Market Snapshot
briefing.com
| Dow | 37440.34 | +10.15 | (0.03%) | | Nasdaq | 14510.30 | -81.91 | (-0.56%) | | SP 500 | 4688.68 | -16.13 | (-0.34%) | | 10-yr Note | -6/32 | 3.99 |
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| | NYSE | Adv 1330 | Dec 1428 | Vol 1.0 bln | | Nasdaq | Adv 2013 | Dec 2236 | Vol 5.3 bln |
Industry Watch
| Strong: Financials, Industrials, Health Care |
| | Weak: Energy, Real Estate, Information Technology, Consumer Discretionary |
Moving the Market
-- AAPL loss weighing over market after downgrade to Neutral from Overweight at Piper Sandler
-- Rising market rates tied to worries that the Fed might not cut rates as much as expected; 10-yr note yield hit 4.00% again
-- Digesting better than expected labor market data
-- Rethinking rate-cut expectations
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Closing Summary
04-Jan-24 16:30 ET
Dow +10.15 at 37440.34, Nasdaq -81.91 at 14510.30, S&P -16.13 at 4688.68
[BRIEFING.COM] Today's session started with a positive bias. The A-D line favored advancers at both the NYSE and at the Nasdaq, and the major indices were mostly trading higher. Buying activity was modest, yet broad based.
Some early buyer enthusiasm started to dissipate around mid-day, though, which led the S&P 500 to trade around the 4,700 level in the afternoon. A surge of selling, especially in the mega cap stocks, drove the major indices to their worst levels of the session just before the close. The S&P 500 ultimately settled below 4,700 today.
The Russell 2000 declined 0.1%; the S&P 500 fell 0.3%; and the Nasdaq Composite registered a 0.6%. Meanwhile, the Dow Jones Industrial Average finished slightly higher than yesterday.
The Vanguard Mega Cap Growth ETF (MGK) logged a 0.4% loss, due in part to weakness in Apple (AAPL 181.91, -2.34, -1.3%) after a downgrade to Neutral from Overweight at Piper Sandler.
Other mega cap stocks had been trading higher in the early going, but rolled over before the close. Microsoft (MSFT 367.94, -2.66, -0.7%), which was up 0.7% at its high, and Tesla (TSLA 237.93, -0.52, -0.3%), which had been up as much as 1.8%, were standouts in that respect.
The S&P 500 sector that house mega cap constituents saw some of the largest declines, along with the energy sector (-1.6%). Meanwhile, the health care (+0.5%) and financials (+0.2%) sectors outperformed.
Market participants were reacting to rising rates today, and recalibrating rate-cut expectations after some strong data from the labor market ahead of the December jobs report tomorrow. The 2-yr note yield rose five basis points to 4.37% and the 10-yr note yield climbed eight basis points to 3.99% after hitting 4.00% earlier.
- Dow Jones industrial Average: -0.7%
- S&P 500: -1.7%
- S&P Midcap 400: -2.8%
- Nasdaq Composite: -3.3%
- Russell 2000: -3.4%
Reviewing today's economic data:
- December ADP Employment Change 164K (Briefing.com consensus 114K); Prior was revised to 101K from 103K
- Weekly Initial Claims 202K (Briefing.com consensus 220K); Prior was revised to 220K from 218K; Weekly Continuing Claims 1.855 mln; Prior was revised to 1.886 mln from 1.875 mln
- The key takeaway from the report -- and the ADP number -- is that the labor market is still in good shape, which is good news for the economy if not for the market's aggressive rate-cut outlook.
- December S&P Global US Services PMI - Final 51.4; Prior 50.8
Looking ahead, Friday's economic calendar features:
- 8:30 ET: December Nonfarm Payrolls (Briefing.com consensus 162,000; prior 199,000), Nonfarm Private Payrolls (Briefing.com consensus 132,000; prior 150,000), Unemployment Rate (Briefing.com consensus 3.8%; prior 3.7%), Average Hourly Earnings (Briefing.com consensus 0.3%; prior 0.4%), and Average Workweek (Briefing.com consensus 34.4; prior 34.4)
- 10:00 ET: November Factory Orders (Briefing.com consensus 1.3%; prior -3.6%) and December ISM Non-Manufacturing Index (Briefing.com consensus 52.5%; prior 52.7%)
Treasury yields climb
04-Jan-24 15:35 ET
Dow +86.95 at 37517.14, Nasdaq -35.65 at 14556.56, S&P -2.77 at 4702.04
[BRIEFING.COM] The S&P 500 and Nasdaq Composite are near their worst levels of the day.
The 2-yr note yield rose five basis points to 4.37% and the 10-yr note yield climbed eight basis points to 3.99%.
Looking ahead, Friday's economic calendar features:
- 8:30 ET: December Nonfarm Payrolls (Briefing.com consensus 162,000; prior 199,000), Nonfarm Private Payrolls (Briefing.com consensus 132,000; prior 150,000), Unemployment Rate (Briefing.com consensus 3.8%; prior 3.7%), Average Hourly Earnings (Briefing.com consensus 0.3%; prior 0.4%), and Average Workweek (Briefing.com consensus 34.4; prior 34.4)
- 10:00 ET: November Factory Orders (Briefing.com consensus 1.3%; prior -3.6%) and December ISM Non-Manufacturing Index (Briefing.com consensus 52.5%; prior 52.7%)
S&P 500 briefly slips below 4,700; Energy complex settles mixed
04-Jan-24 15:05 ET
Dow +111.82 at 37542.01, Nasdaq -34.66 at 14557.55, S&P -0.55 at 4704.26
[BRIEFING.COM] The S&P 500 (-0.03%) briefly slipped below 4,700 recently.
Only three sectors are trading up now. The health care sector continues to outperform, trading up 0.7%, followed by the industrial (+0.5%) and financial (+0.5%) sectors.
The energy sector sports the largest decline by a decent margin, down 1.5%.
On a related note, WTI crude oil futures declined 1.0% to $72.12/bbl and natural gas futures jumped 4.9% to $2.57/mmbtu.
Allstate, EPAM Systems ride sell side upgrades to top of S&P 500
04-Jan-24 14:30 ET
Dow +103.72 at 37533.91, Nasdaq -37.11 at 14555.10, S&P -1.06 at 4703.75
[BRIEFING.COM] The S&P 500 (-0.02%) has fallen into the red in the prior half hour, but only just.
Elsewhere, S&P 500 constituents Allstate (ALL 149.75, +4.75, +3.28%), EPAM Systems (EPAM 291.80, +9.14, +3.23%), and Dollar General (DG 134.73, +3.45, +2.63%) show decent gains. ALL caught a Morgan Stanley upgrade to Overweight this morning, Wolfe Research upgraded EPAM, and DG, too, had a sell side upgrade.
Meanwhile, e-commerce platform Etsy (ETSY 76.20, -2.93, -3.70%) is notably lower despite a dearth of corporate news.
Gold climbs as dollar slips
04-Jan-24 14:00 ET
Dow +124.36 at 37554.55, Nasdaq -14.26 at 14577.95, S&P +3.94 at 4708.75
[BRIEFING.COM] The tech-heavy Nasdaq Composite (-0.10%) remains in the red with about two hours to go on Thursday.
Gold futures settled $7.20 higher (+0.4%) to $2,050.00/oz, helped along by a modestly weaker greenback.
Meanwhile, the U.S. Dollar Index is down about -0.1% to $102.42.
Page One
Last Updated: 04-Jan-24 09:04 ET | Archive
Dealing with some rate-cut angst
There was no Santa Claus rally this year, but let's not kid ourselves. There was a Santa Claus rally, only it started in late October and simply veered off course for some R&R over the last five trading sessions of 2023 and the first two trading sessions of 2024.
To that end, we wouldn't get too caught up in the fact that the S&P 500 declined 0.9% in the past seven trading sessions, with almost all of that decline coming yesterday, not when it rallied as much as 16.8% from its low on October 27.
What we would get caught up in is seeing how the market responds to the pullback, which widened out yesterday to include many stocks and not just the mega-cap stocks. There again, though, that shouldn't have come as any surprise. Going into yesterday, the S&P 500 Equal-Weighted Index was up 18.2% from its low on October 27.
Currently, the S&P 500 futures are down three points and are trading 0.1% below fair value, the Nasdaq 100 futures are down 77 points and are trading 0.5% below fair value, and the Dow Jones Industrial Average futures are up 83 points and are trading 0.2% above fair value.
Why the mixed disposition?
It is partly due to this: Apple (AAPL) is down 1.2% after being downgraded by Piper Sandler to Neutral from Overweight; American Express (AXP) is up 1.0% after being upgraded by JPMorgan to Overweight from Neutral; Eli Lilly (LLY) is up 1.2% after announcing LillyDirect, whereby patients can obtain obesity, migraine, and diabetes medications direct from Eli Lilly, and Walgreens Boots Alliance (WBA) is down 2.2% after topping fiscal Q1 expectations and slashing its dividend by 48%.
Those are some of the key corporate news drivers along with APA Corp's (APA) $4.5 billion all-stock acquisition of Callon Petroleum (CPE).
There are some macro drivers in play today as well. Energy prices are up on geopolitical angst and Treasury yields are higher on rate-cut angst. That is, there is some budding angst that the Fed might not cut rates as much as expected.
That view has been driven partly by the FOMC Minutes for the December 12-13 meeting that were released yesterday and partly by some economic data released this morning.
Briefly, the minutes noted that it seemed likely a lower target range for the fed funds rate would be appropriate by the end of 2024, but that the path to lower rates was highly uncertain. There were acknowledgments, too, that future data could make further rate hikes appropriate and that the target range for the fed funds rate could be held where it is longer than anticipated.
Treasury yields rallied yesterday, mostly on the added insight that several participants were looking to the future and when it might be necessary to hold discussions related to ending the Fed's balance sheet reduction effort.
Yield are climbing again today, however. The 2-yr note yield is up five basis points to 4.37% and the 10-yr note yield is up seven basis points to 3.98%. An acceleration in the year-over-year rate of CPI inflation in Germany in December (to 3.7% from 3.2%) and the ADP Employment change and Weekly Initial and Continuing Jobless Claims reports are behind the bump in yields.
ADP estimated that 164,000 jobs were added to private-sector payrolls in December (Briefing.com consensus 114,000) following a downwardly revised 101,000 (from 103,000) in November. Most of that gain (155,000) came from the service-providing sector; additionally, job gains were seen across small (74,000), medium (53,000), and large (40,000) establishments.
Initial jobless claims for the week ending December 30 decreased by 18,000 to 202,000 (Briefing.com consensus 220,000) while continuing jobless claims for the week ending December 23 decreased by 31,000 to 1.855 million.
The key takeaway from the report -- and the ADP number -- is that the labor market is still in good shape, which is good news for the economy if not for the market's aggressive rate-cut outlook.
-- Patrick J. O'Hare, Briefing.com
RPM Inc takes a spill in Q2 as weakness in DIY and specialty OEM markets weigh on results (RPM)
RPM Inc (RPM -4%) took a spill in Q2 (Nov), missing earnings and revenue estimates for the first time in at least a year and lowering its FY24 (May) sales growth forecast. There were a few silver linings in the quarter, primarily emanating from the specialty coatings manufacturer's MAP 2025 savings initiatives. However, lingering softness across the do-it-yourself (DIY) and specialty OEM markets brushed aside any encouraging trends.
- Headline numbers were disappointing. RPM fell short of earnings expectations for the first time in six quarters. Meanwhile, flat yr/yr sales at $1.79 bln was worse than the modest positive growth analysts anticipated.
- The laggards were RPM's Consumer Group and Specialty Products Group, which both recorded negative sales growth in the quarter, falling by 5.2% to $578.69 mln and 16.6% to $176.98 mln, respectively.
- Consumer Group was pressured by weak takeaway at retailers as typical DIY customers allocated their discretionary dollars toward travel and entertainment rather than home improvement projects. Similar trends have occurred at retail giants Lowe's (LOW) and Home Depot (HD) in recent quarters. Retailers also remain cautious with their inventories, which placed outsized volume pressure on RPM.
- Specialty Products Group was clipped by soft specialty OEM demand, particularly among end markets with more exposure to residential housing.
- On the flip side, Construction Products Group and Performance Coating Group kept sales from sinking in Q2, registering 8.1% and 5.1% sales growth to $661.75 mln and $374.86 mln, respectively. Both segments benefited from a focus on repair and maintenance as well as robust demand for infrastructure reshoring and high-performance buildings.
- Meanwhile, many changes RPM has made regarding its management structure and MAP 2025 initiatives yielded healthy gains. For example, increased collaboration among sales teams in Africa, the Middle East, and Asia Pacific led to growth of 13% in Africa and the Middle East and over 6% in Asia Pacific. Additionally, MAP 2025 benefits resulted in double-digit adjusted EBIT growth and reiterated FY24 growth in the low double-digit to mid-teen range.
- Nevertheless, weakness within Consumer and Specialty Products will likely persist for the remainder of the year, culminating in RPM's reduced FY24 revenue growth outlook of a low-single-digit percentage down from mid-single-digits.
Relative strength in RPM's Construction Products and Performance Coatings segments was uplifting and bode well for peers PPG Industries (PPG) and Axalta Coating Systems (AXTA), both of which have significantly greater exposure to performance and industrial coatings than RPM. Conversely, given the elevated interest rates, existing home turnover has been at a multi-decade low over the past couple of years. Until interest rates fall and homeowners begin to consider moving, RPM's Consumer and Specialty Products segments may remain under pressure, a bad sign for competitor Sherwin-Williams (SHW).
Mobileye crashes lower as inventory glut weighs severely on FY24 outlook (MBLY)
Semiconductor companies with significant exposure to the PC, laptop, and mobile device end markets are finally emerging from a deep inventory correction that plagued the industry for several quarters, but now a supply-demand imbalance is surfacing in pockets of the automotive end market. This morning, Mobileye Global (MBLY), a chip maker focused on ADAS and self-driving technology, issued very weak FY24 guidance, citing excess inventory levels at its customers.
- As MBLY's customers work through the surplus inventory they built up when supply chains were under duress, sales of its EyeQ SoCs are expected to take a major hit -- especially in 1Q24. For Q1, the company is expecting revenue to plunge by about 50% yr/yr, a far cry from the 20%+ growth analysts were anticipating.
- Given the magnitude of the guide down, it's unsurprising that other chip makers exposed to the automotive end market are also seeing some selling pressure. In particular, Ambarella (AMBA), which makes computer vision chips for advanced driver-assistance systems, is down sharply.
- Although Intel (INTC) no longer has much direct exposure to the auto industry following its spin-off of MBLY in 2022, its stock is weak today as well because it still holds an 88% stake in MBLY. With INTC expanding its manufacturing base in the U.S., its MBLY holding is viewed as a potential source of capital to help finance the construction of new facilities.
- Overall, MBLY has performed quite well for INTC, gaining nearly 90% vs. its IPO price before today's nosedive. Solid financial results and the anticipation of a long runway for growth have underpinned MBLY's strength. In fact, MBLY is coming off a better-than-expected Q3 report that featured 18% revenue growth, 59% adjusted net income growth, and a reaffirm of its Q4 EyeQ volumes.
- Since then, though, demand has evaporated amid inventory drawdowns across Tier 1 auto OEM customers. EyeQ shipments are now expected to fall to 31-33 mln units compared to an estimated 37 mln units in 2023. The drop-off in sales will filter through to MBLY's bottom-line with the company forecasting a 1Q24 adjusted operating loss of ($80)-($65) mln. For the sake comparison, MBLY's generated an adjusted operating profit of $124 mln in the year-earlier period.
The main takeaway is that the severity of the guide down for FY24 is catching market participants off-guard. Like the PC and mobile phone markets before it, the auto industry is working through an inventory correction of its own, but we also believe that macroeconomic conditions are also likely causing MBLY's customers to take a cautious approach with ordering.
Conagra pulls back despite EPS upside; changes in consumer food behavior have pressured volumes(CAG)
Conagra (CAG -2.4%) is pulling back a bit after reporting Q2 (Nov) results this morning. The numbers were not horrible, with modest EPS upside and generally in-line revs, although a bit light. The main problem for this food giant (Birds Eye, Duncan Hines, Healthy Choice, Marie Callender's, Reddi-wip, Slim Jim) was lowered EPS and organic revenue guidance for FY24, which tells us the second half of the fiscal year is looking weaker than the fairly positive commentary we heard on the last call.
- Its Grocery & Snacks segment saw revenue decline 4.1% to $1.3 bln. A price/mix decrease of 0.4% played a part, but the bigger problem was a volume decrease of 3.7%, primarily due to continued lower consumption trends. A silver lining was CAG gaining dollar share in snacking and staples categories including microwave popcorn and seeds, chili, and hot cocoa.
- Its Refrigerated & Frozen (R&F) segment saw an even bigger revenue decline, by 5.8% to $1.3 bln. Price/mix decreased 2.5% while volume fell 3.3%. This segment has been hurt by recent shifts in consumer behavior, particularly in areas like single-serve meals. Some consumers are focusing more on multi-serve meals and scratch cooking to stretch their budgets.
- CAG's smaller segments were able to show growth. Specifically, International segment sales increased 8.1% to $280 mln while Foodservice segment sales rose 4.3% to $295 mln. Unfortunately, these segments are small relative to to CAG's two primary segments.
- CAG explained the big picture on the call this morning. Basically, US consumer behavior started to shift in spring 2023 as inflation caused consumers to stretch their budgets. This resulted in a reprioritization of food choices as shoppers moved towards more stretchable meals. CAG has been saying it expects these trends to be transitory, but the shift back to normal consumer behavior has been slower than CAG had initially expected. This pressured volume and mix in Q2.
- In terms of its current view, CAG believes the tide appears to be turning. While volume trends are not yet positive, CAG says progress is clearly underway. Within its R&F segment, volume went from -10.5% in Q1 to -3.3% in Q2. Also, its overall 3.4% decrease in organic sales is the third quarter in a row where the rate of yr/yr volume change has improved. Despite broader macro challenges and increased brand investments, CAG noted that it still delivered solid margins and EPS in Q2.
Overall, investors are disappointed with Conagra's Q2 results. While there has been progress in terms of volumes, it has been slower to recover than expected. We think this is dashing hopes of investors for a meaningful recovery in 2H. The stock trended lower from early May to early October, but has since started to consolidate and slowly recover. As such, we think there were expectations for a more optimistic for Q2, or at least a more bullish 2H outlook.
Walgreens Boots Alliance tanks as a cut dividend and challenging retail landscape weighs (WBA)
Walgreens Boots Alliance (WBA -9%) is getting the boot today despite turning around its string of two straight earnings misses in Q1 (Nov) -- topping estimates by low-single digits -- on accelerating yr/yr sales growth. Also, the global retail pharmaceutical giant kept its FY24 (Aug) earnings target unchanged.
However, WBA slashed its quarterly dividend by 48%. At a previously rich 7.5% annual yield, we remarked in the past that with a new CEO at the helm, Tim Wentworth, starting in late October, WBA's dividend could be on the chopping block. WBA mentioned that the cut will free up capital to invest in its pharmacy and healthcare businesses.
- Margins continued to compress in Q1, with adjusted gross and operating margins slipping by 180 bps and 110 bps yr/yr, respectively. As a result, WBA's bottom line took a hit, tumbling by 43% yr/yr to $0.66 per share. However, the contraction was not as bad as analysts feared, leading to WBA's first earnings beat since 2Q23 (Feb).
- Top-line growth of 9.9% yr/yr to $36.7 bln was also more robust than anticipated and represented an acceleration from the +9.2% delivered last quarter despite lapping a period of stronger growth.
- U.S. Retail Pharmacy, WBA's largest segment at 79% of total revs, underperformed total revenue growth in the quarter, climbing by just 6.4% on +8.1% comp growth.
- The growth was entirely driven by WBA's pharmacy business, registering +13.1% comps, lifted by higher branded drug inflation, which offset a weaker flu and respiratory season.
- Conversely, the retail environment remains weak, evidenced by retail comps falling -5.0% in Q1. Management mentioned that consumers remain stressed, shifting buying habits toward value brands, illuminated by WBA's private labels enjoying a 90 bp jump. Meanwhile, seasonal and discretionary categories continue to struggle.
- International sales were a positive standout, improving by 12.4% yr/yr to $5.83 bln. Boots UK's comparable pharmacy and retail sales were positive at +0.8% and +9.8%, respectively, boasting growth across all categories and expanding its market share.
- Within WBA's more frustrating U.S. Healthcare segment, which was a central focus of former CEO Rosalind Brewer, spending approximately $17.0 bln to fortify the segment, pro forma sales grew at a combined rate of 12.0% yr/yr, led by VillageMD and Shields. Adjusted operating losses narrowed to $96 mln from $152 mln in the year-ago period, highlighting that WBA is on a path to profitability. WBA reiterated its forecast of reaching adjusted EBITDA breakeven in FY24 (Aug), a $425 mln improvement yr/yr.
WBA's Q1 results contained several encouraging developments, including reaffirmation of U.S. Healthcare possibly achieving adjusted EBITDA breakeven this year after enduring extended growing pains in 2023. However, a slashed dividend, a challenged end consumer, and an unfavorable cold and flu season eroded any initial enthusiasm sparked by these highlights. WBA remains a risky turnaround play, especially given the current retail environment. We continue to view CVS Health (CVS) as the healthier retail pharmacy stock. However, after WBA's Q1 report, we urge caution ahead of CVS's Q4 (Dec) report slated for next month.
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