15 at 4110.70
[BRIEFING.COM] The major averages ticked slightly lower following the release of the FOMC's minutes from its May meeting. The S&P 500 (-0.87%) holds the worst losses on the day.
The minutes highlighted that, participants generally expressed uncertainty about how much more policy tightening would be appropriate. Participants agreed that inflation was unacceptably high. They commented that data through March indicated that declines in inflation, particularly for measures of core inflation, had been slower than they had expected.
Some participants stressed that it was crucial to communicate that the language in the postmeeting statement should not be interpreted as signaling either that decreases in the target range are likely this year or that further increases in the target range had been ruled out.
In discussing the likely effects on inflation of recent banking-sector developments, several participants remarked that tighter credit conditions may not put much downward pressure on inflation in part because lower credit availability could restrain aggregate supply as well as aggregate demand. Participants emphasized that with appropriate firming of monetary policy, well-anchored longer-term inflation expectations would support a return of inflation to the Committee's 2 percent longer-run goal.
Further, many participants mentioned that it is essential that the debt limit be raised in a timely manner.
In recent trading the yield on the benchmark 10-yr treasury note is up about one basis point to 3.711%.
Gold slips ahead of FOMC minutes
24-May-23 13:55 ET
Dow -205.93 at 32849.49, Nasdaq -89.48 at 12470.94, S&P -29.27 at 4117.58
[BRIEFING.COM] With about two hours to go on Wednesday the tech-heavy Nasdaq Composite and the S&P 500 share losses of about -0.71% apiece. As a reminder, FOMC minutes from the May meeting are due out at the top of the hour.
Gold futures settled $9.90 lower (-0.5%) to $1,964.60/oz, down now about -0.86% week-to-date.
Meanwhile, the U.S. Dollar Index is up about +0.3% to $103.82.
Debt ceiling drama starting to test market's patience
The stock market for the most part has been granting President Biden and congressional leaders a good bit of latitude in working to reach an agreement on raising the debt ceiling. Yesterday, however, was the first indication that the stock market's patience in that regard is wearing thin.
The major indices all traded lower, digesting press reports that effectively said the two sides still have big differences on spending and that they are nowhere near a deal. That reporting didn't sit well for two reasons: (1) it came right after President Biden and House Speaker McCarthy labeled their latest meeting as being "productive," making it appear as if that declaration was just fluff and (2) while a deal may not be near, the potential X-date of June 1 is.
The headline coming in this morning was that the debt ceiling talks have hit an impasse and that no meetings are scheduled for today. Not long ago, however, Bloomberg News reported by tweet that there is a tentative plan for the White House and GOP negotiators to resume talks this morning.
"Tentative" of course does not mean definitely, so we'll know when we know if those talks do take place.
The uncertainty of the matter -- both if talks are going to resume and the timing of when a deal ultimately gets reached -- is keeping a lid on the market. To be sure, it is crimping the conviction of buyers even if it isn't necessarily fueling any panic selling.
The stock market's baseline view is that a deal will be reached in time to avoid a default, yet that doesn't mean it is enjoying the process or not allowing itself to envision a worst-case scenario. Accordingly, it is trading with a burgeoning sense of impatience on the matter, which, ironically, might be what negotiators need to get to the finish line before the X-date.
Currently, the S&P 500 futures are down 20 points and are trading 0.5% below fair value, the Nasdaq 100 futures are down 82 points and are trading 0.5% below fair value, and the Dow Jones Industrial Average futures are down 120 points and are trading 0.3% below fair value.
The debt ceiling uncertainty is the main hang-up, yet a higher-than-expected CPI print for April out of the UK, the impending release of the FOMC Minutes for the May 2-3 meeting at 2:00 p.m. ET, talk of China grappling with a new wave of COVID cases, weak price action in foreign markets, and some ongoing softness in the mega-cap stocks are also playing a part in keeping the stock market in check.
Some retailers, however, are making a break for it this morning. Kohl's (KSS), Abercrombie & Fitch (ANF), and Urban Outfitters (URBN) are all up double-digit percentages following better-than-expected earnings results. Palo Alto Networks (PANW) is a standout on the tech side, up 4% after its better-than-expected report.
These moves, though, are only helping on the margin to raise the floor this morning for the stock market, which is seeing the walls close in on the debt ceiling uncertainty.
-- Patrick J. O'Hare, Briefing.com
(Correction: The original post said the UK CPI report was for May. It was the April CPI report.)
Toll Brothers looks right at home in touch macro climate as tight housing supply buoys results (TOL)
Amid a tough macroeconomic environment that's characterized by high inflation and rising interest rates, luxury homebuilder Toll Brothers (TOL) crushed Q2 EPS and revenue estimates and raised its FY23 guidance across the board. A combination of better-than-expected deliveries of 2,492 (+4% yr/yr) and an average sales price of approximately $1.0 mln that also exceeded the midpoint of TOL's guidance drove the impressive results.
- TOL's strong Q2 performance and outlook may seem surprising given the sluggish housing market. However, the cool down in home sales has been far more pronounced for existing homes than for new homes.
- For instance, existing home sales in April declined by 3.4% month/month, while new home sales jumped by 4.1% in April.
There are two primary reasons for this divergence.
- First, the supply of homes on the market remains very tight, pushing prospective buyers towards new construction. This supply shortage is partly a function of single-family home construction lagging household formations.
- According to a recent article published on Realtor.com, the gap between single-family home construction and household formations expanded to 6.5 mln homes between 2012 and 2022.
- Second, those in existing homes are hesitant to sell because many homeowners have mortgages that are locked in with lower interest rates than today's rates. This reluctance to sell is amplifying the supply and demand imbalance.
TOL CEO Douglas Yearley commented in the earnings press release that he expects these dynamics to continue "well into the future", supporting other favorable market trends, such as more flexible work arrangements and demographic factors.
The fact that TOL caters to a wealthier customer base also doesn't hurt, but it's not alone in capitalizing on the healthy home construction market.
- About one month ago, D.R. Horton (DHI), which sells homes that are much less expensive than TOL, also delivered a strong beat-and-raise quarterly report. Notably, DHI's net sales orders soared by 73% sequentially, while its cancelation rate improved to 18% from 27% in the preceding quarter.
- With both TOL and DHI shining, this suggests that the strength in the new housing market is broad based. TOL is well-positioned to ride the momentum, too, since it has 71,300 lots owned or under its control.
The main risk for TOL and its homebuilding peers is that the economy takes a major turn for the worse, sending the job market into a tailspin. A U.S. debt default could certainly instigate an economic storm that slows the new housing market down. That notable risk aside, TOL seems poised to generate solid results in 2H23.
Kohl's profitability framework starts to bear fruit, resulting in a surprise profit in AprQ (KSS)
Following Dillard's (DDS) weak AprQ report earlier this month, sparked by soft consumer spending, investors were worried Kohl's (KSS) would follow suit. However, KSS swam against the tide, delivering a surprise profit in Q1 (Apr) while topping revenue estimates handily. As a result, shares are breaking out of their downward trend, helping lift the broader retail sector today. This is also being boosted by massive gains from Urban Outfitters (URBN) and Abercrombie & Fitch (ANF) following their impressive AprQ results.
Still, macroeconomic pressure remains, evidenced by KSS maintaining its FY24 (Jan) adjusted earnings outlook of $2.10-2.70 and revenue growth of negative 4-2% yr/yr -- both of which fell short of analyst targets last quarter -- despite its outperformance in Q1. Nonetheless, the company's framework to return to profitable growth outlined in Q4 resulted in tangible benefits, an encouraging development as KSS navigates the obstacle-filled economic landscape.
- In Q1, KSS expanded its adjusted earnings by 18.2% yr/yr to $0.13, assisted by a 67 bp jump in gross margins to 39%. Meanwhile, revs fell 4.8% to $3.57 bln, and comps decreased by -4.3%. KSS's stores business achieved productivity gains in Q1, posting positive low single-digit comp growth, higher in-store traffic, and increased units per transaction, offsetting a lower average ticket from additional clearance actions.
- Conversely, KSS's digital business did not fare as well due to customers shifting toward in-store shopping and KSS reducing online-only promotions. As a result, digital penetration was 26%, down from 30% last year, although still up meaningfully compared to pre-pandemic levels.
- Sephora (LVMUY) at Kohl's performed nicely in the quarter, igniting total beauty sales growth of 150% yr/yr. The cosmetic industry continues to prove its resilience to unfavorable macroeconomic trends, evidenced by robust Sephora sales, which followed last week's significant outperformance by Ulta Beauty (ULTA) at Target (TGT) in AprQ.
- On the other hand, KSS continued to experience weaknesses within the home category, a dynamic playing out across a few home furnishing retailers lately, illuminated by negative AprQ comp growth from TJX's (TJX) HomeGoods banner and Williams-Sonoma (WSM).
- Still, due to KSS's updated inventory control processes, inventory was down 6% yr/yr, consistent with its goal of planning inventory down mid-single-digits percent this year.
- Looking toward the remainder of FY24, strengthening its balance sheet is a top priority for KSS. Helping on this front will be continually trimming SG&A expenses, which were down 4% yr/yr in Q1. Management also emphasized the importance of showing incremental improvements from its strategic initiatives, including enhancing its Sephora partnership, simplifying pricing strategies, clearing out excess inventory, and managing expenses.
Following KSS's weak finish to FY23 (Jan), which kicked its profitability framework into gear, we stated that it was best to employ a wait-and-see attitude. After demonstrating healthy progress with its updated framework, we think KSS is positioning itself to reverse its long downward trend. Although macroeconomic challenges still exist, which could create volatility over the near term, KSS is deploying the right strategies to boost sales and improve margins.
Analog Devices capitalizes on strong industrial and auto markets again, but momentum fading (ADI)
Due to its favorable positioning within the resilient industrial and automotive end markets, Analog Devices (ADI) has weathered the slowdown in the semiconductor industry better than most chip makers, as reflected in its upside Q2 earnings report and consistent top-line growth. The ongoing strength in those two markets, which represent a combined 78% of total Q1 revenue, led to record revenue and EPS for the quarter. However, just as competitor Texas Instruments (TXN) issued soft quarterly guidance last month, so did ADI, guiding Q3 EPS below expectations and forecasting its first potential yr/yr revenue decline in three years.
- In the earnings press release, CEO Vincent Roche stated that ADI expects revenue to moderate in the second half of the fiscal year as a result of economic uncertainty and normalizing supply chains.
- While the improving supply chain situation is a positive development for the economy overall, it is having a short-term negative effect on orders for a variety of companies. For instance, when networking equipment giant Cisco (CSCO) reported Q3 results last week, it disclosed that customers were becoming less aggressive with orders as lead times shrink due to improved product availability.
- Consequently, sales cycles are elongating, impacting CSCO's Q4 revenue guidance, which was still in line with estimates.
- ADI is experiencing this same dynamic. Therefore, the growth rates for the industrial and automotive markets will likely slip from the 16% and 24% levels seen in Q2.
- Meanwhile, ADI's Consumer segment continues to struggle from the inventory imbalances at smartphone and table OEMs, causing sales for that business to plunge by 22% this quarter.
- When putting these two factors together, the company took a cautious approach with its outlook, guiding for Q3 revenue to modestly decline at the midpoint of its forecast.
- The slowing revenue growth is also expected to have a negative impact on margins due to reduced sales leverage. After adjusted operating margin increased by 90 bps to 51.2% in Q2, ADI is now anticipating adjusted margin to slip to 48.5% in Q3, plus or minus 70 bps.
Prior to this quarter, ADI had been on a role, consistently beating quarterly expectations with revenue growth solidly in double digit territory, as opposed to this quarter's more modest 9.8% increase. The company had also issued upside EPS and revenue guidance in each of the previous two quarters. This strong performance helped push shares higher by nearly 40% since mid-October of last year.
In the wake of ADI's disappointing outlook, investors are now anxious to lock in gains, especially given the heightened volatility in the broader market as fears surrounding the debt ceiling escalate.
The main takeaway is that ADI posted another solid quarterly report, but its key growth drivers -- namely, the industrial and automotive markets -- are losing some steam as macroeconomic worries mount and as customers digest prior orders made when the supply chain situation was in worse shape.
Intuit falls following earnings as its tax segment comes up short (INTU)
Intuit (INTU -7%) is trading sharply lower following its Q3 (Apr) earnings report last night. INTU focuses on small businesses and consumers (TurboTax, QuickBooks, Mint, Credit Karma, Mailchimp). This is always a highly-anticipated quarter because tax season is Intuit's largest quarter every year. Unfortunately, the tax segment did not perform as expected.
- INTU beat handily on EPS, but revs were light. The Q4 (Jul) guidance was mixed with downside EPS but upside revs. The star of the show was its Small Business and Self-Employed Group (SBSE), which saw revenue grow 21% yr/yr to $2.0 bln, which led to an increase in INTU's FY23 top line guidance for SBSE to +24% from +19-20%. Unfortunately, Consumer segment sales rose just 3% to $3.3 bln, which caused INTU to lower its FY23 segment guidance to +5-6% from 9-10%.
- The Consumer business did not perform well because its tax segment fell short. Intuit now expects FY23 overall IRS returns to decline 2% through July 31, below its original expectations of +1%. INTU also expects the DIY category share of total IRS returns to decline nearly three-quarters of a point, also below internal expectations.
- This may not sound like much, but INTU estimates this decline in total IRS returns and DIY category share equates to $200 mln of lost TurboTax revenue. Every point of IRS returns growth equals about 1 point of TurboTax revenue growth, and every point of DIY category share growth equals about 2.5 points of TurboTax revenue growth. Intuit believes the IRS and DIY category declines were driven by taxpayers who filed in order to receive pandemic-era stimulus and tax credits during the past several years but did not file taxes this season.
- The SBSE segment performed well. QuickBooks Online Accounting revenue grew 25%, driven primarily by customer growth, higher prices, and mix-shift. Online Services revenue grew 21%, driven by growth in Mailchimp, QuickBooks Online payroll, and QuickBooks Online payments.
- Credit Karma has been a laggard the past two quarters, but seems to be stabilizing. Revenue fell 12% yr/yr but grew 9% sequentially to $410 mln. In Q2, Credit Karma saw a 16% decline. The Q3 decline was driven by headwinds in personal loans, home loans, auto loans and auto insurance, partially offset by growth in Credit Karma Money and credit cards. INTU says it's seeing more stability across its core verticals. INTU guided to the higher end of its prior range (now at -11% vs -15 to -10%).
Overall, this quarter was a disappointment for Intuit. What makes it worse is that it was Intuit's core tax segment that was largely responsible for the shortfall. The stock had run nicely over the past week in anticipation of a strong tax season, but that was not to be. Its SBSE segment continues to perform well, but TurboTax is the crown jewel. And what's more, INTU has built a financial services ecosystem that relies a lot on cross-selling. So when a big funnel like TurboTax comes up short, that affects other businesses.
Palo Alto Networks' beat-and-raise in Q3 underscore resilience within the cybersecurity space (PANW)
Palo Alto Networks (PANW +7%) breaches one-year highs today after beating bottom-line estimates by double-digits in Q3 (Apr) and raising its FY23 (Jul) targets. After its cybersecurity counterpart Zscaler (ZS) hiked its FY23 (Jul) earlier this month, investors were hopeful that the persistent budget tightening within IT departments was beginning to ease. While cautious spending and deal scrutiny were still present for PANW during Q3, it still managed to register solid numbers in the quarter, a testament to its services and a reflection of the importance of cybersecurity.
- PANW expanded its adjusted EPS 83% yr/yr to $1.10, cruising past its $0.90-0.94 forecast, on top-line growth of 24% to $1.72 bln, hitting the higher-end of its $1.695-1.725 bln target. Meanwhile, total billings climbed 26% to $2.26 bln, exceeding the high end of its guidance. Strength was not concentrated in any particular geographic region, with the Americas growing 24%, EMEA up 23%, and APAC up 24%.
- The substantial bottom-line growth was fueled mainly by PANW's workforce reductions and slower headcount additions earlier this year, as well as supply chain challenges abating at an accelerated pace, which resulted in non-GAAP gross margin growth of 320 bps yr/yr to 76.1%.
- CEO Nikesh Arora noted that he has not noticed any significant changes from a technology trend perspective; cloud adoption, automation, and hybrid work continue with minor variations. Given the cost savings, organizations are embarking on network transformations, which inevitably enhances the need for cybersecurity.
- Furthermore, the surging popularity of AI is igniting an even greater need to protect against cyberattacks as the technology poses significant security problems as cyber attackers deploy AI to better access user data.
- PANW is also looking to embed generative AI into its workflows to improve detection and prevention efficacy, gather insights into incoming data from customers, and improve operational efficiency.
- With digital transformations coinciding with more cautious spending, software is taking on a greater role, evidenced by software comprising 30% of PANW's total product revenue, up from around 10% three years ago. Although constricted CapEx budgets dampen hardware demand, PANW is beginning to see more appliance replacements and is planning for this trend to continue, possibly accelerating in future quarters.
- On a side note, the shift toward software should benefit CrowdStrike (CRWD), which derives its revenue from its software-based applications. CRWD reports AprQ earnings on May 31.
- PANW expects to end the year strong, projecting Q4 (Jul) adjusted EPS of $1.26-1.30 and revs of $1.937-1.967 bln, both translating to solid sequential improvements.
Cybersecurity remains atop IT budgets despite the challenging macro environment, especially as AI gains traction. Organizations may be more contentious about where they allocate funds, but that does not mean they are willing to risk being more prone to a cyberattack, which should provide a cushion for PANW against the global economic pressures over the near term.
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