Market Snapshot
briefing.com
| Dow | 33962.14 | +247.52 | (0.73%) | | Nasdaq | 13564.43 | +228.27 | (1.71%) | | SP 500 | 4382.56 | +52.47 | (1.21%) | | 10-yr Note | -25/32 | 3.77 |
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| | NYSE | Adv 2065 | Dec 800 | Vol 817 mln | | Nasdaq | Adv 2634 | Dec 1773 | Vol 5.0 bln |
Industry Watch
| Strong: Consumer Discretionary, Information Technology, Industrials, Communication Services |
| | Weak: Health Care |
Moving the Market
-- Broad based gains with a risk-on bias
-- Quarter end rebalancing activity
-- Strength from mega cap stocks except Alphabet (GOOG), which was downgraded to Mkt Perform from Outperform at Bernstein
-- Reacting to a slate of better than expected economic data this morning, featuring a strong new homes sales report for May, a jump in consumer confidence in June, and an increase in nondefense capital goods orders, excluding aircraft, which is a proxy for business spending
-- Selling in the Treasury market in response to the data
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Closing Summary
27-Jun-23 16:30 ET
Dow +212.03 at 33926.65, Nasdaq +219.89 at 13556.05, S&P +49.59 at 4379.68
[BRIEFING.COM] It was a decidedly strong day for the stock market. The major indices all closed near their best levels of the session with gains ranging from 0.6% to 1.7%. The upside moves were in response to a slate of stronger-than-expected economic data this morning that helped to ease some concerns about a hard landing for the economy.
Namely, the May Durable Goods Orders, May New Home Sales, and June Consumer Confidence reports all went the market's way. As a result, today's trade had a risk-on and pro-cyclical vibe.
In the early going, buying interest was more pronounced in parts of the market that have been trailing index level gains this year. Mega caps, meanwhile, were relative underperformers, but were still trading up for the most part. By the afternoon, mega caps had caught up with the broader market, accelerating index gains.
Even Alphabet (GOOG 119.01, -0.08, -0.1%), which had been down as much as 1.8% after being downgraded to Market Perform from Outperform at Bernstein, briefly tipped into positive territory before closing with a modest loss.
The Vanguard Mega Cap Growth ETF (MGK) rose 1.5%; the Invesco S&P 500 Equal Weight ETF (RSP) rose 1.2%; and the market-cap weighted S&P 500 rose 1.2%.
Gains in their respective mega cap components propelled the information technology (+2.0%) and consumer discretionary (+2.1%) sectors to first place on the leaderboard.
The consumer discretionary sector was also boosted by outperforming homebuilder components in response to the jump in new homes sales in May. The information technology sector, meanwhile, was boosted by outperforming semiconductor components. The SPDR S&P Homebuilder ETF (XHB) rose 2.9%. The PHLX Semiconductor Index rose 3.6%.
Other top performers included the economically-sensitive materials (+1.4%) and industrials (+1.3%) sectors.
The countercyclical health care (-0.2%), utilities (+0.3%), and consumer staples (+0.3%) sectors all underperformed, closing near the bottom of the pack. The consumer staples sector was partially weighed down by a sizable loss in Dow component Walgreens Boots Alliance (WBA 28.64, -2.95, -9.3%) after its disappointing fiscal Q3 earnings report and outlook.
This morning's data fueled selling in the Treasury market. The 2-yr note yield rose two basis points to 4.76% and the 10-yr note yield rose five basis points to 3.77%.
- Nasdaq Composite: +29.5% YTD
- S&P 500: +14.0% YTD
- Russell 2000: +5.0% YTD
- S&P Midcap 400: +6.0% YTD
- Dow Jones Industrial Average: +2.4% YTD
Reviewing today's economic data:
- Total durable goods orders were up 1.7% month-over-month in May (Briefing.com consensus -1.0%) following an upwardly revised 1.2% increase (from 1.1%) in April. Excluding transportation, durable goods orders increased 0.6% month-over-month (Briefing.com consensus 0.0%) following a downwardly revised 0.6% decline (from -0.2%) in April.
- The key takeaway from the report is that nondefense capital goods orders, excluding aircraft -- a proxy for business spending -- jumped 0.7% following a 0.6% increase in April.
- The FHFA Housing Price Index rose 0.7% in April following a revised 0.5% increase in March (from 0.6%).
- The S&P Case-Shiller Home Price Index fell 1.7% in April (Briefing.com consensus -2.5%) following a 1.1% decrease in March.
- The Conference Board's Consumer Confidence Index jumped to 109.7 in June (Briefing.com consensus 103.8) from an upwardly revised 102.5 (from 102.3) in May. In the same period a year ago, the index stood at 98.4.
- The key takeaway from the report is that the uptick in consumer confidence was driven both by a pickup in views about current conditions and the outlook, the latter of which included a brighter outlook for consumers' family finances.
- New home sales surged 12.2% month-over-month in May to a seasonally adjusted annual rate of 763,000 units (Briefing.com consensus 665,000) from a downwardly revised 680,000 (from 683,000) in April. On a year-over-year basis, new home sales were up 20.0%.
- The key takeaway from the report is that lower sales prices helped drive new home sales, which are counted when contracts are signed, to their highest level since February 2022.
Looking ahead to Wednesday, market participants will receive the following economic data:
- 7:00 a.m. ET: Weekly MBA Mortgage Applications Index (prior +0.5%)
- 8:30 a.m. ET: May Adv. Intl. Trade in Goods (prior -$96.8 billion), Adv. Retail Inventories (prior +0.2%), and Adv. Wholesale Inventories (prior -0.2%)
- 10:30 a.m. ET: Weekly EIA Crude Oil Inventories (prior -3.83 million barrels)
Treasuries settle with losses after strong data
27-Jun-23 15:35 ET
Dow +239.56 at 33954.18, Nasdaq +237.56 at 13573.72, S&P +53.12 at 4383.21
[BRIEFING.COM] The market continues to climb. The major indices are trading near their highs of the day.
Treasuries settled with losses across the curve following this morning batch of better than expected economic data. The 2-yr note yield rose two basis points to 4.76% and the 10-yr note yield rose five basis points to 3.77%.
Looking ahead to Wednesday, market participants will receive the following economic data:
- 7:00 a.m. ET: Weekly MBA Mortgage Applications Index (prior +0.5%)
- 8:30 a.m. ET: May Adv. Intl. Trade in Goods (prior -$96.8 billion), Adv. Retail Inventories (prior +0.2%), and Adv. Wholesale Inventories (prior -0.2%)
- 10:30 a.m. ET: Weekly EIA Crude Oil Inventories (prior -3.83 million barrels)
Small and mid caps continue to outperform
27-Jun-23 15:05 ET
Dow +247.52 at 33962.14, Nasdaq +228.27 at 13564.43, S&P +52.47 at 4382.56
[BRIEFING.COM] The major indices continue to climb.
Small and mid cap stocks continue to outperform. The Russell 2000 and S&P Mid Cap 400 both sport gains of 1.6%.
The Russell 2000 has been partially supported by its strong regional bank shares. On a related note, the SPDR S&P Regional Banking ETF (KRE) is up 2.1%.
Energy complex futures settled the session on a downbeat note. WTI crude oil futures fell 2.8% to $67.58/bbl and natural gas futures fell 1.1% to $2.77/mmbtu.
Generac gains on demand chatter following Texas heatwave
27-Jun-23 14:30 ET
Dow +250.78 at 33965.40, Nasdaq +229.97 at 13566.13, S&P +52.16 at 4382.25
[BRIEFING.COM] The S&P 500 (+1.20%) is in second place to this point on Tuesday afternoon.
S&P 500 constituents Generac (GNRC 143.73, +12.72, +9.71%), Carnival (CCL 15.79, +1.19, +8.15%), and Newell Brands (NWL 8.84, +0.62, +7.54%) pepper the top of the standings. GNRC gains on reports of increased generator demand owing to Texas heatwave, while CCL moves higher after analysts raise tgts following earnings, and NWL follows general strength in consumer discretionary stocks.
Meanwhile, San Diego-based diagnostics firm Illumina (ILMN 183.59, -8.29, -4.32%) is near the bottom of the S&P following last night's headcount reduction news.
Gold lower on Tuesday
27-Jun-23 14:00 ET
Dow +227.26 at 33941.88, Nasdaq +223.37 at 13559.53, S&P +49.60 at 4379.69
[BRIEFING.COM] With about two hours remaining on Tuesday the tech-heavy Nasdaq Composite (+1.67%) alongside its counterparts continues to make session highs, jogging modestly higher over the previous half hour.
Gold futures settled $10.40 lower (-0.5%) to $1,923.40/oz as equities and yields rise.
Meanwhile, the U.S. Dollar Index is down about -0.2% to $102.49.
Some tipping in rebalancing scales
The second quarter isn't over yet, but the end is near. That means the stock market is apt to be influenced by rebalancing dynamics, and it appeared yesterday as if the stock market encountered such activity.
The mega-cap stocks, which have been stalwarts during the second quarter (and all year for that matter) ran into a rush of selling interest. That sent the Vanguard Mega-Cap Growth ETF (MGK) 1.3% lower, which weighed heavily on the market-cap weighted S&P 500 (-0.5%).
An interesting undercurrent is that the Invesco S&P 500 Equal-Weight ETF (RSP), the Russell 2000, and the S&P Midcap 400 Index, which have not been stalwarts in the second quarter (or all year for that matter) outperformed and ended the session with modest gains.
Similarly, Treasuries eked out some small gains.
There is still a long way to go in this trading day, but the early look favors a mixed start for stocks.
Currently, the S&P 500 futures are up six points and are trading 0.2% above fair value, the Nasdaq 100 futures are up 53 points and are trading 0.4% above fair value, and the Dow Jones Industrial Average futures are down 27 points and are trading 0.1% below fair value.
This imbalance reflects some tipping of the scales, with mega-cap stocks back in a position of relative strength. Alphabet (GOOGL) is an exception as it grapples with a Bernstein downgrade to Market Perform from Outperform on the heels of a UBS downgrade yesterday to Neutral from Buy.
The question now is, will this relative strength hold for the duration of today's session or will these stocks ultimately face another rebalancing roll?
Dow component Walgreens Boots Alliance (WBA) is already rolling over, not because of rebalancing activity though, but because of disappointing fiscal Q3 earnings results and full-year guidance that the company blamed in part on "shifting U.S. consumer spending with heightened macro pressures." Shares of WBA are down 8.6%.
Notably, Delta Air Lines (DAL) sounded a much different tune, having raised its Q2 EPS outlook above consensus estimates, saying this summer travel season is stronger than expected and that Q2 will be the highest Q2 earnings in its history.
That weakness in Walgreens is weighing on the Dow Jones Industrial Average futures, but with a market capitalization of just $27 billion, it isn't moving the needle for the S&P 500 futures.
A stronger than expected Durable Goods Orders Report for May helped move things some. Total durable goods orders were up 1.7% month-over-month (Briefing.com consensus -1.0%) following an upwardly revised 1.2% increase (from 1.1%) in April. Excluding transportation, durable goods orders increased 0.6% month-over-month (Briefing.com consensus 0.0%) following a downwardly revised 0.6% decline (from -0.2%) in April.
The key takeaway from the report is that nondefense capital goods orders, excluding aircraft -- a proxy for business spending -- jumped 0.7% following a 0.6% increase in April.
The June Consumer Confidence and May New Home Sales reports will be released at 10:00 a.m. ET.
-- Patrick J. O'Hare, Briefing.com
Korn/Ferry slips lower as struggling executive search business weighs on results again (KFY)
Executive search and consulting company Korn/Ferry (KFY) edged past 4Q23 earnings estimates on better-than-expected revenue, but a soft outlook for 1Q24 is clouding over the upside performance. Like last quarter, the company's Executive Search business, which is its largest segment at about 30% of total revenue, struggled as recruiting at the board and executive levels remains slow.
- What's especially troubling is that the downward trend in Executive Search seems to be accelerating a bit. After declining by 7% in Q2 and then by 11% last quarter, revenue for the segment fell by 13% in Q4. Not only is the downturn in Executive Search weighing on KFY's top line, but it's also hurting the company's earnings since the segment's fee revenue carries higher margins relative to the other segments.
- On that note, KFY's EPS fell by 42% on a yr/yr basis, even as revenue inched higher by 1.4%. Back in January, the company also announced a workforce reduction initiative that's expected to lower its annualized cost base by $45-$55 mln. Even that plan, though, wasn't enough to prevent the steep yr/yr EPS decline.
- The good news for KFY is that the rest of its business is performing reasonably well. A relatively healthy labor market, combined with the shift to a hybrid work model and the ongoing digital transformation, are key factors that are supporting KFY.
- This is most clearly seen in the Professional Search & Interim Data segment, which posted revenue growth of 51% in Q4 to $151.7 mln. However, that impressive growth rate is also a function of some acquisitions, including Salo which was completed this past February, and Infinity Consulting Solutions in August 2022.
- Those two acquisitions helped to establish a completely new line of business for KFY -- namely, interim and transition management. In the earnings press release, CEO Gary Burnison stated that these new capabilities combined for more than $400 mln of annual revenue on a run rate basis.
- Meanwhile, the Consulting and Digital segments continue to perform well, posting revenue growth of 3% and 5%, respectively, on a constant currency basis. These segments in particular are well-positioned to benefit from the substantial changes in workforce trends and companies' desires to drive greater efficiency from their workforces.
Overall, the story remains mostly the same for KFY. While the company's efforts to diversify and add new capabilities is helping it to navigate through a challenging macroeconomic environment, softness in the Executive Search segment is still weighing heavily on its results.
TD Synnex stumbles following rare EPS miss as PC demand weakens post pandemic (SNX)
TD Synnex (SNX -7%) is under pressure today following its first EPS in several years. Revenue fell 7.9% yr/yr to $14.06 bln, which also was below expectations. Guidance was also an problem as SNX guided below analyst Q3 (Aug) expectations for both EPS and revs. SNX is a name we like to keep an eye on to gauge enterprise spending levels for network equipment and PCs. Also, SNX reports early in the earnings reporting cycle, so it gives us a sense of what to expect when earnings season rolls in.
TD Synnex does not manufacture anything. It's more of a distributor of third party IT products, from software to servers and storage systems. Think of SNX as more of a wedding planner. When a business wants to spend on IT, SNX acts as the point person, putting everything together. It also has a lot of small and medium sized IT resellers as customers.
- So what happened in Q2? The main problem was short term weakness in demand for PC products post pandemic. SNX was able to offset deeper than anticipated declines in Endpoint Solutions (ES) (PCs) with growth in Advanced Solutions (AS) and high-growth technologies (cloud, data center).
- From a regional perspective, SNX says the Americas experienced the largest impact from the post-pandemic decline in demand with yr/yr declines for PC ecosystem products. Declines were primarily in the largest customer segment, while SMB and MSP customer segments have grown. Europe continued to show resilience with smaller declines in ES, thanks to a diverse product line, including mobile phones and very strong growth in AS. Asia Pacific Japan also saw strength in high-growth technologies.
- In terms of how long the downturn might last, SNX offered a ray of hope. SNX believes that gross billings and net revenue in fiscal Q2 and the outlook for Q3 represent the trough levels for its ES segment. SNX expects the PC demand decline to abate over time as customers upgrade an aging installed base of devices. Also, SNX is encouraged by improving macroeconomic sentiment and stable supply chain conditions that are mostly back to historical profile levels.
This was a rare stumble for SNX. The company has a long history of EPS beats, so this was a surprise to investors and explains why the stock is down so much. We think investors anticipated a weak PC demand environment as the industry comes down from its pandemic highs. However, this came in weaker than even SNX was expecting. A good thing about SNX is that it has been diversifying into higher growth technology areas (cloud, security, data, AI, IoT, hyperscale infrastructure), which helped to soften the blow from the PC weakness. In terms of what this means for earnings season next month, it definitely makes us more wary about tech names with PC exposure.
Delta Air Lines cleared for take-off as strengthening demand enables company to lift guidance (DAL)
At its Investor Day presentation, Delta Air Lines' (DAL) main message to participants is that demand remains as strong as ever, that its business is structurally improved, and that momentum is building ahead of FY24.
- Accordingly, the company raised its Q2 guidance, forecasting EPS of $2.25-$2.50 versus its prior outlook of $2.00-$2.25, and revenue growth of 17-18% compared to its previous guidance of 15-17% growth. DAL also said that it expects FY23 EPS to come in at the top end of its prior guidance range of $5-$6 on revenue growth of 17-20%.
- Less than one month ago, rival American Airlines (AAL) raised its Q2 EPS guidance, citing robust travel demand -- especially for premium seats -- and lower fuel costs. Based on DAL's bullish commentary and outlook, it's evident that those trends have continued, or even improved, since the end of May.
There are a few key factors that are powering this potent demand tailwind.
- In the wake of the pandemic, a monumental shift in consumer spending towards services emerged and continues on today. In fact, DAL noted in its presentation slides that spending on services still hasn't caught up to spending on goods, on a percentage of total personal consumption expenditures basis.
- It may seem surprising that high inflation and rising interest rates haven't slowed demand for services like air travel, but DAL pointed out that high income travelers account for about 75% of spending on air travel.
- These consumers, who are more capable of absorbing higher costs, are also frequently upgrading to higher margin premium seats.
- In 2019, premium revenue accounted for approximately 32% of DAL's total revenue. This year, that figure is on track to increase to about 35% of total revenue as leisure travel has become the highest priority purchase for high income households, according to DAL.
- Meanwhile, corporate budgets are also starting to loosen up. When the company reported Q1 results in mid-April, it stated that small and medium business bookings were fully recovered versus 2019 levels. We presume that SMB demand trends have at least remained steady since that earnings report, with larger corporate accounts also improving.
- From a company-specific standpoint, DAL continues to prioritize free cash flow and debt reduction. Those efforts are aided by the growing higher margin revenue from premium seat sales. Last quarter, DAL generated operating cash flow of $2.2 bln, helping it to cut its long-term debt balance by nearly $900 mln.
The main takeaway is that not only has travel demand remained healthy in the face of macroeconomic headwinds, but it has actually strengthened for the summer travel season. With fuel prices coming down and with DAL forecasting non-fuel costs to decline by low single-digits in 2H23 and 2024, DAL's earnings and cash flow look ready to take flight.
Walgreens Boots Alliance hits five-year lows after cutting its FY23 EPS forecast (WBA)
Walgreens Boots Alliance (WBA -8%) shares are wilting today, hitting five-year lows after the retail pharmaceutical giant missed Q3 (May) earnings expectations and slashed its FY23 (Aug) adjusted EPS outlook. With WBA pouring $17.0 bln into its U.S. Healthcare segment via investments in VillageMD, Summit Health, Shields, and CareCentrix, the company needed to show it was not making these moves at a lousy time, particularly amid deteriorating economic conditions, a sentiment held by investors over the past several months, evidenced by WBA shares tumbling 15% on the year as of yesterday's close.
Unfortunately, the macroeconomic environment only worsened in Q3, with few signs of near-term improvement, driving WBA's slashed FY23 earnings guidance -- expecting $4.00-4.05 from $4.45-4.65 -- and bearish FY24 commentary.
- Management acknowledged its disappointment in falling short of expectations in the quarter. CEO Rosalind Brewer discussed several dynamics pressuring FY23 margins, including consumers prioritizing value due to challenging economic conditions, a steep COVID vaccine and testing drop-off, and a slower profit ramp for U.S. Healthcare. That final point is the most troublesome, given the billions WBA has spent bolstering this segment.
- U.S. Retail Pharmacy comp growth was still a decent +7%, with gross margins expanding by over 100 bps yr/yr. However, COVID-related demand plummeted, with vaccinations down 83% yr/yr. The softening macro environment also weighed on retail performance as consumers exhibited heightened caution in their spending patterns due to higher inflation, lower SNAP benefits, and lighter tax refunds. Script volume was also light during the quarter, especially in the higher-margin cough-cold-flu category. WBA anticipates this to linger through Q4.
- These headwinds culminated in WBA delivering adjusted EPS of $1.00, missing analysts' forecasts. On the bright side, this did mark a return to positive growth of 4% yr/yr, the first yr/yr improvement since 2Q22 (Feb). Also, revs of $35.41 bln, a 9% jump, topped estimates handily. Meanwhile, International sales remained positive for the second-straight quarter, climbing 5% yr/yr and 6.9% excluding FX impacts.
- Still, alongside WBA's reduced FY23 outlook, its comments that the adverse impacts from Q3 will likely extend into FY24 overshadow the few bright spots from the quarter. WBA added that it is closely watching emerging challenges, such as the end of fiscal stimulus and the resumption of student loan payments.
To contend with current headwinds, WBA is undergoing several aggressive initiatives to enhance profitability and cash flow next year, including reducing spending and pursuing portfolio simplification. WBA is also focused on accelerating U.S. Healthcare's path to profitability. As a result, WBA projects low to mid-single-digit adjusted operating growth in FY24, with its U.S. Retail Pharmacy and U.S. Health Care segments offsetting lower COVID-19 contribution and WBA's sale of its $4.1 bln holding in AmerisourceBergen (ABC).
Bottom line, WBA endured intensifying headwinds during MayQ while not experiencing as swift a ramp to profitability in its U.S. Health Care segment as expected, driving its slashed FY23 guidance and a bearish FY24 color. Incorporating today's sell-off, WBA is now tracking closely to CVS Health's (CVS) performance on the year. However, of the two, CVS shared more optimistic remarks regarding next year during its Q1 earnings call last month, reiterating its FY24 and FY25 earnings targets. Still, this could change after CVS reports Q2 numbers on August 2.
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