Market Snapshot
briefing.com
| Dow | 33798.09 | -128.56 | (-0.38%) | | Nasdaq | 13578.56 | +22.51 | (0.17%) | | SP 500 | 4371.90 | -7.78 | (-0.18%) | | 10-yr Note | +26/32 | 3.71 |
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| | NYSE | Adv 1601 | Dec 1277 | Vol 838 mln | | Nasdaq | Adv 2261 | Dec 2112 | Vol 4.5 bln |
Industry Watch
| Strong: Energy, Consumer Discretionary, Communication Services |
| | Weak: Utilities, Consumer Staples, Materials, Health Care |
Moving the Market
-- Lingering sense the market is still due for some consolidation
-- Relative strength from some mega cap stocks
-- Weakness in semiconductor stocks after reports that the U.S. is considering imposing more restrictions on AI chip exports to China
-- Digesting Fed Chair Powell's comments at the European Central Bank (ECB) Forum on Central Banking 2023
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Closing Summary
28-Jun-23 16:25 ET
Dow -74.08 at 33852.57, Nasdaq +36.08 at 13592.13, S&P -1.55 at 4378.13
[BRIEFING.COM] The stock market had a mixed showing. There wasn't a lot of conviction on either side of the tape following yesterday's rally. Upside moves in the mega cap stocks offered some support to the broader market initially, but some of those stocks rolled over by the close.
The major indices ultimately settled the session near their flat lines, registering only modest gains or declines. The Russell 2000 was a relative outperformer, gaining 0.5%.
Market breadth was positive, but only modestly so. Advancers led decliners by a 4-to-3 margin at the NYSE and an 11-to-10 margin at the Nasdaq.
Fed Chair Powell took part in a panel discussion today, along with heads of the ECB, Bank of England, and Bank of Japan, at the ECB's Forum on Central Banking. He didn't say anything too surprising and mostly reiterated prior comments from the June FOMC meeting and the semiannual monetary policy report before Congress last week.
Mr. Powell did acknowledge that he doesn't think core inflation will be back at 2.0% until 2025. Additionally, he indicated that the policy rate has not been restrictive long enough, that more rate hikes may be needed, and that the idea that there could be consecutive rate hikes should not be taken off the table.
The market didn't move much in reaction to his commentary. In fact, expectations of future rate hikes are little changed from yesterday. The probability of a 25 basis points rate hike in July to 5.25-5.50% stands at 79.4% versus 76.9% yesterday and the probability of another 25 basis points rate hike in September to 5.50-5.75% stands at 15.9% now versus 15.4% yesterday.
Semiconductor stocks were a notable pocket of weakness, but they recovered somewhat before the close. This followed reports that the U.S. is considering more restrictions on AI chip exports to China. The PHLX Semiconductor Index fell 0.9% today after being down as much as 1.7%. NVIDIA (NVDA 411.17, -7.59, -1.8%) logged a decent loss, yet it had been down as much as 3.2% in the early going. NVIDIA's CFO addressed the reports, indicating that the company expects no material change to earnings from the restrictions, according to Bloomberg TV.
Despite weakness in its semiconductor components, the S&P 500 information technology sector (flat) closed near the middle of the pack. Apple (AAPL 189.25, +1.19, +0.6%), which reached a new 52-week high and nearly reached a $3 trillion valuation today, and Microsoft (MSFT 335.85, +1.28, +0.4%) offered some support to the sector.
The energy (+1.0%), communication services (+0.8%), consumer discretionary (+0.3%), and real estate (+0.2%) sectors were alone in positive territory by the close. On the flip side, the utilities (-1.5%) and materials (-0.7%) sectors saw the biggest declines.
Treasuries settled with gains across the curve. The 2-yr note yield fell four basis points to 4.72% and the 10-yr note yield fell six basis points to 3.71%, aided by strong demand seen at the 7-yr note auction.
- Nasdaq Composite: +29.9% YTD
- S&P 500: +14.0% YTD
- Russell 2000: +5.5% YTD
- S&P Midcap 400: +6.0% YTD
- Dow Jones Industrial Average: +2.1% YTD
Reviewing today's economic data:
- Weekly MBA Mortgage Applications Index 3.0%; Prior 0.5%
- May Adv. Intl. Trade in Goods -$91.1 bln; Prior was revised to -$97.1 bln from -$96.8 bln
- May Adv. Retail Inventories 0.8%; Prior was revised to 0.3% from 0.2%
- May Adv. Wholesale Inventories -0.1%; Prior was revised to -0.3% from -0.2%
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 a.m. ET: Weekly initial (Briefing.com consensus 266,000; prior 264,000) and continuing (prior 1.759 million) jobless claims; Q1 Third Estimate GDP (Briefing.com consensus 1.3%; prior 1.3%) and GDP Deflator (Briefing.com consensus 4.2%; prior 4.2%)
- 10:00 a.m. ET: May Pending Home Sales (Briefing.com consensus -0.8%; prior 0.0%)
- 10:30 a.m. ET: Weekly EIA Natural Gas Inventories (prior +95 bcf)
Treasuries settle with gains across the curve
28-Jun-23 15:25 ET
Dow -107.56 at 33819.09, Nasdaq +28.13 at 13584.18, S&P -4.66 at 4375.02
[BRIEFING.COM] The major indices are sticking to fairly narrow ranges ahead of the close.
Treasuries settled with gains across the curve. The 2-yr note yield fell four basis points to 4.72% and the 10-yr note yield fell six basis points to 3.71%.
After the close today, Micron (MU) will headline the earnings reports.
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 a.m. ET: Weekly initial (Briefing.com consensus 266,000; prior 264,000) and continuing (prior 1.759 million) jobless claims; Q1 Third Estimate GDP (Briefing.com consensus 1.3%; prior 1.3%) and GDP Deflator (Briefing.com consensus 4.2%; prior 4.2%)
- 10:00 a.m. ET: May Pending Home Sales (Briefing.com consensus -0.8%; prior 0.0%)
- 10:30 a.m. ET: Weekly EIA Natural Gas Inventories (prior +95 bcf)
Small caps lead; market breadth remains positive
28-Jun-23 15:00 ET
Dow -128.56 at 33798.09, Nasdaq +22.51 at 13578.56, S&P -7.78 at 4371.90
[BRIEFING.COM] Things are little changed at the index level over the last half hour. The Russell 2000 continues to outperform, up 0.4%.
Market breadth remains slightly positive. Advancers have a roughly 11-to-10 lead over decliners at both the NYSE and the Nasdaq.
Growth stocks have an edge over value stocks today. The Russell 3000 Growth Index is up 0.1% while the Russell 3000 trades down 0.3%.
Energy complex futures settled the session in mixed fashion. WTI crude oil futures rose 2.8% to $69.50/bbl and natural gas futures fell 5.8% to $2.61/mmbtu.
General Mills slides after earnings/guidance disappoints
28-Jun-23 14:25 ET
Dow -100.47 at 33826.18, Nasdaq +40.42 at 13596.47, S&P -3.14 at 4376.54
[BRIEFING.COM] The S&P 500 (-0.07%) is middle of the pack among the major averages, down just 3 points.
S&P 500 constituents General Mills (GIS 77.19, -3.71, -4.59%), Catalent (CTLT 40.15, -1.57, -3.76%), and Albemarle (ALB 219.04, -8.03, -3.54%) dot the bottom of the standings. GIS falls following earnings/guidance/dividend news, CTLT continues yesterday's Regeneron (REGN 697.12, -18.97, -2.65%)-related losses, while ALB is pressured by overall weakness in materials stocks.
Meanwhile, Netflix (NFLX 433.30, +16.22, +3.89%) is near the top of the S&P following Oppenheimer tgt raise.
Gold modestly lower as dollar firms
28-Jun-23 14:00 ET
Dow -140.15 at 33786.50, Nasdaq +6.00 at 13562.05, S&P -10.60 at 4369.08
[BRIEFING.COM] With about two hours to go on Wednesday the tech-heavy Nasdaq Composite (+0.1%) is near flat lines, having traded places a few times over the past hour.
Gold futures settled $1.60 lower (-0.1%) to $1,922.20/oz, well off overnight lows of about -0.6%.
Meanwhile, the U.S. Dollar Index is up about +0.4% to $102.94.
Policy views on display today
The stock market put together a good day yesterday, accented with broad-based buying interest and a quick snapback for the mega-cap stocks. It appears this morning that some of Tuesday's gains will be picked apart at the open.
Currently, the S&P 500 futures are down 11 points and are trading 0.2% below fair value, the Nasdaq 100 futures are down 70 points and are trading 0.4% below fair value, and the Dow Jones Industrial Average futures are down 29 points and are trading fractionally below fair value.
NVIDIA (NVDA) and the chip stocks are a center of attention following reports that the U.S. is considering imposing more restrictions on AI chip exports to China. NVIDIA, the heavyweight of the bunch, is down 3.6% in pre-market trading.
The expected weakness there is the primary drag on the Nasdaq 100 and S&P 500 futures. Otherwise, there isn't a lot to discuss in terms of catalyst for moving the market in a meaningful way.
There is a bit of a buzz about China's disappointing industrial profits (-18.8% year-to-date) signaling weak demand there and the potential for additional policy stimulus.
Market participants will be hearing monetary policy views from leading central bankers, including Fed Chair Powell, who will appear at 9:30 a.m. ET in a panel discussion at the ECB's Central Banking Forum. The element of surprise -- at least in terms of what Mr. Powell is apt to say -- seems negligible considering he just delivered his semiannual monetary policy report to Congress last week.
It is likely, though, that Mr. Powell and his colleagues will be emphasizing the point that inflation is still too high and that more work needs to be done to get inflation back down to target. Separately, President Biden will be delivering a speech at 1:00 p.m. ET on the economy and his economic plan.
Another Federal Reserve matter will also be in focus after the close. The annual bank stress test results will be released at 4:30 p.m. ET.
There were some economic releases earlier this morning. The Mortgage Bankers Association's Mortgage Applications Index was up 3.0% week-over-week, bolstered by a 3.0% jump in both purchase and refinancing applications. The Advance International Trade in Goods Report for May showed a decrease in the goods deficit to $91.1 billion from $97.1 billion in April; meanwhile, advance retail inventories were up 0.8%, and advance wholesale inventories were down 0.1%.
There was little reaction in the equity futures market to these releases.
There has been more of a reaction to the latest earnings report from General Mills (GIS), which included lackluster volume and weaker-than-expected sales results. Shares of GIS are down 5.2%.
-- Patrick J. O'Hare, Briefing.com
Jefferies misses EPS estimates amid challenging climate, but "green shoots" appear in June (JEF)
Since the end of last quarter, the business climate has only become more challenging for investment banking firm Jefferies (JEF), as illustrated by the company's largest EPS miss in over four years. Already contending with macroeconomic headwinds in the form of higher interest rates and inflation, the fallout from the regional banking crisis and the uncertainty surrounding the U.S. debt ceiling created an even more difficult environment in Q2.
The company's earnings miss may be a harbinger for what's to come for other financial firms with significant investment banking and trading operations. On that note, Morgan Stanley (MS) and Goldman Sachs (GS) are scheduled to report Q2 earnings on July 18 and July 19, respectively.
- In JEF's Investment Banking segment, net revenue declined by 26% yr/yr to $510 mln, mostly due to weakness on the advisory side as M&A activity dried up amid tough conditions for deal making. On a qtr/qtr basis, advisory experienced a 14.5% drop in revenue, making the unit a laggard within the Investment Banking group.
- Conversely, momentum is building for equity underwriting following a dreadful period in 2022 when the IPO market froze up. Following a 70% yr/yr plunge in 4Q22, equity underwriting fees decreased by a far less drastic 20% last quarter, before jumping higher by 22% in Q2.
- The improvement reflects an IPO market that's gradually thawing out with nearly 50 deals pricing so far this year. For some perspective, there were only about 70 IPOs in all of 2022. However, the modest increase in IPO activity isn't the only driver behind the rebound in JEF's equity underwriting business.
- JEF's core strategy is to expand and grow its Investment Banking segment in order to take market share from the traditional leaders in the field, including MS and GS. Recently, the company has ramped up its hiring efforts, adding 21 new Managing Directors since the beginning of 2023. The hiring spree stands in stark contrast to other companies in the financial sector, some of which have announced significant layoffs, including in trading departments.
- Trading conditions were vastly improved compared to a year ago as JEF's Capital Markets unit saw a 30% yr/yr increase in revenue. Fixed income in particular was strong with trading revenue surging by 61% to $259.4 mln.
With JEF commenting that it increased market share in all of its businesses, and with the company stating that green shoots in the investment banking and capital markets businesses have popped up in June, it seems that Q2 may represent a turning point heading into the back half of the year. That possibility likely explains why the stock has turned higher this morning despite JEF's earnings miss.
AeroVironment flys high on earnings beat and robust FY24 guidance (AVAV)
AeroVironment (AVAV +5%) is flying higher today after this supplier of drones and tactical missile systems closed out FY23 on a strong note. While its Q4 (Apr) EPS beat was pretty modest, the revenue upside was quite substantial with revs up 40% yr/yr to $186 mln. Perhaps even more impressive was the FY24 guidance with both EPS and revs well above analyst expectations.
- Its largest segment during Q4 was Small UAS (SUAS) with a record $94.6 mln in sales, up 60% yr/yr. This segment delivered a record year of performance, propelled by its largest-ever foreign military sales award in support of Ukraine. Specifically, AVAV says its Puma systems have proven themselves on the battlefield, and are providing scouting and support for all US-supplied artillery weapon systems deployed in Ukraine. Ukraine shipments accounted for just over 40% of segment sales. AVAV expects SUAS revenue to remain strong in fiscal year 2024.
- Another bright spot was its Tactical Missile Systems (TMS) segment where revenue more than doubled yr/yr to $42.5 mln, driven by domestic and global demand for its Switchblade products. AVAV says the conflict in Ukraine and its Switchblade success on the battlefield has accelerated the global trend towards increased adoption of loitering munitions, which are aerial weapons that can stay in the air while they search for a target. Some can even return to base if a target not found.
- Importantly, the US government recently approved AVAV to market and sell Switchblades to nearly 50 allied countries, up from 20 countries last year. Given the current level of global interest, the record backlog and growing demand in Switchblade, AVAV expects its TMS business to be a leading growth driver moving forward.
- AVAV makes an important point when it says the Ukraine conflict has accelerated greater adoption of small drones and loitering munitions by demonstrating their effectiveness against well-equipped adversaries. These technologies are highly impactful, but far less expensive, and enable an agile force structure compared with larger traditional manned systems. AVAV argues this enables countries with smaller defense budgets to secure effective defensive capabilities and provide a deterrent to adversaries.
Overall, this report was impressive, especially the FY24 guidance which we think is a big reason for the movement in the stock today. This report is cheering up investors after the stock fell in May when AVAV was not selected by the US Army to proceed further with Increment 2 of FTUAS. But a big takeaway here is that the Ukraine conflict has really demonstrated the benefit of using drones and loitering munitions. Other small countries have taken notice, which should help drive sales even after the Ukraine conflict winds down.
General Mills sells off as accelerating consumer price resistance drives light Q4 sales growth (GIS)
General Mills (GIS -5%) is struggling to take command of its stock price today after investors trigger a sell-off on the company's Q4 (May) revenue miss and deteriorating volume growth, underpinning consumer price resistance. The food processing mammoth, owning several famous brands like Betty Crocker and Cheerios, did topple earnings expectations in the quarter and guided FY24 (May) EPS mostly ahead of consensus, expecting +4-6% growth. Also, its FY24 organic net sales outlook of +3-4%, albeit a deceleration from its +5% jump in FY23, still indicates positive change. Meanwhile, GIS hiked its dividend by 9% to $0.59 per share, boosting its annual yield to a solid 3.1%.
Nevertheless, the widening volume declines in Q4 and an underwhelming FY24 outlook are sending shares back to retest 2023 lows of $74.24 set in February.
- Although GIS exceeded bottom-line estimates in Q4, fueled by a solid 120 bp expansion in adjusted gross margins, revs were light, improving by just 2.8% yr/yr to $5.03 bln. Price/mix no longer had as meaningful an effect on sales in Q4 as it had over the previous three quarters, contributing just 10 pts. Meanwhile, with prices constantly rising, consumers began to demonstrate significant pushback, causing volumes to slip by 6%, a stark reversal from the flat volume growth last quarter.
- The situation was most evident overseas, with GIS's International segment enduring a 15% volume decline as prices climbed by 18% yr/yr. Incorporating lingering FX impacts, International was the only segment where reported net sales fell yr/yr, dropping by 1%.
- North America Retail also exhibited relative weakness, with volumes sliding by 8% as price/mix increased by 11% in the quarter. Retailers reducing inventories over the past two years has been a major headwind for GIS in six of the past eight quarters. The good news is that GIS does not anticipate a further reduction during FY24.
- With GIS's Pet business being a critical driver of future growth, it was discouraging to see volumes slip by 2%. Still, organic net sales improved by 7% yr/yr, resulting in double-digit organic sales growth in 2H23, matching management's prior outlook.
- Looking ahead, the inflationary environment will remain GIS's primary obstacle. The company forecasted a 5% input cost inflation, led mostly by higher wages across all aspects of its supply chain. On the bright side, management expects less of a headwind from pricing and projects organic volumes to improve from the 4% drop in FY23. GIS also anticipates a more stable supply chain, allowing more robust commercial activity.
Bottom line, investors are growing increasingly worried about national brands struggling against sticky inflation. Mass merchants like Walmart (WMT) are already likely taking share in grocery from smaller regional grocers, underscoring shoppers' accelerating trade-down activity. At the same time, private label penetration from WMT and others like Kroger (KR) remains strong. Still, GIS noted that it is holding or gaining share in over half its businesses globally. The company also has plenty of capacity to constantly innovate (a necessity to differentiate from off-brands) and grow through M&A.
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.
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