Market Snapshot
briefing.com
| Dow | 34448.74 | -193.23 | (-0.56%) | | Nasdaq | 13845.37 | -175.59 | (-1.25%) | | SP 500 | 4460.98 | -35.85 | (-0.80%) | | 10-yr Note | -3/32 | 4.29 |
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| | NYSE | Adv 1049 | Dec 1773 | Vol 788 mln | | Nasdaq | Adv 1443 | Dec 2870 | Vol 4.2 bln |
Industry Watch
| Strong: Energy, Utilities |
| | Weak: Consumer Discretionary, Information Technology, Materials, Health Care |
Moving the Market
-- Big loss in Apple (AAPL) weighing down market following negative headlines from China and the EU
-- Treasury yields sharply higher after the better than expected August ISM Non-Manufacturing Index, which stoked concerns about Fed policy
-- S&P 500 closing below its 50-day moving average (4,475)
-- Reacting to several airlines warning about rising jet fuel costs
-- Concerns about a slowdown in discretionary spending due to high gas prices
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Closing Summary
06-Sep-23 16:25 ET
Dow -198.78 at 34443.19, Nasdaq -148.48 at 13872.48, S&P -31.35 at 4465.48
[BRIEFING.COM] Today's trade started on a mixed note. There wasn't much conviction on either side of the tape early on, leading the major indices to trade near yesterday's closing levels. Stocks settled into a broad retreat, though, after market rates bounced in response to the ISM Services PMI at 10:00 a.m. ET.
The ISM Services PMI jumped to 54.5% from 52.7% and the Prices Index rose to 58.9% from 56.8%. That is a combination that will support the Fed's thinking that rates need to stay higher for longer. The 2-yr note yield, which is most sensitive to changes in the fed funds rate, sat at 4.95% before the data, but settled up eight basis points from yesterday at 5.04%. The 10-yr note yield, at 4.25% before the data, settled at 4.29%.
Another jump in oil prices ($87.57/bbl, +1.02, +1.2%) contributed to the negative bias today. That move, along with elevated gas prices, has stirred concerns about a slowdown in discretionary spending. On a related note, several airlines sounded a cautious note today about rising jet fuel costs.
The major indices were able to climb off their worst levels in the afternoon trade, but still registered decent losses. The S&P 500 for its part closed below its 50-day moving average (4,475). A big loss in Apple (AAPL 182.91, -6.79, -3.6%) following a few negative headlines weighed heavily on the broader market. China banned government officials from using Apple devices, according to The Wall Street Journal, and the EU Commission designated Apple as one of six "gatekeepers," which will place it under a regulatory microscope.
The Vanguard Mega Cap Growth ETF (MGK) fell 1.2% while the Invesco S&P 500 Equal Weight ETF (RSP) logged a 0.3% decline. Other growth stocks were noticeably weak, too, pressured by the jump in market rates. The Russell 3000 Growth Index fell 0.9% versus a 0.3% loss in the Russell 3000 Value Index.
Nine of the 11 S&P 500 sectors closed with a loss. The information technology sector (-1.4%) saw the largest decline by a decent margin, weighed down by Apple. The utilities (+0.2%) and energy (+0.1%) sectors closed at the top of the leaderboard.
Volume remained on the light side as decliners topped advancers by a roughly 9-to-5 margin at the NYSE and a nearly 2-to-1 margin at the Nasdaq.
- Nasdaq Composite: +32.5% YTD
- S&P 500: +16.3% YTD
- S&P Midcap 400: +7.0% YTD
- Russell 2000: +6.4% YTD
- Dow Jones Industrial Average: +3.9% YTD
Reviewing today's economic data:
- Weekly MBA Mortgage Applications Index -2.9%; Prior 2.3%
- July Trade Balance -$65.0 bln (Briefing.com consensus -$68.0 bln); Prior was revised to -$63.7 bln from -$65.5 bln
- The key takeaway from the report is that there was a pickup in both exports and imports that was not suggestive of any material economic weakness on a global scale, yet there are clear signs of slowing with exports down 3.5% year-over-year and imports down 4.7% year-over-year.
- August S&P Global US Services PMI - Final 50.5; Prior 51.0
- August ISM Non-Manufacturing Index 54.5% (Briefing.com consensus 52.4%); Prior 52.7%
- The key takeaway from the report is twofold: services sector activity accelerated in August but prices also increased at a faster pace. The latter will be a concerning development presumably for the Fed and the Treasury market, which will be contemplating the notion of rates needing to stay higher for longer.
Thursday's economic calendar features:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 233,000; prior 228,000), Continuing Claims (prior 1.725 mln), revised Q2 Productivity (Briefing.com consensus 3.7%; prior 3.7%), and revised Q2 Unit Labor Costs (Briefing.com consensus 1.6%; prior 1.6%)
- 10:30 ET: Weekly natural gas inventories (prior +32 bcf)
- 11:00 ET: Weekly crude oil inventories (prior -10.58 mln)
Treasury yields climb; econ calendar Thursday
06-Sep-23 15:30 ET
Dow -189.37 at 34452.60, Nasdaq -173.89 at 13847.07, S&P -34.12 at 4462.71
[BRIEFING.COM] The market is moving sideways ahead of the close.
The 2-yr note yield jumped eight basis points to 5.04% while the 10-yr note yield rose two basis points to 4.29%.
Thursday's economic calendar features:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 233,000; prior 228,000), Continuing Claims (prior 1.725 mln), revised Q2 Productivity (Briefing.com consensus 3.7%; prior 3.7%), and revised Q2 Unit Labor Costs (Briefing.com consensus 1.6%; prior 1.6%)
- 10:30 ET: Weekly natural gas inventories (prior +32 bcf)
- 11:00 ET: Weekly crude oil inventories (prior -10.58 mln)
Energy outperforms
06-Sep-23 15:00 ET
Dow -193.23 at 34448.74, Nasdaq -175.59 at 13845.37, S&P -35.85 at 4460.98
[BRIEFING.COM] The major indices are little changed over the last half hour.
Energy complex futures settled the session mixed. WTI crude oil futures jumped another 1.2% to $87.57/bbl. Natural gas futures fell 2.7% to $2.51/mmbtu.
On a related note, the S&P 500 energy sector (flat) is alone in positive territory.
Sept. Beige Book shows activity grew modestly in July, August; market eyes wage, jobs commentary
06-Sep-23 14:30 ET
Dow -206.18 at 34435.79, Nasdaq -177.32 at 13843.64, S&P -37.90 at 4458.93
[BRIEFING.COM] The broader market was largely unaffected after the release of the Fed's latest Beige Book which showed that economic growth was modest during July and August. Currently, the S&P 500 (-0.84%) is still situated comfortably in second place.
Other points of interest from the report included: Job growth was subdued across the nation. The Fed found that, though hiring slowed, most Districts indicated imbalances persisted in the labor market as the availability of skilled workers and the number of applicants remained constrained.
Many contacts suggested "the second half of the year will be different" when describing wage growth. Growth in labor cost pressures was elevated in most Districts, often exceeding expectations during the first half of the year. But nearly all Districts indicated businesses renewed their previously unfulfilled expectations that wage growth will slow broadly in the near term.
Additionally, most Districts reported price growth slowed overall, decelerating faster in manufacturing and consumer-goods sectors. However, contacts in several Districts highlighted sharp increases in property insurance costs during the past few months. Contacts in several Districts indicated input price growth slowed less than selling prices, as businesses struggled to pass along cost pressures. As a result, profit margins reportedly fell in several Districts.
Also, the Fed found that consumer spending on tourism was stronger than expected, surging during what most contacts considered the last stage of pent-up demand for leisure travel from the pandemic era. But other retail spending continued to slow, especially on non-essential items.
Gold slips ahead of Beige Book
06-Sep-23 13:55 ET
Dow -261.18 at 34380.79, Nasdaq -174.30 at 13846.66, S&P -41.20 at 4455.63
[BRIEFING.COM] With about two hours to go on Wednesday the tech-heavy Nasdaq Composite (-1.24%) is still today's top laggard; market participants await the Fed's September Beige Book which is on tap for the top of the hour.
Gold futures settled $8.40 lower (-0.4%) to $1,944.20/oz, this alongside modest gains in the dollar and short-tenor bond yields.
Meanwhile, the U.S. Dollar Index is up about +0.1% to $104.86.
Page One
Last Updated: 06-Sep-23 09:05 ET | Archive
Interest rates and oil prices remain in focus
There is some weakness in the equity futures market this morning. It isn't terrible, but buyers continue to be a reluctant bunch on the heels of yesterday's uptick in interest rates and oil prices.
Currently, the S&P 500 futures are down 10 points and are trading 0.2% below fair value, the Nasdaq 100 futures are down 40 points and are trading 0.2% below fair value, and the Dow Jones Industrial Average futures are down 69 points and are trading 0.2% below fair value.
Oil prices and Treasury yields are a little tamer today (emphasis on the word little), yet that doesn't mean market participants are necessarily feeling better about recent trends.
WTI crude futures are down 0.5% to $86.23/bbl and the 10-yr note yield is down two basis points to 4.25%. It is the recent bump, however, that has raised concerns about slower growth resulting from a pullback in discretionary spending.
The confounding element is that long-term rates have pushed higher, not lower, in spite of the growth concerns. That is the residual effect of concerns about supply and concerns that inflation expectations will remain elevated with oil and gas prices.
If so, then one can count on the target range for the fed funds rate remaining elevated at its current level or even moving higher. On a related note, CNBC reported that Boston Fed President Collins (not an FOMC voter) said she thinks the Fed will need to hold at a restrictive level for some time, but that the Fed may be at, or near, a peak with its policy rate.
Mortgage applications aren't anywhere near a peak. With a 2.9% week-over-week decline, they hit their lowest level since December 1996, according to the Mortgage Bankers Association. Purchase applications were down 2% and refinancing applications were down 5% with demand tailing off due to the elevated mortgage rates.
In other economic news, the U.S. trade deficit widened to $65.0 billion in July (Briefing.com consensus -$68.0 billion) from an upwardly revised $63.7 billion (from -$65.5 billion) in June. Exports were $3.9 billion more than June exports, and imports were $5.2 billion more than June imports.
The key takeaway from the report is that there was a pickup in both exports and imports that was not suggestive of any material economic weakness on a global scale, yet there are clear signs of slowing with exports down 3.5% year-over-year and imports down 4.7% year-over-year.
The market took this news in stride, keeping its attention on the impending release of the ISM Non-Manufacturing Index (Briefing.com consensus 52.4%; prior 52.7%) at 10:00 a.m. ET.
In other developments, several airlines have sounded a cautious note on rising jet fuel costs, Enbridge (ENB) announced a deal to acquire three U.S.-based utilities from Dominion Energy (D) for an aggregate price of $14.0 billion, and the European Commission has named Amazon.com (AMZN), Alphabet (GOOG), Apple (AAPL), Meta Platforms (META), and Microsoft (MSFT) as "Gatekeepers" under its Digital Markets Act.
-- Patrick J. O'Hare, Briefing.com
Southwest Air faces some turbulence as softening demand and rising fuel costs weigh on shares (LUV)
Southwest Air (LUV) is descending after issuing an updated outlook for Q3 that warned of rising fuel costs and a slowdown in leisure bookings for August, sparking fears that macroeconomic headwinds are finally making a dent in leisure travel demand.
While LUV still expects to achieve record operating revenue in Q3, the airline did ratchet its revenue per available seat mile (RASM) guidance lower, forecasting RASM to decline by 5-7% compared to its prior outlook of a drop of 3-7%.
- LUV's comment that "close-in" leisure bookings for August are trending towards the low-end of expectations is also putting a damper on other airlines with significant exposure to domestic leisure travel demand. For instance, JetBlue Airways (JBLU) and Spirit Airlines (SAVE) are both trading lower today, while those that generate more revenue from pricier, higher-margin international routes are faring better.
- United Airlines (UAL), which also increased its fuel expense guidance, forecasting $2.95-$3.05 per gallon compared to its former projection of $2.50-$2.80, has exhibited relative strength today, along with American Airlines (AAL) and Delta Air Lines (DAL).
- On the positive side, LUV did reaffirm its cost per available seat mile (CASM) guidance of +3.5-6.5%, indicating that the airline is executing well in terms of costs that it can control.
- With LUV bumping its fuel cost guidance higher to $2.70-$2.80 from $2.55-$2.65, at the same time that leisure travel demand cools off a bit, Q3 earnings estimates seem likely to come down. That is the root cause for today's weakness.
The main takeaway is that the lingering concerns that macroeconomic headwinds would eventually create a headwind for leisure travel demand seems to be coming to fruition. With that said, business remains quite healthy for LUV and Q3 is still poised to be a strong quarter for the company and its competitors. However, for LUV and other airlines with substantial domestic exposure, the jump in fuel costs figures to be more impactful to earnings since they can't mitigate those cost pressures through higher-priced international flights.
Roku channels solid gains today after announcing a series of initiatives to cut costs (ROKU)
Roku (ROKU +3%) channels gains today after announcing a 10% workforce reduction, office space consolidation, and strategic review of its content portfolio. The streaming device and content giant also raised its Q3 revenue guidance by a meaningful margin, predicting $835-875 mln, up from $815 mln. Investors are cheering the announcements, sending shares toward 52-week highs, only to retreat from intra-day highs as the broader markets started breaking down. Still, on the year, the stock has more than doubled.
- Today's layoffs were not the first go-around for ROKU. The company has been streamlining its operations for some time, announcing a 7% reduction in November 2022, only to follow this up with a 6% reduction in March. Reactions have been mixed, with the market not too pleased after the first round of layoffs while applauding the second round.
- Alongside the weakening macroeconomic backdrop, which is clipping device sales, the ad market, the primary revenue driver for ROKU, has remained relatively soft over the past year, hurting margin growth. Last quarter, total gross margins slid by 180 bps yr/yr to 44.7%, with platform margins (advertising side) comprising the bulk of this decline, tumbling 270 bps. ROKU did not anticipate the headwinds to let up for the rest of 2023.
- ROKU is also trimming its content portfolio in connection with its ongoing evaluation of operations, opting to remove select existing licensed and produced content from its TV streaming platform. The Roku Channel is ad-supported, so, given the soft advertising market, it makes sense to cut costs here as it may not translate to material user flight.
ROKU is not alone in its restructuring. Plenty of its partners have announced layoffs over the past year to better contend with slowing consumer spending and the subsequent softening ad market. For example, Disney (DIS), Warner Bros Discover (WBD), and Paramount (PARA) have implemented meaningful workforce reductions this year.
However, several of ROKU's peers have noticed stabilization lately, such as DIS, which stated last month that it observed early signs of improvement within the ad market. PARA also remarked that advertising enjoyed a yr/yr improvement in Q2. As a result, ROKU may be finally carving out a bottom related to its core advertising business. This would translate to healthy margin improvement in subsequent quarters, especially following its streamlining initiatives announced today.
AeroVironment flying high today on huge earnings beat (AVAV)
AeroVironment (AVAV +27%) is flying high today after this supplier of drones and tactical missile systems started FY24 on a strong note. When we posted AVAV's earnings last night, we had to double check it, but it's right. AVAV reported a monster EPS and revenue beat for Q1 (Jul). AVAV guided FY24 revs modestly higher and reaffirmed FY24 EPS guidance.
- Given the large beat, we would have expected a more generous guidance raise. However, it's only one quarter in the books, so it's still early in the fiscal year, so maybe AVAV wants to give itself some wiggle room in case orders slow down. Also, AVAV explained on the call that it is working with suppliers to scale their businesses to match AVAV's needs. Plus, the US government is nearing the end of its fiscal year.
- Its largest segment during Q1 was Unmanned Systems (UMS), which saw revenue jump 45% yr/yr to $98.2 mln, driven primarily by its small UAS business unit. AVAV is seeing strong demand across a broad range of products, particularly its Puma systems, which are urgently needed overseas, particularly in Ukraine.
- Its Loitering Munitions Systems (LMS) segment saw revenue rise a healthy 34% yr/yr to $30.9 mln, driven by strong US and international orders. This reflects Switchblade shipments to an expanding number of allied countries across the globe. AVAV has noted previously that the conflict in Ukraine has accelerated the global trend towards the use 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.
- AVAV was also pretty excited about its deal to acquire Tomahawk Robotics, which was announced in August. AVAV sees Tomahawk as a leader in AI-enabled robotic common control systems. Basically, its technology allows for more seamless integration between AVAV's own and other drones. This makes it easier for customers to operate a variety of drones in the field.
Overall, this report was impressive, especially the huge Q1 upside. We could nitpick that the guidance should have been raised more, but it's still so early in the fiscal year, so investors are giving them a pass. 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.
Zscaler sees some investors scaling out of their positions due to a more tepid outlook (ZS)
ZScaler (ZS), a cybersecurity company that focuses on Zero Trust and private access applications, reported another strong quarterly report, easily beating EPS and revenue expectations, extending a winning streak that exceeds five years. Relative to many other tech companies, ZS has experienced healthy and resilient demand amid a tough business climate that's characterized by smaller deals and lengthening sales cycles. Due to the company's impressive results and solid double-digit growth, expectations were elevated heading into last night's 4Q23 earnings report, as reflected in the stock's 13% gain since last week.
- Those high expectations are working against ZS today as the stock succumbs to a "sell-the-news" reaction as investors lock in gains. The main issue that's causing some investors to head for the exits is that ZS's guidance fell a little flat -- particularly its FY24 guidance.
- For FY24, the company guided for EPS of $2.20-$2.25, which did beat expectations. However, its revenue outlook of $2.05-$2.065 was essentially only in line with analysts' estimates, while representing a slowdown in yr/yr growth to about 27% compared to 48% in FY23.
- That's still a solid growth rate, but for a stock with a lofty P/S of about 15x, the deceleration invites this type of sell-off. That's especially the case this week with growth stocks selling off as interest rates rise.
- Also notable is the slight change in tone from the executive team. Last quarter, ZS was quite bullish and optimistic, stating that customers are expanding their commitments as they consolidate systems around ZS's Zero Trust Exchange platform, even as some enterprises scale back their spending. Although the company is still positive regarding its prospects, CFO Remo Canessa acknowledged that predicting close rates and ramp ups in any 90-day period remains challenging given the environment, causing the company to take a cautious view of its outlook.
Overall, it was another strong quarterly performance for ZS, but the company's more tepid outlook for FY24 is causing some disappointment among market participants who had very high expectations for the company.
GitLab is getting it done; reports a surprise profit and offers healthy guidance (GTLB)
GitLab (GTLB +4%) is trading higher today after it eked out a small profit in Q2 (Jul) when a loss was expected. This provider of software development tools, also known as DevOps Platforms, also reported healthy revenue upside and guided above analyst expectations for Q3 (Oct) and the full year. After a big guide down in Q4, GitLab has now posted back-to-back large beats-and-raises.
- Customer purchasing behavior in Q2 was consistent with Q1. GitLab believes buying patterns appear to have stabilized. Contraction (fewer seat licenses) was lower than Q1 and appears to be stabilizing. Ultimate, its top tier offering, continues to see strong adoption driven by customer wins for security and compliance use cases.
- GitLab continues to make good progress in terms of growing its base of large customers. At the end of Q2, GitLab had 810 customers with ARR of at least $100,000 compared to 760 customers in Q1 and 593 customers a year ago. Furthermore, GitLab ended Q2 with over 7,800 customers with ARR of at least $5,000 vs over 7,400 customers in Q1 and over 5,800 a year ago.
- The improving trends allowed GitLab to raise prices. In April, GitLab raised the price of its premium SKU for the first time in five years. The company has added 400+ new features since the last price increase. In the first four months post launch, customer behavior has been in-line, or perhaps just slightly above expectations. GitLab expects minimal financial benefit in the current year. The price increase will have a much larger impact in FY25 as customers renew contracts throughout the year.
- Speaking of FY25, in addition to the price increase for its Premium tier, GitLab sees several other catalysts. In Q2, the company started enforcing new user limits on its free SaaS tier. It's early, but more free users are upgrading to Premium. GitLab is also excited about the launch of Dedicated, which caters to clients with complex security and compliance requirements. Finally, GitLab plans to monetize its AI capabilities by launching an add-on that will include Code Suggestions functionality later this year.
Overall, we think investors are quite pleased with the Q2 results. GitLab's business seems to have stabilized. In fact, another quarter of strong guidance seems to suggest that management is feeling more confident about its outlook. And that's before the full benefits of the price increase really kick in. With other tech names talking a lot about tighter deal scrutiny and macro headwinds generally, we think these results are quite good.
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