Market Snapshot
briefing.com
| Dow | 33637.44 | +6.34 | (0.02%) | | Nasdaq | 13408.72 | -165.49 | (-1.22%) | | SP 500 | 4327.02 | -22.59 | (-0.52%) | | 10-yr Note | +27/32 | 4.63 |
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| | NYSE | Adv 1066 | Dec 1742 | Vol 855 mln | | Nasdaq | Adv 1552 | Dec 2678 | Vol 4.2 bln |
Industry Watch
| Strong: Energy, Utilities, Consumer Staples, Health Care, Financials |
| | Weak: Communication Services, Consumer Discretionary, Information Technology, Industrials, Materials |
Moving the Market
-- A drop in market rates on geopolitical concerns, but Treasuries gave back some gains after the preliminary University of Michigan Consumer Sentiment Survey showed a pickup in inflation expectations
-- Reacting to better-than-expected earnings results from JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C), and UnitedHealth (UNH)
-- Relative weakness in the mega cap space
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Closing Summary
13-Oct-23 16:25 ET
Dow +39.15 at 33670.25, Nasdaq -166.98 at 13407.23, S&P -21.83 at 4327.78
[BRIEFING.COM] The major indices finished the day mixed, but the complexion under the surface was more negative for the broader market. Relative weakness in the mega cap space had a disproportionate impact on the S&P 500 and Nasdaq Composite, but many stocks registered declines.
The Vanguard Mega Cap Growth ETF (MGK) fell 1.1% versus a 0.5% decline in the market-cap weighted S&P 500. The equal weighted S&P 500 declined only 0.2%.
Geopolitical uncertainty weighed on sentiment ahead of the weekend following the news that Israel warned 1.1 million residents in the northern Gaza Strip to evacuate within 24 hours. At the same time, Iran's foreign minister has noted that Israel's continued siege of Gaza "will face reactions in other areas."
That news fueled some safe-haven buying in Treasuries, but rates moved off their lows after the preliminary University of Michigan Consumer Sentiment Survey showed a pickup in year ahead inflation expectations to 3.8% from 3.2% and long run inflation expectations to 3.0% from 2.8%. The 2-yr note yield, which skimmed 5.00% at its best level, fell one basis point to 5.05%. The 10-yr note yield, which traded down to 4.59% at today's low yield, declined eight basis points to 4.63%.
The geopolitical angst offset what was some otherwise good news on the earnings front. Dow components UnitedHealth (UNH 539.40, +13.86, +2.6%) and JPMorgan Chase (JPM 148.00, +2.19, +1.5%) were standout winners today, along with Wells Fargo (WFC 40.96, +1.22, +3.1%), following their better-than-expected earnings and/or guidance.
Five of the 11 S&P 500 sectors closed with gains. Energy (+2.3%) was the top performer by a wide margin thanks to a jump in oil prices ($87.80/bbl, +4.73, +5.7%), which was another manifestation of the geopolitical angst. The financials sector (+0.2%) also logged a gain, boosted by gains in JPMorgan Chase and Wells Fargo.
- Nasdaq Composite: +28.1% YTD
- S&P 500: +12.7% YTD
- Dow Jones Industrial Average: +1.6% YTD
- S&P Midcap 400: +0.5% YTD
- Russell 2000: -2.4% YTD
Reviewing today's economic data:
- September Export Prices 0.7%; Prior was revised to 1.1% from 1.3%
- September Export Prices ex-ag. 1.0%; Prior was revised to 1.5% from 1.7%
- September Import Prices 0.1%; Prior was revised to 0.6% from 0.5%
- September Import Price ex-oil -0.2%; Prior was revised to -0.2% from -0.1%
- October Univ. of Michigan Consumer Sentiment - Prelim 63.0 (Briefing.com consensus 67.5); Prior 68.1
- The key takeaway from the report is that high prices and inflation expectations were the primary weight on consumer sentiment. How that translates into actual spending remains to be seen, but consumers' perspective on inflation is a reason why the Fed is going to stay with high rates for longer.
Looking ahead, notable economic releases on Monday include the October Empire State Manufacturing Survey (prior 1.9) at 8:30 a.m. ET.
Stocks move sideways ahead of the close; Treasuries settle with gains
13-Oct-23 15:35 ET
Dow +40.17 at 33671.27, Nasdaq -165.56 at 13408.65, S&P -21.65 at 4327.96
[BRIEFING.COM] Things are little changed at the index level over the last half hour.
Treasuries settled with gains. The 2-yr note fell one basis point to 5.05% and the 10-yr note yield declined eight basis points to 4.63%. The U.S. Dollar Index rose 0.1% to 106.68.
Looking ahead, notable economic releases on Monday include the October Empire State Manufacturing Survey (prior 1.9) at 8:30 a.m. ET.
Citigroup slip into the red; energy complex futures settle mixed
13-Oct-23 15:05 ET
Dow +6.34 at 33637.44, Nasdaq -165.49 at 13408.72, S&P -22.59 at 4327.02
[BRIEFING.COM] The major indices moved mostly sideways over the last half hour.
Energy complex futures settled mixed. WTI crude oil futures jumped 5.7% to $87.70/bbl. The S&P 500 energy sector is up 2.6%, sporting the largest gain among the 11 sectors by far.
The S&P 500 financials sector (+0.2%) sports the slimmest gain among the sectors in positive territory. Citigroup (C 41.50, -0.02, -0.1%) gave back its early gain after reporting better than expected earnings.
Progressive bucks broader S&P 500 weakness, PGR higher following Q3 beat
13-Oct-23 14:30 ET
Dow +18.06 at 33649.20, Nasdaq -185.32 at 13388.90, S&P -25.65 at 4323.96
[BRIEFING.COM] The S&P 500 (-0.59%) is in familiar territory on Friday afternoon, sandwiched between the modestly higher DJIA (+0.05%) and the tech-heavy Nasdaq Composite (-1.37%).
S&P 500 constituents Match Group (MTCH 35.36, -2.03, -5.43%), ON Semiconductor (ON 88.88, -4.17, -4.48%), and Old Dominion (ODFL 404.80, -19.27, -4.54%) pepper the bottom of the standings. Beaten down online dating app technology firm MTCH continues its rough 2023 campaign, pushing MTD losses to -9.6%, while ON trips into the weekend alongside broader weakness in tech and semi stocks, with ODFL carrying some of its worst percentage losses since the spring.
Meanwhile, Ohio-based insurance firm Progressive (PGR 153.85, +10.55, +7.36%) brings peers higher following this morning's Q3 beat.
Gold rips into the weekend, move past $1,900 for first time in October
13-Oct-23 14:00 ET
Dow +31.00 at 33662.14, Nasdaq -167.87 at 13406.35, S&P -23.16 at 4326.45
[BRIEFING.COM] With about two hours to go on Friday the tech-heavy Nasdaq Composite (-1.24%) is still the top declining major average, albeit having pulled higher off session lows in the last half hour.
Gold futures settled $58.50 higher (+3.1%) to $1,941.50/oz as tensions escalate into the weekend in Israel, pushing gains to +5.2% on the week.
Meanwhile, the U.S. Dollar Index is up about +0.1% to $106.71.
Page One
Last Updated: 13-Oct-23 09:02 ET | Archive
Earnings news good, geopolitical news bad
The 10-yr note yield has made a good move overnight, reclaiming a good chunk of what it lost yesterday after digesting the September Consumer Price Index and the weak 30-yr bond auction. Currently, the 10-yr note yield is down 12 basis points to 4.59%. Despite the improvement there and some better-than-expected earnings results from JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C), and UnitedHealth (UNH), the equity futures market is moving in a somewhat guarded fashion.
The S&P 500 futures are up 13 points and are trading 0.3% below fair value, the Nasdaq 100 futures are up 13 points and are trading 0.1% above fair value, and the Dow Jones Industrial Average futures are up 111 points and are trading 0.6% above fair value.
Why the guarded trade when the thing the stock market seems to love most -- lower rates -- is on the board? Because the overnight improvement in the Treasury market hasn't been for the best of reasons.
China stirred concerns about the strength of its economy when it reported some soft inflation data and a year-over-year decline in both exports (-6.2%) and imports (-6.2%) for September; and Israel stirred concerns about an escalation in its fight against Hamas with a warning to 1.1 million residents in northern Gaza that they should evacuate in the next 24 hours.
An observation from Iran's foreign minister that Israel's continued siege of Gaza "will face reactions in other areas," according to CNBC, has added to the angst over the situation that is fueling some safe-haven trades.
Oil prices are reacting accordingly, too. WTI crude futures are up 4.8% to $86.87/bbl and Brent crude futures are up 4.5% to $89.90/bbl.
This saber-rattling ahead of the weekend, when the equity market is closed, has mitigated some of the enthusiasm for the good earnings reports noted above.
Another drag on sentiment is the news that Steve Scalise (R-LA) has withdrawn from the Speaker race, recognizing he didn't have enough support to get the 217 votes necessary to be elected Speaker of the House. This news has cast more uncertainty about who the next Speaker will be and whether Congress will be able to reach an agreement to avoid a government shutdown after November 17.
Following this week's September Producer Price Index (PPI) and Consumer Price Index (CPI) reports, market participants got a little better inflation news this morning with the September Export-Import Price Index.
Briefly, export prices were up 0.7% month-over-month following a 1.1% increase in August, but were down 4.1% year-over-year. Import prices were up 0.1% month-over-month following a 0.6% increase in August, but were down 1.7% year-over-year. Excluding fuel, import prices were down 0.8% year-over-year.
It is hard for this report to trump the PPI and CPI inflation reports as a market mover, but the headlines succeeded in keeping the Treasury market on a lower track.
The open for the stock market is setting up to be a modestly higher one. It should be better based on the earnings news, but it isn't all about earnings at the moment.
-- Patrick J. O'Hare, Briefing.com
Belden crashes as weakening demand adds to channel destocking headwinds(BDC)
Network infrastructure and connectivity device company Belden (BDC) is plummeting after lowering its Q3 guidance last night, sending shares to their lowest levels of the year. Although the company didn't revise its FY23 guidance lower, it commented that softer demand is expected to continue into Q4, negatively impacting revenue and profitability. When BDC reported Q2 results in early August, it raised its FY23 EPS outlook due to stronger-than-expected gross margins, but it slightly lowered its revenue forecast as channel partners reduced their inventories.
At that time, BDC didn't seem overly concerned about the channel destocking situation, characterizing the impact on orders as "temporary" and "slightly higher than anticipated." Since then, though, it's clear that demand has weakened considerably, compounding the pressures from the inventory reduction situation.
- The magnitude of the reduction in BDC's revenue guidance is catching market participants off guard. Specifically, the company now expects to generate Q3 revenue of approximately $625 mln versus its prior guidance of $675-$690 mln. This equates to a yr/yr decline of about 7%, compared to an increase of about 2% based on its former projection.
- BDC didn't specify in the press release which business segment or products in particular are experiencing weaker demand. The company operates through two primary divisions: Enterprise Solutions (applications such as 5G, data centers, and local area networks) and Industrial Automation Solutions (routers, firewalls, ethernet switches, and gateways).
- In Q2, Enterprise Solutions lagged behind, posting revenue growth of just 1% compared to 8% for Automation Solutions.
- It's also notable that Cisco Systems (CSCO), which is a direct competitor of BDC's Automation Solutions segment, delivered strong Q4 results in mid-August, illustrating that demand for routers, switches, and networking equipment is healthy.
- On the other hand, companies with more exposure to the 5G, data center, and home automation end markets have dealt with inventory destocking headwinds for several quarters.
- Despite the substantial cut to revenue guidance, BDC only slightly lowered its Q3 EPS guidance to $1.75-$1.77 from $1.75-$1.85. Amid a tough demand environment, gross margin has remained resiliently strong. Last quarter, gross margin expanded by 400 bps yr/yr to 38%.
From a longer-term perspective, BDC remains optimistic about its prospects, pointing to growing investments in automation and increasing bandwidth usage as primary growth drivers for its business. For the time being, though, the company is facing a daunting combination of slowing end market demand and inventory destocking that will make it difficult for the stock to recover in a meaningful way.
SMART Global plunges on wide top and bottom-line misses in AugQ and discouraging guidance (SGH)
SMART Global (SGH -44%) erases its 2023 gains, plunging to late October 2022 levels following substantial earnings and sales misses in Q4 (Aug) as well as dismal Q1 (Nov) guidance. SGH sells various products, including DRAM and Flash-based memory under its Memory Solutions segment, high-performance computing (HPC), AI and IoT platform technologies under its IPS segment, and application-optimized LEDs under its LED Solutions group. Given that most (~80%) of its annual revenue stems from businesses outside LEDs, SGH can be viewed as more of a memory and data center company. As such, its alarming Q4 results may be a canary in the coal mine ahead of several prominent tech names reporting SepQ earnings over the coming weeks.
- Headline results were dismal. SGH registered adjusted EPS of $0.35, an over 56% decline from $0.80 delivered in the year-ago period and marking its first miss in over five years. Revenue did not fare any better, dropping 28% yr/yr to $316.66 mln, SGH's widest single quarter decline since 1Q19 (Nov), and well short of the company's $350-400 mln forecast.
- What happened? When SGH originally guided for Q4 in June, it incorporated its Brazil operations into its continuing business. Around that time, SGH agreed to divest an 81% stake in SMART Brazil but did not expect it to close until early 2024. However, even if added back into SGH's Q4 revenue, SMART Brazil would have only helped revs by $32 mln, still short of its quarterly forecast.
- Another factor weighing on Q4 performance was orders in SGH's IPS business shifting from Q4 to Q1. When SGH first provided its Q4 prediction, it did not anticipate order delays, partly due to supply constraints clouding inventory visibility. Still, orders shifting into Q1 did not materially impact SGH's guidance. The company projected adjusted EPS and revs well short of consensus at $0.00-0.30 and $250-300 mln, respectively.
- That brings us to the crux of the matter: weak demand. Management conceded that it is observing headwinds from persistent market softness and customers still working through finished goods inventory. Specifically, in IPS, the HPC market remains lumpy with high customer concentration. Meanwhile, in Memory Solution, while early signs of price stabilization unfold, demand for specialty products is lower than expected as inventories remain elevated.
There were some bright spots, such as LED Solutions revs edging 3% higher sequentially with improving customer design activity heading into FY24. SGH is also witnessing interest in its AI platforms, citing plenty of enthusiasm surrounding the technology. Furthermore, non-GAAP gross margins jumped 460 bps yr/yr to 31.7%, a testament to SGH's cost containment initiatives.
Nevertheless, the wide top and bottom-line misses, weak guidance, and lingering macroeconomic softness were a wake-up call today, especially after such solid results last quarter. A possible silver lining for the data center and AI industry is that much of SGH's problems in Q4 were internal, which likely initially staved off selling pressure across some of its peers today until a market-wide sell-off dragged them lower. Still, SGH's results should not be ignored ahead of earnings season.
Citigroup deposits solid beat-and-raise report, easing concerns about high interest rates (C)
There was a feeling of uneasiness as the Q3 earnings season approached for the banking industry, but Citigroup (C) joined JPMorgan Chase (JPM) and Wells Fargo (WFC) in delivering results that were much better-than-expected. Following a deep slump that has persisted for more than a year, the investment banking business finally perked up in Q3, while higher fixed income trading activity also provided a boost for the institutional side of the business. Both of these factors bode well for Goldman Sachs (GS) and Morgan Stanley (MS) when they report earnings next week.
Meanwhile, rising interest rates haven't negatively impacted the consumer banking and lending businesses as badly as many market participants had anticipated. In fact, Citigroup raised its FY23 net interest income guidance to $47.5+ bln from $46+ bln as growth remained strong for personal loans and branded cards. While net credit losses did increase by 10% qtr/qtr to $1.37 bln, loan write-offs remain manageable for Citigroup.
Citigroup is also undergoing a major reorganization that will ultimately result in a 15% reduction in jobs and the elimination of management layers. These changes, which will begin to be reflected in Citigroup's Q4 results, should provide another lift to earnings following this quarter's 9% increase in EPS.
Taking a closer look at the key drivers behind this quarter's earnings growth, we find a few items that stand out.
- Coming off a rough Q2 in which investment banking revenue declined by 24%, a rebound in debt and equity underwriting activity fueled a 34% jump in investment banking revenue to $844 mln.
- Bolstered by a 14% increase in fixed income trading revenue, Citigroup's Markets business generated growth of 10%. In particular, the company saw strength in rates and currencies related products.
- Turning to the consumer banking side of the business, total revenue for the Personal Banking and Wealth Management (PBWM) segment grew by 10%. Higher interest rates pushed Branded Cards revenue higher by 12%, while average loans in U.S. personal banking grew by 13%.
- Citigroup did raise its total allowance for credit losses on loans to $17.6 bln from $16.3 bln in the year-earlier period, illustrating that it's view on the overall economy remains cautious.
The main takeaway is that Citigroup's upside results, alongside solid reports from JPM and WFC, help alleviate concerns that this high interest rate environment is taking a toll on the industry's financials. Furthermore, the rebound in the investment banking business is an encouraging sign that the ice-cold conditions for deal-making is finally thawing out.
JPMorgan Chase banks higher today on strong Q3 report; US consumer remains healthy (JPM)
JPMorgan Chase (JPM +3%) is banking higher today after it reported sizeable EPS upside this morning. Revenue rose a healthy 24.4% yr/yr to $40.69 bln, which was better than expected. With rates continuing to rise, people may think that is good for banks. However, while they are able to charge higher rates for loans, they also pay more for deposits, loan demand decreases, default risk increases and consumers get more cautious generally. So higher rates are generally not good for banks.
- In its Consumer & Community Banking (CCB) segment, revenue rose a healthy 29% yr/yr to $18.36 bln. Consumer spend growth has now reverted to pre-pandemic trends with nominal spend per customer stable and relatively flat yr/yr. Banking & Wealth Mgmt revenue was $11.3 bln, up 43%, or up 30% excluding First Republic, driven by higher net interest income, reflecting higher deposit margins, partially offset by lower balances. Home Lending revenue was $1.3 bln, up 36%, or down 2% excluding FR. Card Services & Auto revenue rose 7% to $5.8 bln.
- In the Corporate & Investment Bank (CIB) segment, revenue declined 2% yr/yr to $11.73 bln. Markets revenue was down 3% to $6.6 bln. Investment Banking revs were down 6%, driven by lower advisory fees. Payments revenue was up 3%, predominantly driven by higher rates. In terms of its outlook, JPM was encouraged by the level of capital markets activity in September, and the bank has a healthy pipeline going into Q4. Advisory has also picked up compared to 1H23, but announced M&A remains down significantly on a YTD basis, which will continue to be a headwind.
- Commercial Banking (CB) revs jumped 32% yr/yr to $4.03 bln while Asset & Wealth Mgmt (AWM) revs rose 10% to $5.0 bln. As you can see, most segments performed pretty well. The provision for credit losses was $1.4 bln, reflecting net charge-offs of $1.4 bln and a net reserve build of $47 mln, including a net build of $301 mln in Card Services and a net release of $250 mln in Home Lending.
- JPM says US consumers and businesses generally remain healthy, although, consumers are spending down their excess cash buffers. However, persistently tight labor markets and extremely high government debt levels are increasing the risks that inflation remains elevated and that interest rates rise further from here. JPM also sees the war in Ukraine compounded by last week's attacks on Israel may have far-reaching impacts. CEO Jamie Dimon said "This may be the most dangerous time the world has seen in decades."
Overall, investors are very happy with JPM's robust Q3 results. The bank performed well overall. Consumer banking was notably strong and JPM's comments on the consumer heading into the holiday season were positive. JPM did caution about some macro concerns, but this language was generally similar to past comments. All in all, this was a very good quarter for JPM and eased investor fears. This report, coupled with several other bank earnings beats this morning, bodes well for other banks set to report early next week.
UnitedHealth maintains its healthy upward momentum following a beat-and-raise in Q3 (UNH)
With UnitedHealth's (UNH +1%) medical care ratio (MCR), the percentage of premiums used to cover claims, edging lower sequentially in Q3, consistent with management's remarks last quarter, shares of the nation's largest health insurer are maintaining their upward momentum today. The favorable MCR data helped push UNH's bottom line over analyst expectations by its largest margin in a year while keeping revenue growth in mid-teen territory yr/yr, translating to the company's 13th consecutive beat.
Given that UNH's quarterly numbers provide a barometer of the health of its industry, its upbeat results today are igniting a fire under many of its peers, including Humana (HUM), Centene (CNC), Molina Healthcare (MOH), and The Cigna Group (CI), all of which report Q3 earnings over the next several weeks.
- In Q3, earnings expanded by 13.3% yr/yr to $6.56, keeping UNH's string of double-digit beats alive. Meanwhile, revenue stayed buoyant, jumping 14.2% to $92.36 bln. Growth remained broad-based, improving by 13% and 22% at UnitedHealthcare and Optum, respectively. Like last quarter, Optum's operating margins contracted yr/yr, slipping by 100 bps to 6.9%, reflecting initial clinical engagement activities and higher care patterns. Still, operating earnings continued to increase, up 5.4% yr/yr to $3.9 bln.
- MCR did tick up 70 bps yr/yr to 82.3%, reflecting continuous outpatient care demand, primarily among seniors, as well as an increasing number of individuals seeking mental health support relative to before the pandemic. However, UNH's MCR edged 90 bps lower sequentially, in line with management's confidence last quarter that the MCR would track slighter lower in Q3.
- The lower sequential MCR largely stems from seasonality. The summer tends to spur outdoor activity, so individuals hold off on outpatient procedures until closer to winter when they already spend more time indoors. The other factor is the consistent pacing of care activity. UNH continues to observe stable outpatient care, providing better clarity into where its MCR might land quarter to quarter.
- However, due to the MCR ticking lower due to seasonality, UNH expects Q4 earnings to be slightly lower marginally compared to Q3, explaining why the company only narrowed its FY23 earnings outlook. UNH now expects EPS of $24.85-25.00, up $0.15 at the low end from its prior forecast.
Overall, UNH registered a healthy quarter, sufficient to keep its share trending positively. Since the start of September, UNH has appreciated by roughly +12%, turning green on the year after a turbulent first half. Price cuts to UNH's Medicare Advantage program from the CMS sparked some panic from investors as it would hike costs in 2024. However, given that CMS provided the warnings months before the phased-in price cuts, UNH has had ample time to reengineer its cost base. Meanwhile, with patient care activity remaining consistent over the past several quarters, fears of a rapid spike in UNH's MCR are easing. As such, UNH remains a solid long-term play, particularly during challenging economic times.
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