Market Snapshot
briefing.com
| Dow | 36247.87 | +130.49 | (0.36%) | | Nasdaq | 14403.97 | +63.98 | (0.45%) | | SP 500 | 4604.37 | +18.78 | (0.41%) | | 10-yr Note | -8/32 | 4.25 |
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| | NYSE | Adv 1569 | Dec 1209 | Vol 883 mln | | Nasdaq | Adv 2390 | Dec 1866 | Vol 5.4 bln |
Industry Watch
| Strong: Energy, Materials, Industrials, Information Technology, Financials |
| | Weak: Communication Services, Consumer Staples, Utilities, Health Care |
Moving the Market
-- Treasury yields moving higher in response to the November Employment Situation Report
-- Digesting a solid November jobs report
-- Reacting to earnings news from the likes of Broadcom (AVGO), lululemon athletica (LULU), and DocuSign (DOCU)
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Closing Summary
08-Dec-23 16:30 ET
Dow +130.49 at 36247.87, Nasdaq +63.98 at 14403.97, S&P +18.78 at 4604.37
[BRIEFING.COM] The major indices closed today's session near their highs of the day. The S&P 500 (+0.4%) closed above the 4,600 for the first time since March 2022. The Dow Jones Industrial Average, Nasdaq Composite, and Russell 2000 registered gains of 0.4%, 0.5%, and 0.7%, respectively.
Only four of the S&P 500 sectors registered a decline while the energy sector (+1.1%) registered the largest gain as oil prices jumped 2.7% to $71.18/bbl. The consumer staples sector was the "worst" performer with a 0.7% decline.
The price action was more mixed in the early going, though, as the market digested this morning's economic data. The November Employment Situation Report featured a 199,000 increase in nonfarm payrolls, a larger than expected 0.4% increase in average hourly earnings, and a drop in the unemployment rate to 3.7% from 3.9%, which made for a solid report.
The preliminary University of Michigan Index of Consumer Sentiment for December climbed to 69.4 from the final reading of 61.3 for November. The spike in sentiment was aided by a large drop in year-ahead inflation expectations (to 3.1% from 4.5%) and five-year inflation expectations (to 2.8% from 3.2%).
Stocks did not have an outsized reaction to the aforementioned reports due in part to a growing sense that the market is due for consolidation. Another factor that kept buyer enthusiasm in check was the implication that strong data won't put the Fed in a rate-cut frame of mind.
As a result, the fed funds futures market is no longer pricing in a cut in March, but it still sees a strong likelihood of a cut in May (78.5% vs. 89.0% yesterday), according to the CME FedWatch Tool.
The 2-yr note yield climbed 17 basis points today, and 18 basis points this week, to 4.74%. The 10-yr note yield rose 12 basis points today, and two basis points this week, to 4.25%.
- Nasdaq Composite: +37.6%
- S&P 500: +19.9%
- Dow Jones industrial Average: +9.4%
- S&P Midcap 400: +8.3%
- Russell 2000: +6.8%
Reviewing today's economic data:
- Nonfarm payrolls increased by 199,000 in November (Briefing.com consensus 175,000) after an increase of 150,000 in October.
- Nonfarm private payrolls increased by 150,000 in November (Briefing.com consensus 155,000) after a revised increase of 85,000 in October (from 99,000).
- Average hourly earnings increased by 0.4% in November (Briefing.com consensus 0.2%) following a 0.2% increase in October.
- The average workweek rose to 34.4 hours in November (Briefing.com consensus 34.3) from 34.3 hours in October.
- The unemployment rate fell to 3.7% in November (Briefing.com consensus 3.9%) from 3.9% in October.
- The key takeaway from the report is the recognition that the unemployment rate dropped as the participation rate increased, which suggests hiring activity in November was -- word of the day -- solid. In fact, the number of employed civilians increased by 747,000 while the number of unemployed civilians decreased by 215,000.
- The preliminary reading for the University of Michigan Consumer Sentiment Index for December came in at 69.4 (Briefing.com consensus 62.6) versus the final reading of 61.3 in November. In the same period a year ago, the index stood at 59.8. Prior to this report, consumer sentiment had declined for four straight months.
- The key takeaway from the report is the linkage between the increase in sentiment and the decrease in inflation expectations. The latter set the tone for improved attitudes across age, income, education, geography, and political identification.
Looking ahead, there is no U.S. economic data of note on Monday, but Tuesday's calendar features the November Consumer Price Index.
Treasury yields settle higher after jobs report
08-Dec-23 15:35 ET
Dow +142.20 at 36259.58, Nasdaq +67.09 at 14407.08, S&P +19.89 at 4605.48
[BRIEFING.COM] Things are little changed at the index level over the last half hour.
The 2-yr note yield climbed 17 basis points today, and 18 basis points this week, to 4.74%. The 10-yr note yield rose 12 basis points today, and two basis points this week, to 4.25%.
Looking ahead, there is no U.S. economic data of note on Monday, but Tuesday's calendar features the November Consumer Price Index.
WTI crude oil futures rebound
08-Dec-23 15:05 ET
Dow +126.56 at 36243.94, Nasdaq +55.78 at 14395.77, S&P +16.34 at 4601.93
[BRIEFING.COM] The major indices remain near session highs. The Russell 2000 is up 0.6%.
WTI crude oil futures climbed 2.7% today to $71.18/bbl. Natural gas futures fell 0.8% to $2.57/mmbtu.
On a related note, the S&P 500 energy sector is trading at the top of the leaderboard, up 1.0%. The information technology (+0.8%), financial (+0.5%), and consumer discretionary (+0.5%) sectors are also showing notable strength.
Paramount higher amid M&A speculation, Dollar General falls in S&P 500 on continued weakness
08-Dec-23 14:30 ET
Dow +103.69 at 36221.07, Nasdaq +60.70 at 14400.69, S&P +15.03 at 4600.62
[BRIEFING.COM] The S&P 500 (+0.33%) is in second place once more on Friday afternoon, up about 15 points.
Elsewhere, S&P 500 constituents Paramount Global (PARA 17.16, +2.13, +14.17%), Allegion (ALLE 110.79, +5.70, +5.42%), and Qorvo (QRVO 104.53, +4.21, +4.20%) dot the top of the average. PARA moves higher after reports that David Ellison and RedBird Capital are eyeing a potential takeover of National Amusements controlling stake in PARA, ALLE advances amid a M&A deal in the company's sector, and QRVO jumps higher after a morning Morgan Stanley upgrade to Overweight.
Meanwhile, Dollar General (DG 126.81, -5.49, -4.15%) is today's worst performer, a bevy of analyst target raises weren't enough to cool the continued post-earnings pullback.
Gold compounds weekly losses on Friday following upbeat jobs report
08-Dec-23 14:00 ET
Dow +89.27 at 36206.65, Nasdaq +45.00 at 14384.99, S&P +11.43 at 4597.02
[BRIEFING.COM] With about two hours to go on Friday the tech-heavy Nasdaq Composite is up a clean 45 points, leading the major averages.
Gold futures settled $31.90 lower (-1.6%) to $2,014.50/oz, ending lower by about -3.6% on the week, as a better than expected jobs report spurred a rally in treasury yields and the greenback.
Meanwhile, the U.S. Dollar Index is up about +0.5% to $104.01.
Page One
Last Updated: 08-Dec-23 09:03 ET | Archive
Employment situation in November was solid
There has been a some back and forth in the stock market this week, as the indices have hinged on the rotation in, out, between, and all around the mega-cap stocks. Yesterday was a very good day for the mega-cap stocks and that translated into a good day for the market. Still, it wasn't enough to pull the market higher for the week.
Entering today, the market-cap weighted S&P 500 is down 0.2% for the week and the equal-weighted S&P 500 is down 0.3% for the week.
Not to sound glib, but the market could go either way today, resulting in a winning week or a losing week. We say that knowing that the November employment report was a solid report overall, but also knowing that, because it was solid, it didn't necessarily support the market's notion that the Fed will cut rates sooner than later.
Today, therefore, could give us a glimpse of whether the market sees good economic news as good news for earnings or good economic news as bad news for the rate-cut appetizer it has been feasting on the last five weeks.
The S&P 500 futures are down seven points and are trading 0.1% below fair value, the Nasdaq 100 futures are down 68 points and are trading 0.4% below fair value, and the Dow Jones Industrial Average futures are down 40 points and are trading fractionally below fair value.
Notably, Treasury yields moved higher immediately after the release that featured a 199,000 increase in nonfarm payrolls, a drop in the unemployment rate to 3.7% from 3.9%, and a larger-than-expected 0.4% month-over-month increase in average hourly earnings that left the year-over-year change at a moderating 4.0%.
The key takeaway from the report is the recognition that the unemployment rate dropped as the participation rate increased, which suggests hiring activity in November was -- word of the day -- solid. In fact, the number of employed civilians increased by 747,000 while the number of unemployed civilians decreased by 215,000.
The 2-yr note yield, at 4.63% just before the report, shot up to 4.72% and is at 4.69% now. The 10-yr note yield, at 4.18% just before the report, spiked to 4.27% and is at 4.23% now. The probability of a 25 basis points rate cut at the March 2024 FOMC meeting has been reduced to 50.3% from 64.5%.
Notable headlines from the September Employment Situation Report:
- November nonfarm payrolls increased by 199,000 (Briefing.com consensus 175,000). The 3-month average for total nonfarm payrolls increased to 204,000 from 192,000. October nonfarm payrolls unrevised at 150,000. September nonfarm payrolls revised to 262,000 from 297,000.
- November private sector payrolls increased by 150,000 (Briefing.com consensus 155,000). October private sector payrolls revised to 85,000 from 99,000. September private sector payrolls revised to 199,000 from 246,000.
- November unemployment rate was 3.7% (Briefing.com consensus 3.9%), versus 3.9% in October. Persons unemployed for 27 weeks or more accounted for 18.3% of the unemployed versus 19.8% in October. The U6 unemployment rate, which accounts for unemployed and underemployed workers, was 7.0% versus 7.2% in October.
- November average hourly earnings were up 0.4% (Briefing.com consensus 0.2%) versus 0.2% in October. Over the last 12 months, average hourly earnings have risen 4.0%, versus 4.0% for the 12 months ending in October.
- The average workweek in November was 34.4 hours (Briefing.com consensus 34.3), versus 34.3 hours in October. Manufacturing workweek was unchanged at 40.0 hours. Factory overtime was unchanged at 2.9 hours.
- The labor force participation rate increased to 62.8% from 62.7% in October.
- The employment-population ratio jumped to 60.5% from 60.2% in October.
Beyond today's important employment report, some added attention will also be paid to the earnings results from the likes of Broadcom (AVGO), lululemon athletica (LULU), and DocuSign (DOCU), as well as to the behavior of the mega-cap stocks versus the rest of the market, which has been a driving force this week.
-- Patrick J. O'Hare, Briefing.com
RH's margins take a hit in Q3 as the elevated promotional retail environment refuses to budge (RH)
RH's (RH -14%) considerable earnings miss in Q3 (Oct) and downbeat FY24 guidance are not making investors feel very comfortable today. Leading into its Q3 results, RH was benefiting immensely from falling U.S. Treasury yields and several uplifting reports from peers, including luxury home builder Toll Brothers (TOL), Pottery Barn owner Williams-Sonoma (WSM), and furniture maker La-Z-Boy (LZB). Excellent performance from these counterparts signaled that despite weakening discretionary spending and elevated interest rates, consumers were not entirely forgoing their willingness to spend.
However, following RH's first net loss in over five years on its fifth consecutive yr/yr revenue decline, consumers are not springing toward RH's relatively pricey products. CEO Gary Friedman, who does not tend to sugarcoat situations, continued to blame the increasingly promotional home furnishing markets. The end consumer is placing value at the top of their priorities, a common theme throughout the retail industry, gravitating toward clearance products and pressuring RH's margins in the process.
- RH's adjusted operating margins plummeted 13.5 pts yr/yr to 7.3% in Q3. At the same time, revenue continued to contract, slipping by 13.6% yr/yr to $751 mln. The result was an adjusted net loss of $(0.42) per share, the first time RH has registered negative earnings in years.
- Alongside the heightened promotional environment, RH is also undergoing a broad product transformation to disrupt multiple markets and position it to capture market share throughout FY24 (Jan), placing more pressure on margins. However, RH anticipates the dilutive effect on margins to be short-lived, remaining optimistic that the investments will become margin-accretive over the long term.
- Nevertheless, the housing market will remain a significant headwind for RH in the interim. Mr. Friedman commented that given how many homeowners enjoy mortgage rates below 5%, the housing market will likely remain frozen until interest rates and/or home prices fall meaningfully.
- As a result, RH narrowed its FY24 revenue forecast to $3.06-3.08 bln from $3.04-3.10 bln. Additionally, RH trimmed its adjusted operating margin outlook for the year to 13.6-14.0% from 14.5-15.5%, reflecting the aforementioned margin headwinds.
On a more positive note, RH expects demand trends to accelerate during 1H24 as its ongoing product transformation unfolds and it introduces its new Sourcebooks, i.e., catalogs. The company anticipates its inflection point will peak during 2Q24 as its new collections fully ramp. Mr. Friedman also stayed steadfast in his long-term optimism, pointing to the massive potential of moving beyond the home furnishing market into the North American housing market with the launch of RH Residences (fully furnished luxury homes).
Still, it could be some time before the promotional environment stabilizes and RH can return to margin growth. Even though more affluent incomes are better cushioned from economic downturns, it does not mean they will not engage in trade-down activity. We already saw most of Dollar Tree's (DLTR) new customers this year coming from households with incomes over $125,000. As such, until macroeconomic conditions turn, it may be better to hold off on RH for now.
Broadcom trades sideways as mild FY24 revenue guidance overshadows solid OctQ results (AVGO)
Broadcom (AVGO) is not picking a side with much conviction today despite exceeding Q4 (Oct) top and bottom-line estimates by similar margins as in past quarters and raising its quarterly dividend by 14% to $5.25 per share. Investors' fixation today is likely the semiconductor giant's mild FY24 revenue forecast. AVGO projected revs of approximately $50 bln, which included an estimated $11.0 bln in contributions from its recently closed purchase of VMware. When backing this out, AVGO's guidance was roughly in-line with analyst forecasts.
While not necessarily a glaring issue, given AVGO's ~66% jump this year, the market may have anticipated a modestly better revenue guide for FY24, especially when factoring in the outsized potential of AI, a technology that continues to provide a meaningful revenue boost for the company.
- AI's role in propping up AVGO's top line was again visible in Q4, as each division in Semiconductor Solutions (79% of revs) outside of networking saw flat or declining growth yr/yr. Networking revs surged by 23% yr/yr to $3.1 bln, fueled by hyperscalers' strong appetite for its custom AI accelerators.
- Conversely, while seasonal demand drove a 23% sequential improvement in wireless revenue in Q4, sales still fell by 3% to $2.0 bln compared to the year-ago period. Likewise, server storage connectivity and broadband revenue were down 17% yr/yr and 9% to $1.0 bln and $950 mln, respectively. Industrial demand was relatively better, as sales remained stable yr/yr at $236 million.
- In total, AVGO maintained positive revenue growth at 4.1% yr/yr to $9.29 bln, slightly ahead of its prior prediction of $9.27 bln. Meanwhile, adjusted EPS ticked 5.8% higher yr/yr to $11.06 on operating margins of 62%, unchanged from the year-ago period when the figure expanded by 240 bps yr/yr.
- Looking ahead, alongside its formal guidance, AVGO also provided color about the businesses in its Semiconductor segment. AI will remain a vital component of overall growth; management forecasted networking revs to grow 30% yr/yr in FY24, a solid uptick from the +21% growth posted in FY23. Wireless will remain stable, similar to the 2% drop in FY23. Server storage connectivity and broadband will both see around a mid-teen percentage decline in FY24, reflecting a carry-over of the cyclical weakness endured in late 2023. Lastly, industrial sales will slip by low single digits.
- Regarding AVGO's $69 bln purchase of VMware, which closed last month, the acquisition is adding a massive boost to the company's top line next year. AVGO is refocusing VMware on its core business of creating private cloud environments among large enterprises, which it expects will take about a year to complete.
AVGO's Q4 performance matched its Q3 (Jul) performance, keeping AI the star while other end markets take a back seat. FY24 is shaping up to be a similar dynamic as the back half of FY23, which could keep shares of AVGO trading sideways over the near term. Investors may wait until pockets of AVGO's broader product portfolio display signs of a turnaround before triggering another substantial rally like the one AVGO enjoyed this year.
lululemon athletica trades higher following nice EPS beat and despite soft Q4 guidance (LULU)
lululemon athletica (LULU +5%) is trading higher following its Q3 (Oct) report last night. LULU posted nice EPS upside and announced a $1 bln share repurchase authorization. Investors seem to not be overly worried that its revenue upside was more modest than usual or that its guidance for the Q4 (Jan) holiday period was below analyst expectations. LULU typically guides higher, so that was a bit of a negative.
- Total comparable sales increased a healthy +13% (+14% CC). This included comparable store sales of +9% and DTC (direct to consumer) comps of +18%. DTC revenue represented 41% of total revenue vs 41% last year. LULU was very pleased with its Black Friday sales, which was the single biggest day in company history. Its stores were very busy, with results driven by strength across both full price and markdown merchandise.
- In Q3, LULU's women's business increased 19%, fueled by new product launches, strength in bottoms and ongoing performance in key franchises. Importantly, LULU launched Wundermost in Q3, its new collection of bodywear made in its softest fabric ever. The Wundermost launch has been met with great initial response.
- The men's business was also strong, with sales up 15% in Q3. However, LULU noted that, when there is some uncertainty in the macro environment, men can become a bit more conservative in their apparel purchases. In Q3, LULU launched two new men's franchises, Steady State and Soft Jersey, which builds out LULU's lounge offering. The response has been very strong and LULU is chasing into additional inventory for these two new hit franchises. Following the holidays, its stores will have a back to gym focus. Also, LULU is gearing up to launch men's footwear in Q1 (Apr). LULU concedes that its men's brand awareness remains low, but building awareness remains top of mind. LULU sees ample opportunity to increase media spend and brand building.
- Turning to international, all regions grew in strong double digits in Q3, including a 53% increase in Greater China. LULU believes several factors benefit it in this important market, including its relatively small size and its relationships with local fitness studios, instructors and influencers.
In terms of the stock reaction, we think investors wanted to see more robust Q4 guidance, especially with the quarter getting off to such a strong start with robust Black Friday sales. We have to admit we are a bit surprised to see the stock higher despite the guidance shortfall and despite shares having already risen +30% since early October (LULU was recently added the S&P 500). It may be that investors think LULU is just being conservative with guidance, and that may well be. Also, the +14% comps were a nice acceleration from Q2's +7% comps. The large buyback was another positive.
JetBlue Airways taking off today as upwardly revised guidance eases demand concerns (JBLU)
A key concern for the airline industry exiting the Q3 earnings season was that demand appeared to have peaked and was softening amid a pullback in consumer spending, but JetBlue Airway's (JBLU) upwardly revised Q4 guidance suggests that those fears may have been overblown. That's especially the case since its brighter outlook, which now calls for Q4 revenue to be down by 4-7% instead of its prior forecast of 6.5-10.0%, comes on the heels of Delta Air Lines (DAL) reaffirming its Q4 guidance yesterday with the airline citing record revenue for the Thanksgiving period.
- JBLU, which is currently battling regulators to get its merger with Spirit Airlines (SAVE) approved, echoed the bullish commentary regarding holiday travel demand in the SEC filing. Specifically, the company stated, "Since late October, close-in bookings have outperformed expectations for both holiday peak and non-holiday travel periods.”
- Recall that when JBLU reported disappointing Q3 results on October 31, it warned that it was continuing to see discounted fares through the pre-Thanksgiving period and that the anticipated return to a normal demand and pricing environment for the peak holiday season was not materializing.
- Perhaps with inflation and interest rates cooling off a bit since then, consumers are feeling a little more comfortable with paying for airfare to travel for the holidays.
- Given that JBLU and other discount airlines generally aren't insulated by the strength in international travel demand like DAL, United Airlines (UAL), and American Airlines (AAL) are, its upwardly revised guidance is directly linked to strengthening demand from the U.S. consumer and businesses.
- With that in mind, it makes sense that Southwest Airlines (LUV) is one of the strongest airline stocks today.
- Higher fuel costs have been another thorn in the side of airlines, prompting many carriers to cut their earnings guidance in September. However, this headwind has also dissipated in recent weeks as crude oil prices have slid sharply lower.
- JBLU nudged its Q4 estimated fuel price per gallon forecast a bit lower to $3.05-$3.15 from $3.05-$3.20, while reaffirming its CASM ex-fuel guidance for an increase of 8.5-10.5%.
- Along with the improved revenue outlook, the modest drop in fuel costs enabled JBLU to raise its Q4 EPS guidance to ($0.35)-($0.25) from ($0.55)-($0.35).
The bottom line is that JBLU and its low-cost competitors like Frontier Group (ULCC) and SAVE have been hit especially hard over the past few months on concerns that demand is slowing. JBLU's updated guidance is helping to alleviate those concerns today.
C3.ai sells off as lengthening sales cycles weigh on current and future revenue growth (AI)
C3.ai (AI -11%) gaps lower despite upbeat Q2 (Oct) earnings, the third straight quarter investors initiated a sell-the-news reaction on better-than-expected results. The constant trend of C3.ai enduring intense profit-taking despite posting solid quarterly results underscores consistently elevated expectations as AI technology remains increasingly popular. Management has only grown more excited over the immense untapped potential of AI, citing a Goldman Sachs prediction during its OctQ conference call that generative AI would raise global GDP by 7%.
However, coinciding with outsized interest in AI applications are intense macroeconomic headwinds.
- C3.ai noted that it is observing lengthening decision cycles. The reason for this boils down to an added step. Over the past six months, organizations have formed new AI governance functions as part of their decision-making processes. These functions assess and approve AI applications. This added step lengthened regular sales cycles, provided a headwind during the quarter, and led to C3.ai falling modestly short of revenue estimates, posting growth of 17.3% yr/yr to $73.2 mln.
- This development also led to the midpoint of C3.ai's Q3 (Jan) and FY24 (Jan) revenue forecasts of $74-78 mln and $295-320 mln, respectively, missing analyst projections.
- Meanwhile, C3.ai's performance in Europe was dismal, posting an 11% drop in sales yr/yr to $10.6 mln, compared to a 28% jump in North America. Management acknowledged its lackluster performance, mentioning that its European sales execution was candidly unacceptable. However, the company has taken organizational steps to improve sales in the region immediately, so subsequent performances may not be as disappointing.
- Underwhelming revenue growth did not stop there. Recall C3.ai's ongoing transition from subscription-based pricing to consumption-based pricing, quickly becoming the cloud pricing standard as it is used across several giants in the industry, like Snowflake (SNOW) and AWS (AMZN). Before the transition, C3.ai was inking massive enterprise deals from $1.0 mln to $50.0 mln. Now, the company is experiencing lumpiness in bookings, lengthening sales cycles, and low levels of revenue predictability.
- On the plus side, consumption-based pricing has made acquiring new customers easier and less costly. As a result, C3.ai ended the quarter with 81% more customer engagements compared to the year-ago period.
While C3.ai's top line was a letdown, its headaches may quickly fade. Eventually, the company will finish its transition to a consumption-based model, stabilizing average selling prices and remaining performance obligation growth. Furthermore, lengthening decision cycles primarily result from the relative immaturity of AI technology. Once organizations have a clearer picture of what AI can do, their governance boards may not drag their feet when approving applications.
Nevertheless, as far as AI goes, C3.ai, an application developer, may have a tougher time over the near term as opposed to AI chip designers like NVIDIA (NVDA) and Advanced Micro (AMD). Plenty of developers can compete for a slice of organizations' budgets, while the semiconductor industry is much less fragmented. Lastly, with shares of C3.ai already up over 130% on the year, expectations will likely remain elevated.
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