Market Snapshot
briefing.com
| Dow | 37806.39 | -99.06 | (-0.26%) | | Nasdaq | 15481.92 | +55.97 | (0.36%) | | SP 500 | 4868.55 | +3.95 | (0.08%) | | 10-yr Note | -4/32 | 4.18 |
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| | NYSE | Adv 1218 | Dec 1525 | Vol 920 mln | | Nasdaq | Adv 1867 | Dec 2397 | Vol 5.0 bln |
Industry Watch
| Strong: Communication Services, Information Technology, Financials, Energy |
| | Weak: Materials, Consumer Staples, Industrials, Utilities, Real Estate, Health Care |
Moving the Market
-- Rising rates coinciding with buyer enthusiasm dissipating in the stock market after weak 5-yr auction
-- Big gain in Netflix (NFLX) after stronger than expected subscriber growth
-- Digesting another slate of earnings news
-- Ongoing strength in tech stocks
-- Reacting to the preliminary S&P Global US Manufacturing PMI and S&P Global US Services PMI for January, which were both in expansion territory (i.e. above 50 readings)
| Closing Summary
24-Jan-24 16:25 ET
Dow -99.06 at 37806.39, Nasdaq +55.97 at 15481.92, S&P +3.95 at 4868.55
[BRIEFING.COM] The market started the day in rally-mode. Early upside moves were driven in part by a big gain in Netflix (NFLX 544.87, +52.68, +10.7%) after beating Q4 subscriber growth estimates, along with strength in mega cap and semiconductor stocks.
The strength in semiconductor stocks was fueled by pleasing earnings results from ASML (ASML 847.31, +68.92, +8.9%), which offset weakness in Texas Instruments (TXN 170.07, -4.27, -2.5%) following its disappointing Q1 guidance.
Stocks rolled over, though, in the afternoon trade, which left the major indices at or near their lows of the day. Still, ongoing strength in heavily-weighted stocks and semiconductor-related names left the Nasdaq Composite (+0.4%) and S&P 500 (+0.1%) with slim gains, marking another record close for the S&P 500. The Dow Jones Industrial Average logged a 0.3% decline and the Russell 2000 fell 0.8%.
Microsoft (MSFT 402.56, +3.66, +0.9%) was a standout winner from the mega cap space, briefly topping a $3 trillion market cap for the first time today. The Vanguard Mega Cap Growth ETF (MGK) gained 0.6% and the PHLX Semiconductor Index (SOX) jumped 1.5%.
There wasn't a strong increase in selling activity in the afternoon, but rather a dissipation of early buyer enthusiasm. This coincided with Treasury yields turning higher in response to today's $61 billion 5-yr note auction, which met poor demand. This followed yesterday's strong $60 billion 2-yr note sale.
The 10-yr note yield climbed four basis points today to 4.18% after hitting 4.09% in front of this morning's economic data. The 2-yr note yield rose one basis point to 4.37%.
Also, the S&P 500 also could not maintain a posture above 4,900, which contributed to the afternoon pullback.
Outsized losses were reserved for stocks that disappointed with earnings and/or guidance. AT&T (T 16.68, -0.51, -3.0%), DuPont (DD 64.20, -10.49, -14.0%), and Kimberly-Clark (KMB 118.04, -6.91, -5.5%) were among the losing standouts in that respect.
Today's economic data was limited to the preliminary S&P Global US Manufacturing PMI and S&P Global US Services PMI for January, which were both in expansion territory (i.e. above 50 readings) and acted as support for the stock market in the early going.
Additionally, news that the People's Bank of China cut its required reserve ratio for commercial banks by a 50 basis points contributed to the early positive bias.
- Nasdaq Composite: +3.1%
- S&P 500: +2.1%
- Dow Jones Industrial Average: +0.3%
- S&P Midcap 400: -1.4%
- Russell 2000: -3.2
Thursday's economic calendar features:
- 8:30 ET: Advance Q4 GDP (Briefing.com consensus 2.0%; prior 4.9%), advance Q4 GDP Deflator (Briefing.com consensus 2.8%; prior 3.3%), December Durable Orders (Briefing.com consensus 0.1%; prior 5.4%), Durable Orders ex-transportation (Briefing.com consensus 0.2%; prior 0.5%), weekly Initial Claims (Briefing.com consensus 200,000; prior 187,000), Continuing Claims (prior 1.806 mln), advance December goods trade deficit (prior -$90.3 bln), advance Retail Inventories (prior -0.1%), and advance Wholesale Inventories (prior -0.2%)
- 10:00 ET: December New Home Sales (Briefing.com consensus 640,000; prior 590,000)
- 10:30 ET: Weekly natural gas inventories (prior -154 bcf)
TSLA trades down ahead of earnings after early gain
24-Jan-24 15:35 ET
Dow -37.63 at 37867.82, Nasdaq +66.46 at 15492.41, S&P +9.09 at 4873.69
[BRIEFING.COM] The S&P 500 and Nasdaq Composite are still trading higher than yesterday's closing levels, but sit at their worst levels of the day. The Dow Jones Industrial Average sports a 0.1% decline and the Russell 2000 is down 0.6%.
Tesla (TSLA 207.32, -1.76, -0.9%) is trading lower ahead of its earnings report this afternoon. Shares had been up as much as 1.7% earlier.
Apple (AAPL 194.77, -0.41, -0.2%) also rolled over as the market declined. It had been up as much as 0.6% earlier.
Thursday's economic calendar features:
- 8:30 ET: Advance Q4 GDP (Briefing.com consensus 2.0%; prior 4.9%), advance Q4 GDP Deflator (Briefing.com consensus 2.8%; prior 3.3%), December Durable Orders (Briefing.com consensus 0.1%; prior 5.4%), Durable Orders ex-transportation (Briefing.com consensus 0.2%; prior 0.5%), weekly Initial Claims (Briefing.com consensus 200,000; prior 187,000), Continuing Claims (prior 1.806 mln), advance December goods trade deficit (prior -$90.3 bln), advance Retail Inventories (prior -0.1%), and advance Wholesale Inventories (prior -0.2%)
- 10:00 ET: December New Home Sales (Briefing.com consensus 640,000; prior 590,000)
- 10:30 ET: Weekly natural gas inventories (prior -154 bcf)
Stocks deteriorate after weak 5-yr auction
24-Jan-24 15:00 ET
Dow -3.49 at 37901.96, Nasdaq +94.59 at 15520.54, S&P +15.32 at 4879.92
[BRIEFING.COM] The market is trading near session lows. Downside moves coincided with Treasury yields turning higher in response to the $61 bln 5-yr note sale, which met poor demand.
The 10-yr note yield, at 4.14% shortly before the results, sits at 4.18% now, which is four basis points higher than yesterday's settlement. The 2-yr note yield, at 4.36% just before the auction results, sits at 4.38% now.
Mega cap stocks have maintained some of their early strength. The Vanguard Mega Cap Growth ETF (MGK) is up 0.8% versus a 0.3% gain in the S&P 500 now.
Textron, TE Connectivity ride earnings to top of S&P 500 on Wednesday
24-Jan-24 14:25 ET
Dow -18.51 at 37886.94, Nasdaq +91.10 at 15517.05, S&P +11.90 at 4876.50
[BRIEFING.COM] The Dow Jones Industrial Average (-0.05%) ducked into negative territory in the last half hour, while the S&P 500 (+0.24%) remains firmly in second place.
Elsewhere, S&P 500 constituents Textron (TXT 85.95, +6.62, +8.34%), TE Connectivity (TEL 144.01, +9.36, +6.95%), and Advanced Micro (AMD 176.76, +8.34, +4.95%) pepper the top of today's standings. TXT and TEL move higher following earnings, while New Street upgraded AMD to Buy citing their view that the stock it at an attractive entry point.
Meanwhile, California-based industrial firm Teledyne Tech (TDY 421.23, -20.75, -4.69%) is near the bottom of the S&P following earnings/guidance.
Gold lower at midweek following econ data
24-Jan-24 14:00 ET
Dow +30.29 at 37935.74, Nasdaq +137.01 at 15562.96, S&P +24.57 at 4889.17
[BRIEFING.COM] With about two hours to go on Wednesday the tech-heavy Nasdaq Composite (+0.89%) remains in the lead.
Gold futures settled $9.80 lower (-0.5%) to $2,016.00/oz, holding modest losses following this morning's PMI readings, both of which were in expansion territory, while modest losses in the dollar kept the yellow metal's retreat at bay.
Meanwhile, the U.S. Dollar Index is down about -0.4% to $103.19.
Market hits trifecta
The record high the S&P 500 set yesterday is going to go higher at the open. The equity futures are up nicely, rallying in response to the much better-than-expected Q4 subscriber numbers out of Netflix (NFLX), lower Treasury yields, and another stimulus move out of China courtesy of the People's Bank of China, which announced a 50 basis points cut in the required reserve ratio for commercial banks.
Currently, the S&P 500 futures are up 25 points and are trading 0.5% above fair value, the Nasdaq 100 futures are up 141 points and are trading 0.9% above fair value, and the Dow Jones Industrial Average futures are up 137 points and are trading 0.4% above fair value.
Netflix is the big mover. It is up 10.7% in pre-market trading, more than offsetting a 2.8% decline in Texas Instruments (TXN), which disappointed with its Q1 outlook.
More importantly, the subscriber growth momentum for Netflix has energized the "Magnificent 7" on the belief that they, too, will show some surprising growth for the December quarter when they report their results.
Enter Tesla (TSLA), which will report after today's close along with IBM (IBM), Lam Research (LRCX), CSX Corp (CSX), Las Vegas Sands (LVS), Seagate Tech (STX), and ServiceNow (NOW). Tesla is up 1.5% in pre-market trading, boosted as well by a Reuters report that it is aiming to build new EVs in mid-2025.
Stocks, in general, have also gotten a boost from lower Treasury yields. The 2-yr note yield is down six basis points to 4.30% and the 10-yr note yield is down four basis points to 4.10%. Those moves follow a $60 billion 2-yr note auction yesterday that was met with strong demand and come in front of today's $61 billion 5-yr note auction at 1:00 p.m. ET.
Alas, the stock market has been greeted by a trifecta that seems to always pay off: better-than-expected growth from a leading growth company, lower Treasury yields, and policy stimulus from a major central bank.
The tone, therefore, is positive ahead of today's open, and maybe even a little fearful in the sense that participants are fearful of missing out on further gains in a market that continues to show good resilience to selling pressure.
-- Patrick J. O'Hare, Briefing.com
Kimberly-Clark's Q4 earnings miss erases January's gains; private labels slowly encroaching (KMB)
After fellow household durables manufacturer Procter & Gamble (PG) delivered improving metrics across the board in DecQ yesterday, investors had high hopes Kimberly-Clark (KMB -4%) would follow suit, especially given how well PG's Family Care division performed, which sells tissues, paper towels, and other similar products to KMB. However, KMB's Q4 (Dec) differed significantly, missing adjusted earnings estimates and projecting mild FY24 organic net sales and adjusted EPS growth. As a result, shares of KMB are failing to clean up today, erasing all of January's gains.
- What happened? KMB's consolidated volumes were flat yr/yr in Q4, as strength in Personal Care and Consumer Tissue segments, exclusively in North America, were offset by weakness across emerging and developed countries overseas. KMB's attention to improving margins has forced it to implement price hikes, leading to increased trade-down activity, denting volumes, and weighing on revenue growth, which edged just 0.7% higher to $5.0 bln.
- Compared to pre-pandemic levels, volumes are significantly down (around 20%). This brings up another critical difference between KMB and some of its peers: its KC Professional segment. This business tends to cater to offices, such as supplying washrooms. It is no secret that work-from-home trends have remained elevated since the pandemic. Much of the severe volume drop-off over the past four years can be attributed to KMB's office exposure. This development may also make the road ahead bumpier for KMB relative to its competition.
- Even though KMB has done a decent job recapturing margins over the past several quarters, there is still work to be done. For example, while operating margins still contracted by over 80 bps yr/yr to 13.5%, the metric is well above the 10.5% figure posted in 4Q21. Nevertheless, because of the margin compression in Q4, KMB missed earnings estimates, its first miss since 3Q22.
Even though Q4 results did not shine, management was optimistic about underlying demand, noting that category growth across each segment remains robust. KMB's product portfolio consists of daily essentials, making them a staple on customers' shopping lists. However, tempering this upbeat tone, KMB acknowledged that the full effects of all the rate hikes and economic policy impacts have likely not fully materialized in the consumer.
KMB's FY24 guidance reflected the mixed demand environment, projecting a low-to-mid single-digits organic net sales increase on top of a +5% jump in FY23 and high-single-digit growth in adjusted EPS in constant currency. KMB anticipates commodity inflation to ease throughout the year but stay at higher cost levels. Meanwhile, logistics and labor inflation will likely remain a headwind, virtually offsetting any tailwinds emanating from more favorable commodity costs.
Bottom line, KMB's Q4 results underscore a tough road ahead. While management is confident in the stickiness of its brands, such as Kleenex and Cottonelle, we are not convinced they are as unmovable, especially stacked against private labels offered by mass merchants and club retailers. It is worth noting that private label share has been creeping up across some of KMB's categories over the past two quarters, underpinning a relatively weaker price elasticity of the company's brands.
General Dynamics flying higher as robust demand for military equipment fuels record backlog (GD)
Defense contractor and aerospace company General Dynamics (GD) is flying higher to new all-time highs in the wake of a Q4 earnings report that highlighted a robust demand environment across its business segments that is also expected to continue as conflicts and tensions around the world intensify. Orders remain strong and broad-based, pushing GD's backlog to nearly $94 bln, representing the highest year-end total in its history.
- Bolstered by strong demand for its military equipment and its Gulfstream business jets, GD easily surpassed Q4 top-line expectations with revenue increasing 7.5% yr/yr to $11.67 bln. Breaking it down by business unit, Marine Systems generated the strongest growth at 15%, followed by Aerospace at 12% and Combat Systems at +8.5%.
- A pair of contract modifications for the Columbia-class submarine program lifted Marine Systems results, while the wars in Ukraine and the Middle East are driving increased orders for armored vehicles and munitions in the Combat Systems unit.
- Furthermore, GD has another catalyst looming outside of the defense sector. After initially expecting FAA certification this past summer, GD is confident that its new G700 Gulfstream jet will receive certification in Q1. This should unlock a "surge of deliveries", according to CEO Phebe Novakovic.
- However, lingering supply chain issues continue to drive costs up, applying pressure to margins and earnings. In Q4, total operating expenses increased by almost 8% to $10.4 bln, limiting EPS growth to just 1.7%, missing analysts' expectations.
- Unfortunately for GD, these supply chain and labor-related headwinds are expected to continue in 2024. As a result, the company issued downside FY24 EPS guidance of $14.40, even as its revenue outlook of $46.3-$46.4 bln edged past expectations.
Based on the stock's spike higher, it's evident that the bullish demand story is taking precedence over the downside EPS guidance. With the Middle East conflict spreading and with no end in sight for the Ukraine-Russia war, along with rising tensions with China and North Korea, investors are betting that the strong demand environment will outlast these supply chain disruptions.
DuPont down in the dumps after issuing bleak Q1 guidance as inventory destocking continues (DD)
The macro-related headwinds that have battered DuPont (DD) in recent quarters have continued and have apparently worsened, prompting the chemical company to issue bleak guidance for 1Q24. More specifically, weak industrial water demand in China, coupled with additional channel inventory destocking in DD's industrial businesses, is driving volume and sales lower.
- Rewinding to DD's Q3 earnings report on November 1, the company warned that these same two issues were increasingly impacting the business. Consequently, the company cut its FY23 net sales guidance to approximately $12.17 bln from its prior forecast of $12.45-$12.55 bln.
- Since there was only one quarter remaining in the fiscal year, the FY23 guidance cut was essentially downside guidance for Q4. Still, DD is going to fall short of that downwardly revised outlook as it guided for Q4 net sales of $2.9 bln this morning, slightly missing analysts' estimates.
- What's really weighing on the stock, though, is DD's very weak guidance for Q1. To add insult to injury, the company also announced that it expects to record a non-cash goodwill impairment charge of $750-$850 mln to adjust for a lower carrying value of its Protection reporting unit.
- Similar to the inventory destocking situation that plagued the semiconductor industry for most of last year and 2022, DD's industrial businesses are facing slowing ordering patterns as customers work down bloated inventory levels.
- This is particularly the case for the Waters Solutions unit, which makes products that purify and filter water, as well as the Shelter Solutions unit, which provides roofing, insulation, and weatherization products.
- A slowing real estate market in China, where approximately 20% of DD's revenue is derives, is mainly to blame.
- The good news is that DD is seeing stabilization within Semiconductor Technologies as fab utilization rates improve due to healthier demand for consumer electronics. In Q3, this business saw sales decline by a high-teens rate, but DD is now forecasting a slight sequential sales increase for Q4 and believes that a broad-based market recovery for electronics materials will occur in 2024.
- DD also anticipates that 1Q24 will mark a bottom for this downturn, forecasting operating EBITDA to grow by 10% from Q1 to Q2, while also predicting a return to sales and earnings growth in 2H24.
The main takeaway is that DD's gloomy guidance for Q1 highlights the cracks in the global economy, especially within China. However, its outlook and commentary also indicate that the worst of the destocking situation may be in the rearview mirror by Q2.
Netflix streams sharply higher on huge Q4 net add number and margin upside (NFLX)
Netflix (NFLX +12%) is streaming sharply higher following its Q4 earnings report last night. The headline numbers were not the main attraction as NFLX missed on EPS but beat on revs. The streaming giant did guide Q1 EPS well ahead of analyst expectations, so that was a bright spot. There is a lot to unpack here, from impressive net adds to success with paid sharing to margin performance to advertising.
- Let's dig into it. Global streaming paid net adds in Q4 were an impressive +13.12 mln. This was really the standout metric from the quarter. Netflix no longer officially guides for net adds but did say on the Q3 call that it expected Q4 paid net adds to be similar to Q3's +8.76 mln (+/- a few million). We consider this upside to that guidance. EMEA was particularly strong due to The Crown finale in UK and other titles.
- These strong back-to-back net add quarters in Q3-Q4 follow Netflix's crackdown on password sharing (which Netflix calls "paid sharing"), which seems to be working well. To be fair, NFLX expects paid net adds to be down sequentially in Q1 (reflecting typical seasonality as well as some likely pull forward from a strong Q4) but to be up yr/yr over +1.8 mln last year. Of note, NFLX largely put price increases on hold while rolling out paid sharing. However, the late 2023 increases in the US, UK, and France went better than forecasted.
- Another metric that jumps off the page at us is operating margin. In Q4, it came in at 16.9%, well ahead of 13.3% prior guidance due to revenue upside and lower-than-planned spending. Maybe even more impressive was NFLX guiding to Q1 operating margin of 26.2%. The company also raised its FY24 guidance to 24% from 22-23%, partly due to favorable FX movements (dollar has weakened) but also because Q4 was so strong and it reflects how NFLX feels that will carry into 2024.
- Turning to advertising, Netflix expects strong growth in 2024 but off a small base so it's not yet a primary driver of overall revenue. A priority now is to grow the technical advertising features, including targeting, improved ad relevance. NFLX says it has tons of work to do in order to improve measurement capabilities. But long term, NFLX sees advertising as a huge opportunity.
- Despite last year's strikes pushing back the launch of some titles, NFLX says it has a big, bold slate for 2024. That includes hit returning dramas like The Diplomat S2, Bridgerton S3, Squid Game S2 and Empress S2.
Overall, investors are clearly impressed with Netflix's Q4 report. This quarter is a good example of how EPS/revenue results are not the most important metrics. Investors are clearly focusing on that big net add number, margin upside and generally positive commentary from the call. It looks like 2024 is shaping up nicely as well as the paid sharing tailwind looks like it will continue. Netflix is clearly the winner in the streaming space.
Texas Instruments powers down following bearish Q1 guidance; demand environment remains weak (TXN)
While Q4 results performed generally in-line with consensus, Texas Instruments' (TXN -2%) bearish Q1 guidance prompts a minor pullback today. Investors are expressing frustration over a persistently weak demand environment, particularly in the semiconductor makers' largest end market, industrials. The discouraging developments from the quarter are triggering selling pressure across many of TXN's counterparts, including Analog Devices (ADI), Microchip (MCHP), and STMicroelectronics (STM).
- Gross margins remained compressed in Q4, tumbling by 650 bps yr/yr on top of a 320 bp decline in 4Q22 to 60%. The usual suspects were at play, including lower revenue, higher manufacturing costs associated with planned capacity expansions, and reduced factory loadings. These headwinds have been keeping margins suppressed for over a year.
- TXN continues to target roughly $5.0 bln in CapEx to expand capacity every year through 2026, so this weight on margins was likely already factored in. Management also touched on a supply/demand imbalance last quarter, triggering greater underutilization that would likely carry over into Q4.
- This placed greater pressure on TXN to deliver more robust top-line growth to counter these stickier costs. Unfortunately for the company, demand just will not turn around. Total revenue fell yr/yr for the fifth consecutive quarter, dropping by 12.7% to $4.08 bln, slightly below consensus.
- On a sequential basis, TXN's top two end markets, industrial (40% of FY23 revs) and automotive (34%), experienced softness, falling by a mid-teens and mid-single-digit percentage, respectively. Personal electronics (15%) did not fare much better, posting flat revenue, while communications equipment (5%) declined by low single digits. The only end market to witness growth was enterprise systems, which was up by a modest low single-digit percentage.
- Particularly disappointing was the revenue decline in automotive, which has been a stable performer for TXN for over three years. Meanwhile, investors may be accustomed to weakness in the industrial end market, which has not seen sequential growth since 2Q22.
- A weak environment is here to stay, at least over the short term, evidenced by TXN's Q1 guidance, projecting EPS of $0.96-1.16 and revs of $3.45-3.75 bln, both well below analyst forecasts. Management remarked that its guidance incorporates stubbornly weak economic conditions where customers will continue rebalancing their inventories. However, TXN did not call attention to one specific troubling area; rather, it is primarily broad-based.
TXN is still upbeat that its emphasis on the industrial and automotive markets will result in outsized gains over the long term as customers turn to analog and embedded technologies to increase reliability and affordability while lowering power consumption. However, until conditions begin to improve, mainly within industrials, it may be better to stay on the sidelines.
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