Market Snapshot
briefing.com
| Dow | 35460.78 | +178.15 | (0.50%) | | Nasdaq | 14327.15 | +276.65 | (1.97%) | | SP 500 | 4584.69 | +46.01 | (1.01%) | | 10-yr Note | +25/32 | 3.97 |
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| | NYSE | Adv 2037 | Dec 830 | Vol 869 mln | | Nasdaq | Adv 3156 | Dec 1176 | Vol 4.4 bln |
Industry Watch
| Strong: Communication Services, Consumer Discretionary, Information Technology |
| | Weak: Real Estate, Utilities |
Moving the Market
-- Continued inclination to buy on weakness after yesterday's afternoon sell off
-- Gains in many companies that reported earnings, including several blue chip names, boosting the broader market
-- Rebound action in mega cap stocks supporting the broader market
-- Reacting to the news that the Bank of Japan voted to conduct yield curve control policies with greater flexibility
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Closing Summary
28-Jul-23 16:30 ET
Dow +176.57 at 35459.20, Nasdaq +266.55 at 14317.05, S&P +44.82 at 4583.50
[BRIEFING.COM] The stock market bounced back from yesterday's afternoon sell off, sticking to its winning formula of buying on weakness. The mega cap stocks were favored attractions in that respect, logging sizable gains that bosoted index performance. Many other stocks, though, participated in today's rally. The major indices registered gains ranging from 0.5% to 1.9%.
Meta Platforms (META 325.48, +13.77, +4.4%) and Tesla (TSLA 266.86, +11.15, +4.4%) each jumped more than 4.0% today on no news. The Vanguard Mega Cap Growth ETF (MGK) rose 1.7% while the Invesco S&P 500 Equal Weight ETF (RSP) rose 0.5%. The market-cap weighted S&P 500 rose 1.0%.
Some notable stocks that reported earnings since yesterday's close garnered positive reactions from investors, acting as added support for the broader market. Intel (INTC 36.83, +2.28, +6.6%), Procter & Gamble (PG 156.41, +4.30, +2.8%), and Roku (ROKU 89.61, +21.42, +31.4%) were among the more influential standouts in that regard.
Also, the June Personal Income and Spending Report was generally supportive of the soft landing narrative, which was another source of support for stocks. Specifically, the report showed a solid increase in real personal spending and ongoing disinflation for the PCE and core-PCE Price Indexes.
Nine of the 11 S&P 500 sectors finished in positive territory. The energy sector (+0.1%) logged the slimmest gain, weighed down by losses in Exxon (XOM 104.16, -1.26, -1.2%) and Chevron (CVX 158.87, -0.79, -0.5%) after their earnings reports.
The S&P 500 consumer staples sector (+1.0%) had a strong showing. Procter & Gamble and Mondelez Int'l (MDLZ 75.04, +2.68, +3.7%) led the sector higher while Colgate-Palmolive (CL 75.62, -1.49, -1.9%) logged a decline as investors digested its quarterly results.
Elsewhere, the Bank of Japan surprised market participants when it voted to conduct its yield curve control policy with greater flexibility, saying it will maintain the target rate at 0.5%, but will offer to purchase 10-yr JGBs at 1.0% every business day through fixed-rate purchase operations. The yen rallied initially on this news but soon lost steam as the dollar rallied back in a big way, supported presumably by short covering activity. Down nearly 1.0% at one point, the USD/JPY pair was up 1.2% to 141.13 as of this writing.
- Nasdaq Composite: +36.8% YTD
- S&P 500: +19.3% YTD
- Russell 2000: +12.5% YTD
- S&P Midcap 400: +11.8% YTD
- Dow Jones Industrial Average: +7.0% YTD
Reviewing today's economic data:
- Personal income increased 0.3% month-over-month in June (Briefing.com consensus 0.5%) following an upwardly revised 0.5% increase (from 0.4%) in May. Personal spending increased 0.5% month-over-month (Briefing.com consensus 0.3%) following an upwardly revised 0.2% increase (from 0.1%) in May. The PCE Price Index was up 0.2% (Briefing.com consensus 0.2%) and the core-PCE Price Index, which excludes food and energy, was also up 0.2%, as expected.
- The key takeaway from the report was a combination of solid spending, evidenced by a 0.4% increase in real personal spending, and ongoing disinflation, evidenced by the 3.0% year-over-year increase in the PCE Price Index, which was down from 3.8% in May, and the 4.1% year-over-year increase in the core-PCE Price Index, which was down from 4.6% in May.
- The Q2 Employment Cost Index showed compensation costs for civilian workers increasing 1.0% (Briefing.com consensus 1.1%), seasonally adjusted, for the three-month period ending in June 2023 versus a 1.2% increase for the the three-month period ending in March 2023.
- The key takeaway from the report is that it featured a deceleration in employment costs, which should be comforting for the market and the Fed.
- The final July University of Michigan Consumer Sentiment Index checked in at 71.6 (Briefing.com consensus 72.6) versus the preliminary reading of 72.6. The final reading for June was 64.4. In the same period a year ago, the index stood at 51.5.
- The key takeaway from the report is that consumer sentiment about the economic outlook has improved with the slowdown in inflation and the ongoing stability in labor markets.
Looking ahead to Monday, economic data will be limited to the July Chicago PMI (prior 41.5) at 9:45 ET.
Treasury yields fall
28-Jul-23 15:40 ET
Dow +180.85 at 35463.48, Nasdaq +264.56 at 14315.06, S&P +43.43 at 4582.11
[BRIEFING.COM] The major indices remain near their best levels of the session ahead of the close.
The 2-yr Treasury note yield fell two basis points to 4.90% and the 10-yr note yield fell four basis points to 3.97%.
Looking ahead to Monday, economic data will be limited to the July Chicago PMI (prior 41.5) at 9:45 ET.
ON Semiconductor (ON) and Sofi Technologies (SOFI) are some of the companies reporting earnings ahead of the open on Monday.
Market continues to climb
28-Jul-23 15:05 ET
Dow +178.15 at 35460.78, Nasdaq +276.65 at 14327.15, S&P +46.01 at 4584.69
[BRIEFING.COM] The major indices continue to move somewhat higher with gains ranging from 0.5% to 2.0%.
The S&P 500 utilities (-0.2%) and energy (-0.1%) sectors continue to underperform.
On an energy related note, WTI crude oil futures rose 0.6% to $80.54/bbl and natural gas futures rose 1.6% to $2.64/mmbtu.
Earnings movers once again dot opposite ends of S&P 500
28-Jul-23 14:30 ET
Dow +168.48 at 35451.11, Nasdaq +262.38 at 14312.88, S&P +42.59 at 4581.27
[BRIEFING.COM] The S&P 500 (+0.94%) is having an honorable showing on Friday, up about 1%, though gains are more aggressive elsewhere.
S&P 500 constituents T. Rowe Price (TROW 126.58, +9.47, +8.09%), Newell Brands (NWL 11.02, +0.77, +7.51%), and Cincinnati Fincl (CINF 110.01, +7.39, +7.20%) pepper the top of the S&P, all following earnings.
Meanwhile, Georgia-based flooring product company Mohawk (MHK 107.89, -7.12, -6.19%) is underperforming owing in part to underwhelming Q3 earnings guidance.
Gold higher on Friday, adding to month-to-date gains
28-Jul-23 14:00 ET
Dow +112.81 at 35395.44, Nasdaq +229.71 at 14280.21, S&P +33.78 at 4572.46
[BRIEFING.COM] With about two hours to go on Friday the tech-heavy Nasdaq Composite (+1.63%) more than doubles up the percentage gains in the S&P 500 (+0.74%).
Gold futures settled $14.70 higher (+0.7%) to $1,999.90/oz, up about +1.7% on the week, and on pace for gains of +3.7% on the month with just Monday's session remaining.
Meanwhile, the U.S. Dollar Index is down about -0.1% to $101.63.
See market dip, buy market dip
Old habits are hard to break, which is why the market is bouncing back from yesterday's big reversal in the afternoon and buying on that weakness. True to habitual form, too, the buying efforts are concentrated on the mega-cap stocks, which is giving a nice boost to the equity futures market.
Currently, the S&P 500 futures are up 32 points and are trading 0.8% above fair value, the Nasdaq 100 futures are up 176 points and are trading 1.1% above fair value, and the Dow Jones Industrial Average futures are up 170 points and are trading 0.5% above fair value.
A ton of earnings news has hit the wires since yesterday's close.
Dow component Intel (INTC) is a headliner, having topped Q2 expectations and providing a better-than-expected Q3 outlook. It is up 6.3% in pre-market trading. Fellow Dow component Procter & Gamble (PG) is trading higher, up 1.6%, after posting better-than-expected results and guiding its FY24 expectations in-line with analysts' consensus estimates.
Exxon (XOM) and Chevron (CVX) are also headliners this morning given their size. Both oil giants came up shy of Q2 earnings estimates, yet that hasn't unnerved investors to any great degree. CVX is down just 0.2% in pre-market action and XOM is down 0.6%.
Other luminaries reporting results and being met with mixed reactions are Ford (F), Mondelez (MDLZ), Roku (ROKU), Colgate-Palmolive (CL), KLA-Tencor (KLAC), T-Mobile (TMUS), Newell Brands (NWL), U.S. Steel (X), and Live Nation (LYV).
For the full rundown of earnings results, be sure to visit Briefing.com's Earnings Results page found under the Calendars tab.
Shifting gears to other important news items, there is also some noteworthy central bank news and economic data this morning.
The Bank of Japan (BOJ) excited the masses overnight with a surprise decision to tweak its yield curve control policy. The bank left its policy rates unchanged, however, as expected. There was speculation yesterday that the BOJ might discuss changes to the yield curve control policy. That got the yen moving and contributed to yesterday's selling in the stock market and Treasury market, piquing some worries that there could be an effort to unwind some yen-based carry trades that have been a support factor for U.S. asset prices.
The tweak heard around the world was a decision to allow "greater flexibility" in conducting yield curve control. The BOJ still has a 0.5% target for the 10-yr Japanese government bond, although it said it will offer to purchase 10-yr JGBs at 1.0% every business day through fixed-rate purchase operations.
Some think this subtle shift is the start of a transition away from the bank's ultra-accommodative policy. The BOJ downplayed that assertion; nonetheless, it is something that, on the margin, could provide some needed support to the yen and lessen some carry-trade activity.
Another shift drawing attention this morning is the downshift in PCE price inflation and employment costs. That was revealed in the June Personal Income and Spending Report and the Q2 Employment Cost Index.
Briefly, personal income increased 0.3% month-over-month in June (Briefing.com consensus 0.5%) following an upwardly revised 0.5% increase (from 0.4%) in May. Personal spending increased 0.5% month-over-month (Briefing.com consensus 0.3%) following an upwardly revised 0.2% increase (from 0.1%) in May. The PCE Price Index was up 0.2% (Briefing.com consensus 0.2%) and the core-PCE Price Index, which excludes food and energy, was also up 0.2%, as expected.
The key takeaway from the report was the combination of solid spending, evidenced by a 0.4% increase in real personal spending, and ongoing disinflation, evidenced by the 3.0% year-over-year increase in the PCE Price Index, which was down from 3.8% in May, and the 4.1% year-over-year increase in the core-PCE Price Index, which was down from 4.6% in May.
The core-PCE Price Index is still too high in relation to the Fed's 2.0% target, yet the Fed is bound to take some solace from the recognition that it continues to move in the right direction.
The same will be said for the Q2 Employment Cost Index, which showed compensation costs for civilian workers increasing 1.0% (Briefing.com consensus 1.1%), seasonally adjusted, for the three-month period ending in June 2023 versus a 1.2% increase for the the three-month period ending in March 2023.
The key takeaway from the report is that it featured a deceleration in employment costs, which should be comforting for the market and the Fed.
The 2-yr note yield is down three basis points to 4.89% and the 10-yr note yield is down four basis points to 3.97%.
-- Patrick J. O'Hare, Briefing.com
Roku rockets higher as beat-and-raise report signals a pickup in ad spending recovery (ROKU)
Connected TV pioneer Roku (ROKU) is soaring to multi-month highs after crushing Q2 top and bottom-line estimates and issuing upside Q3 revenue guidance, demonstrating that its business has been far more resilient than anticipated in a challenging environment for ad spending.
- Following a disappointing Q2 earnings report from Netflix (NFLX) on July 19 that included a revenue miss and downside revenue guidance for Q3, expectations for ROKU's results and outlook were downgraded. This is reflected in a 10% dive in ROKU shares since that earnings report from NFLX.
- Although the U.S. advertising market was indeed soft again in Q2 -- spending was flat on a yr/yr basis -- it did improve from last quarter while viewership on ROKU's platform also trended higher. More specifically, the total U.S. advertising market was down 7.4% yr/yr in Q1 and Active Accounts increased by 1.9 mln qtr/qtr to 73.5 mln in Q2.
- The pickup in ad spending, which was most pronounced in the consumer packaged goods and health and wellness verticals, combined with ROKU's active account growth, drove an 11% increase in Platform revenue to $744 mln.
- For the sake of comparison, Platform revenue declined by 1% last quarter, even as Active Accounts increased by 1.6 mln qtr/qtr.
- On the device side of the business, the news is more mixed. Device revenue grew by 9% yr/yr to $103.4 mln, exhibiting resiliency amid a tough macro climate characterized by rising interest rates and high inflation.
- The growth is especially encouraging since the company launched its first Roku-branded TVs in March, which are exclusively sold at Best Buy (BBY). Based on the better-than-expected growth, its apparent that consumer acceptance of ROKU's own TVs is solid.
- However, after showing major improvement in Q1, device gross margin plunged into negative territory again in Q2, diving by over 20 percentage points qtr/qtr to (17.0)%. The huge decline is a direct result of the higher costs associated with manufacturing TVs in-house.
- This is a price that ROKU is willing to pay, though, because the company gains control over its supply chain by making its own TVs.
- Additionally, the Device segment is basically seen as a loss-leader -- that is, the company will sacrifice margins on devices in order to sell a higher volume, ultimately leading to an increase in higher-margin platform revenue down the road.
- ROKU's upside Q3 guidance is adding fuel to the fire, especially since the company has a recent track record of guiding conservatively. On that note, ROKU blew out its own revenue expectations in both Q2 and Q1.
- Investors are also cheering the fact that the company plans to keep a lid on expenses, even as it sees more signs of a recovery emerging for ad spending. In fact, ROKU expects Q3 expenses to be lower than Q2.
The bottom line is that while business conditions are far from optimal, the arrow is pointing up for ROKU. From a longer-term perspective, the company remains poised to benefit from the ongoing cord-cutting trend and its leading position in the CTV market.
Boston Beer Co's massive EPS upside in Q2 gives investors plenty to cheer about (SAM)
Boston Beer Co (SAM +18%) is giving investors plenty to cheer about today after registering its widest earnings beat in over two years in Q2 on energetic performance from its Twisted Tea brand. Revs still fell yr/yr in the quarter but by less than analysts feared. Meanwhile, although SAM only reiterated its FY23 guidance despite the upside in Q2, it was primarily due to lingering economic uncertainties. Management was confident the positive momentum in Q2 would spill into subsequent quarters, possibly leading to future outperformance.
Part of today's exuberance comes from the fact that SAM's quarterly results were primarily the result of its internal initiatives instead of outside forces. The controversy surrounding Anheuser-Busch Inbev (BUD) is not really feeding into SAM's robust Q2 numbers. SAM Chairman C. James Koch remarked that the beneficiaries of the Bud Light issue are companies offering competing light beers, such as Molson Coors Beverage (TAP) and privately-held Pabst Brewing Company.
- SAM recorded EPS of $4.72, a 9.5% jump yr/yr, fueled largely by ongoing productivity initiatives. SAM has focused on three critical items related to its supply chain: procurement savings, brewery performance, and network optimization. This strategy has propelled gross margins from the low-40s/high-30s to achieving 45.4% in Q2, a 230 bp expansion yr/yr, and SAM's highest number in two years.
- SAM did project gross margins to cool off in 2H23, targeting 41-43%. However, management noted that given recent margin volatility and its work to get back above 45%, it wanted to remain prudent in its forecast to close the year.
- A minor blemish was revs slipping 2.1% yr/yr to $603.3 mln, with depletions and shipments falling 3.0% and 4.5%, respectively, reflecting decreases in Truly, Angry Orchard, Samuel Adams, Hard Mountain Dew, and Dogfish.
- However, encouragingly, Twisted Tea roared back with a vengeance during the quarter, enjoying 38% dollar sales growth, adding 3.3 pts of market share. SAM attributed the pop to expanding availability, improved distribution, and a highly effective brand-building campaign. Demand was so robust that SAM struggled to keep up with demand, enhancing service levels to support further growth acceleration.
- Regarding Truly, while SAM was disappointed that it has not fully recovered the brand's share losses, remaining down around 3.3 volume share pts YTD, it saw green shoots that should positively impact the rest of the summer and Q4. SAM is upping its media spend for the rest of FY23 to reinforce these silver linings, ensuring that Truly is on the air every week.
- Looking ahead, SAM kept its FY23 outlook unchanged, underscoring its conservative near-term outlook. The company targets EPS of $6.00-10.00 and shipments and depletions of down 2% to 8%.
A substantial demand shift toward Twisted Tea provided the kindling needed for SAM to deliver excellent numbers in Q2. Although demand for the rest of SAM's brands remained relatively soft, there are promising developments surrounding Truly ahead of the fall and potentially next spring, allowing for future upside.
Ford Motor lower despite EPS beat; but increases loss estimate for EV segment (F)
Ford Motor (F -4%) is trading lower today following its Q2 earnings report last night despite reporting strong EPS upside. Not only that, Ford boosted its FY23 guidance for adjusted EBIT pretty significantly to $11-12 bln from $9-11 bln while its adjusted FCF guidance was raised to $6.5-7.0 bln from about $6 bln. The main problem seems to be Ford increasing its EBIT loss guidance for its EV segment and some commentary.
- Before digging into it, recall that Ford recently changed its business segment reporting. Ford segments now consist of Ford Model e (EV segment), Ford Blue (gas and hybrid vehicles), and Ford Pro (commercial vehicles).
- Ford now expects an EBIT loss in FY23 of about $(4.5) bln for its EV segment, that is up substantially from prior guidance of $(3) bln. In terms of the market, CEO Jim Farley said in the press release that "[t]he near-term pace of EV adoption will be a little slower than expected, which is going to benefit early movers like Ford." Then on the call, he said that the "number of global entrants is increasing even at the high end and the pricing pressure has dramatically increased in the past 60 days."
- Farley went on to say that "while EV adoption is still growing, the paradigm has shifted. EV price premiums over internal combustion vehicles fell more than $3,000 in [Q2] and nearly $5,000 in [1H23]." He expects the EV market to remain volatile until the winners and losers shake out. Ford is confident it will be one of the winners long term. Its Gen 2 products will be launching soon. Ford is now targeting 600,000 annual production units of EVs by 2024.
- Turning to Ford Blue, the company says it's benefitting from pricing power for its iconic vehicles, including Mustang, Maverick, F-150, Explorer etc. Ford was America's number one brand in the first half of this year. Also in 1H23, its bestseller F-150 grew almost 3x the rate of the overall pickup truck market. Ford expects pricing and revenue power to continue in 2H23 with new launches, including Mustang and its all-new F-150.
- Turning to Pro, which is proving to be a unique strength. CEO Farley mused that its competitors would love to have a Ford Pro segment. He described Pro as a $50 bln commercial business with the potential to become a high-margin, high-multiple hardware, software and service company akin to John Deere. In Q2, volume, pricing, and subscriptions continued to accelerate as the company captured significant pent-up demand across multiple commercial sectors in North America and Europe.
Normally, a large EPS beat coupled with a dramatic increase to its full year adjusted EBIT guidance would propel the stock higher. However, Ford's cautious comments about the EV market and increasing its loss estimate for the segment is understandably troubling investors. The EV segment is small, at only 3% of 1H sales, but it's an important part of Ford's growth story and investor sentiment. This will be an important topic to monitor as we enter 2H23. Finally, Ford boosted overall EBIT guidance even as it reduced EV EBIT guidance, that tells you how strong its Blue and Pro segments are doing.
Procter & Gamble's brands maintain healthy price elasticity, driving upbeat JunQ results (PG)
Procter & Gamble (PG +3%) is enjoying a bounce following better-than-expected Q4 (Jun) results today that came on improving volumes, underpinning healthy price elasticities. The consumer staples giant, with many popular brands like Tide and Pampers, also issued decent FY24 guidance, projecting EPS of $6.25-6.43, revenue growth of +3-4%, up 1-2 pts from FY23, and organic revenue growth (excludes FX headwinds) of +4-5%, a slight decline from the +7% recorded in FY23.
- Like last quarter, volumes still contracted, edging 1% lower yr/yr. However, they improved from the -3% posted in Q3 (Mar) and -6% in Q2 (Dec). There were two underlying factors in PG's improving volumes outside the scope of brand loyalty. Prices climbed only 7% higher in Q4 compared to a 10% jump in the previous two quarters, reflecting easing inflationary pressures. Also, PG lapped a 1% volume decline in Q4, less challenging than the +3% and +2% increases in Q3 and Q2, respectively.
- Nevertheless, the power of PG's brands should not be discounted. Clearly, consumers resist trading down to the private label substitute within the categories PG competes, illustrating a meaningful competitive advantage formed through marketing and innovation.
- With PG's brands remaining on consumers' shopping lists, the company's headline results shined, delivering its second-straight earnings beat on accelerating sales growth of 5.6% yr/yr to $20.6 bln. Excluding FX impacts, organic sales jumped 8%. Two notable standouts from the quarter were Beauty and Baby, Feminine & Family Care categories, which climbed 8% and 7% on flat volumes. Conversely, Grooming and Health Care products lagged, improving sales by just 3%, as market contractions in Europe and, to a lesser extent, Asia Pacific, weighed.
- Regarding Asia Pacific, namely China, organic sales still grew 4%, and PG continued noticing sequential market recovery, albeit at a slow pace.
- Meanwhile, resembling results from other consumer staples lately, Latin America excelled, boasting a 22% jump in organic sales growth.
- PG maintained its positive profitability momentum from Q3 when it returned to operating margin growth after four-straight periods of contraction. Operating margins expanded by 190 bps yr/yr and 310 bps on a currency-neutral basis.
- Looking toward FY24, a relatively strong U.S. dollar will remain a hurdle, clipping an estimated 1 pt to all-in sales growth. However, unlike FY23, when commodity costs erased nearly half of PG's earnings, the company anticipates a net benefit of around $800 mln after-tax in FY24 from favorable commodity costs, further illuminating decelerating inflationary trends.
After surviving a tumultuous FY23, PG enters FY24 with positive momentum from improving volumes and resilient brands. That is not to say economic hurdles have been removed entirely. PG acknowledges that there will be plenty of bumps in the road ahead, still navigating through several challenges, including a nervous end consumer as recession fears are not completely eradicated, wage inflation, and FX headwinds. However, as PG accelerates productivity back to pre-pandemic levels, targeting savings above $1.5 bln, and leans on its resilient brands, it is well-positioned to deliver solid results despite potential obstacles standing in its way.
Intel's turnaround hopes becoming a reality as PC market turns a corner (INTC)
The signs of stability in the PC market that Intel (INTC) CEO Pat Gelsinger spoke about last quarter progressed into a more meaningful recovery in Q2, paving the way for the chip maker to handily beat EPS and revenue expectations. While INTC is far from firing on all cylinders -- revenue still declined by nearly 16% yr/yr -- its significantly improved results and brighter outlook have turned investors' hopes of a turnaround into a reality.
- That turnaround is mainly being driven by a PC market that Mr. Gelsinger described as "healthy again" following a steep downturn over the past two years. Following a boom period during the pandemic that was fueled by the work and learn-from-home trend, PC sales cratered as that catalyst fizzled out. Accordingly, the boom quickly turned into a bust, leaving PC and laptop makers with a glut of inventory that would pressure demand for semiconductors throughout 2022 and 1H23.
- Now, however, the inventory of chips is finally back to normal levels, according to Mr. Gelsinger. As a result, orders are picking back up and the recovery is expected to pick up some steam in the second half of the year.
- Revenue in the PC-centric Client Computing Group (CCG) decreased by 12% to $6.8 bln, but that was better than analysts expected. It also represents a major improvement from last quarter when revenue plunged by 38% for CCG.
- It's not just the top-line that's benefiting from the improving demand environment. A more balanced supply and demand dynamic, combined with greater efficiencies of scale as it ramps up manufacturing capacity, is pushing INTC's depressed margins higher.
- Non-GAAP gross margin expanded by 140 bps qtr/qtr to 39.8%, easily exceeding INTC's guidance of 37.5%.
- Better yet, the company anticipates further margin improvements moving forward, guiding for Q3 non-GAAP gross margin of 43.0%.
- The news isn't as upbeat in the Data Center & AI Group (DCAI), which has lost ground to competitors like NVIDIA (NVDA) and Advanced Micro (AMD). Revenue in this segment fell by 15% to $4.0 bln with the company seeing continued weakness from cloud and enterprise customers.
- Since INTC doesn't specialize in GPUs -- the type of chips that NVDA is known for -- it has largely missed out on this initial burst of demand as cloud customers build out AI training environments.
- However, Mr. Gelsinger believes that the AI opportunity will extend well beyond the GPU market and that the company is well positioned to benefit from the AI explosion. In fact, he commented that even PCs will include more AI-based software in the future, requiring more powerful semiconductors.
- Currently, INTC has orders to sell over $1.0 bln of AI chips through 2024, but that number could rise if a PC upgrade cycle kicks into full swing.
The main takeaway is that the long-awaited recovery in the beleaguered PC market is taking hold, jump-starting INTC's turnaround. There may be more bumps in the road as the company continues its mission to become a chip manufacturing powerhouse in the U.S., but it now appears that margins and profits may have bottomed out, setting the stage for stronger financials in 2H23.
The Big Picture
Last Updated: 28-Jul-23 12:48 ET | Archive
What is in the past is still in the past
From March 2020 to March 2022, the target range for the fed funds rate was set effectively at the zero bound. The shift away from that zero bound happened in late March 2022 with a 25-basis points increase to 0.25-0.50%. That was the first of ten consecutive rate hikes that took the target range for the fed funds rate to 5.00-5.25% on May 3, 2023.
The FOMC skipped a rate hike in June, but got back to it in July, voting unanimously to raise the target range for the fed funds rate another 25 basis points to 5.25-5.50%.
If This, Then That?
If we told you in March 2022 that...
- The Fed would be raising rates a total of 525 basis points over the next 16 months
- There would be a run on the regional banks in March 2023
- The eurozone would slide into a recession
- China's reopening from its COVID lockdown would be a disappointment
- Core inflation would remain north of 4.0%
- There would be a deep inversion of the yield curve
- There would be no end in sight to the Ukraine war
...how many of our dear readers would have predicted that (a) the unemployment rate wouldn't go above 3.7% over the same period (b) real GDP growth would average 2.6% from Q3 2022 to Q2 2023 and (c) the S&P 500 would be within striking distance of an all-time high?
We certainly didn't, adhering too much to historical precedent and admittedly not appreciating the unprecedented effect of more than $5 trillion of fiscal stimulus provided during the COVID pandemic.
Those are the facts, however. The U.S. economy is holding up just fine -- actually, better than fine so far -- with all the rate hikes. Presumably, that's because the lag effect of stimulus spending (meaning it hasn't all been spent) and the enduring wealth effect seem to be offsetting the lag effect of policy tightening.
Avoidance
It helps of course that the labor market is as strong as it is, yet that is the case because demand has held up relatively well with the help of excess savings from the pandemic stimulus. In turn, the prolonged period of zero-bound rates and ultra-low mortgage rates fueled housing demand that has padded equity cushions for homeowners that have aided the wealth effect along with rising stock prices.
The stock market fallout in 2022 notwithstanding, the S&P 500, which topped 4,600 this week, is 55% higher than it was before the pandemic. The Nasdaq Composite for its part is 67% higher.
It has been a remarkable turn of events, and there is still a good bit of spending and investing potential with over $5 trillion currently in money market fund assets. It is there in large part, though, because interest rates have risen and because so many people are looking to preserve capital, mindful that aggressive tightening cycles often lead to bad economic outcomes and earnings recessions.
So far, the bad economic outcome has been avoided, and Fed Chair Powell, along with the Fed staff and a growing number of economists, think the U.S. economy can avoid a recession.
Mr. Powell said as much during his press conference to discuss the FOMC's latest decision to raise the target range for the fed funds rate. In fact, he said a lot at that press conference without saying anything specifically that would upend the capital markets.
An Important Nuance
When it comes to raising rates again, Fed Chair Powell said definitively: "maybe."
The Fed may, or may not, raise rates again at the September meeting or any meeting thereafter. It will depend on the data, he said; hence, it will be a meeting-by-meeting decision. He also said that it makes all the sense in the world to slow down now in order to assess how its prior policy actions are impacting the economy.
Still, he believes the process of getting inflation back down to 2.0% has a long way to go. An important nuance here is that he didn't say the Fed has a long way to go with its rate hikes to get inflation back down to 2.0%. That's possible, but he recognizes the current fed funds rate is at a restrictive level already.
That has helped temper inflation, but with core-PCE inflation still well above the Fed's 2.0% target and not expected to reach that target until 2025 or so, he acknowledged that the Fed thinks it is going to need to hold policy at a restrictive level for some time -- or, in market speak, "higher for longer."
That isn't a scary thought at this point for the market because policy rates are the highest they have been since 2001, and yet the economy is still growing, the labor market is still tight, and the stock market isn't that far off from all-time highs. The only thing to fear at this point -- or so it seems looking at the price action -- is fear itself.
That confident view will change if incoming economic data start to show some acute weakening in the broader economy, and especially hiring activity, as that will ignite concerns about the lag effect of prior rate hikes having a more meaningful impact at a time when the crutch of pandemic stimulus savings is no longer as supportive as it has been.
Market participants are operating today, however, with the luxury of knowing that hasn't happened yet and are imbued with a sense of confidence in the stock market's price action that it won't happen.
What It All Means
Higher interest rates are not all bad. In fact, they are good in many respects:
- They are good for savers wanting to avoid riskier assets.
- They are good for fighting inflation.
- They are good for the dollar.
- They are good for attracting capital from markets where interest rates are lower.
- They are good for weeding out weak, over-leveraged companies.
- They are good for popping asset bubbles.
- They are good for providing room for future rate cuts if/when they are needed.
Higher interest rates, however, present a headwind for economic activity. That is a fact and there is ample historical precedent to indicate as much. To that end, Fed Chair Powell noted in his press conference that the historical record suggests there is likely to be some softening in labor market conditions.
He said as much while maintaining his view that the economy could possibly avoid a recession in spite of the restrictive policy. The direction of the labor market will have a lot to say about that, but the stock market for one likes his way of thinking.
All that remains to be seen is if the economic data in coming months support it and keep historical precedent in the past.
-- Patrick J. O'Hare, Briefing.com
(Editor's Note: the next installment of The Big Picture will be published the week of August 7)
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