Market Snapshot
briefing.com
| Dow | 38150.30 | -317.01 | (-0.82%) | | Nasdaq | 15164.01 | -345.89 | (-2.23%) | | SP 500 | 4845.65 | -79.32 | (-1.61%) | | 10-yr Note | +27/32 | 3.97 |
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| | NYSE | Adv 589 | Dec 2101 | Vol 1.2 bln | | Nasdaq | Adv 1133 | Dec 3161 | Vol 5.8 bln |
Industry Watch
| Strong: -- |
| | Weak: Communication Services, Information Technology, Energy, Consumer Discretionary, Consumer Staples |
Moving the Market
-- Digesting latest FOMC decision and Fed Chair Powell commentary, which indicated that the committee is not likely to cut rates in March like the market had hoped
-- Losses in heavily-weighted stocks like MSFT, GOOG, AMD, which reported earnings
-- Waiting on more earnings news from influential names in the big tech and semiconductor spaces
| Closing Summary
31-Jan-24 16:25 ET
Dow -317.01 at 38150.30, Nasdaq -345.89 at 15164.01, S&P -79.32 at 4845.65
[BRIEFING.COM] The major indices closed at or near their worst levels of the day. The Dow Jones Industrial Average fell 0.8%, the S&P 500 declined 1.6%, the Nasdaq Composite logged a 2.2% loss, and the Russell 2000 sank 2.5%. Volume was on the lighter side at the NYSE in the beginning of the week, but it increased today as participants reacted to the latest move by the FOMC.
The committee voted unanimously to leave the target range for the fed funds rate unchanged at 5.25-5.50%. This move was expected, but the market was hoping for a shift in rhetoric around the Fed's rate cut path. Instead, the directive declared that, "The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent."
Fed Chair Powell reiterated this view in his subsequent press conference. Mr. Powell spoke specifically about the possibility of a March rate cut, saying in part "I don't think it is likely that the Committee will reach a level of confidence by the time of the March meeting to identify March at as the time to do that (cut rates), but that is to be seen."
Just about everything in the stock market began selling off in response. Decliners had a better than 4-to-1 lead over advancers at the NYSE and a 3-to-1 lead at the Nasdaq. The Invesco S&P 500 Equal Weight ETF (RSP) fell 1.3% today and all 11 S&P 500 sectors closed with a loss.
Initially, though, mega cap losses were having an outsized impact on index performance while the "rest" of the market held up okay. The early underperformance of mega cap stocks was a reaction to earnings results from Alphabet (GOOG 141.80, -11.25, -7.4%) and Microsoft (MSFT 397.58, -11.01, -2.7%), which did not live up to the market's sky high expectations.
Dow component Boeing (BA 211.04, +10.60, +5.3%) was another standout after its earnings report, but it traded higher after its results.
Elsewhere, the Treasury market settled with gains. The 2-yr note yield fell 13 basis points today to 4.23% and the 10-yr note yield fell nine basis points to 3.97%. This price action was partially in response to this morning's better than expected economic data.
- S&P 500: +1.6%
- Nasdaq Composite: +1.0%
- Dow Jones Industrial Average: +1.2%
- S&P Midcap 400: -1.8%
- Russell 2000: -3.9%
Reviewing today's economic data:
- Weekly MBA Mortgage Applications Index -7.2%; Prior 3.7%
- January ADP Employment Change 107K (Briefing.com consensus 140K); Prior was revised to 158K from 164K
- Q4 Employment Cost Index 0.9% (Briefing.com consensus 1.0%); Prior 1.1%
- The key takeaway from the report, which Fed Chair Powell keeps a close eye on, is that it shows disinflation in employment costs, offering another signal after the core-PCE Price Index for December that inflation trends are moving in the right direction.
- January Chicago PMI 46.0 (Briefing.com consensus 48.4); Prior was revised to 47.2 from 46.9
Thursday's economic data includes:
- 8:30 ET: Weekly Initial Claims (prior 214,000), Continuing Claims (prior 1.833 mln), preliminary Q4 Productivity (Briefing.com consensus 2.1%; prior 5.2%), and preliminary Q4 Unit Labor Costs (Briefing.com consensus 1.9%; prior -1.2%)
- 9:45 ET: Final January S&P Global U.S. Manufacturing PMI (prior 50.3)
- 10:00 ET: December Construction Spending (Briefing.com consensus 0.4%; prior 0.4%) and January ISM Manufacturing Index (Briefing.com consensus 47.3%; prior 47.4%)
- 10:30 ET: Weekly natural gas inventories (prior -326 bcf)
Market hits lows after Powell pours cold water on March rate cut
31-Jan-24 15:30 ET
Dow -280.79 at 38186.52, Nasdaq -300.59 at 15209.31, S&P -70.19 at 4854.78
[BRIEFING.COM] The market turned lower after Fed Chair Powell poured cold water on the market's notion of a March rate cut.
Mr. Powell said "Based on the meeting today, I would tell you that I don't think it is likely that the Committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that (cut rates), but that is to be seen."
The major indices are trading at session lows now, which has the S&P 500, Nasdaq Composite, and Russell 2000 sporting losses greater than 1.0%.
Elsewhere, the 2-yr note yield fell 13 basis points today to 4.23% and the 10-yr note yield fell nine basis points to 3.97%.
Volatile reaction to Fed Chair Powell commentary
31-Jan-24 15:00 ET
Dow -89.16 at 38378.15, Nasdaq -198.51 at 15311.39, S&P -46.92 at 4878.05
[BRIEFING.COM] The stock market saw volatile action over the last half hour as Fed Chair Powell gives his press conference. Mr. Powell acknowledged that does not believe a soft landing has been achieved, saying in part "We are not declaring victory at all at this point. We think we have a ways to go."
The market was chopping around in a lower range as the press conference began before turning sharply higher a short time. Now, the major indices are little changed from levels seen in front of the 2:00 ET announcement.
The Treasury market has also seen some choppy action. The 10-yr note yield, at 3.96% just before 2:00 ET, pulled back to 3.94% in the immediate aftermath, and sits at 3.97% now. The 2-yr note yield, which is most sensitive to changes in the fed funds rate, moved from 4.23% to 4.20% shortly after 2:00 ET before returning to 4.23%.
Fed leaves rates unchanged, puts a damper on possible future cuts
31-Jan-24 14:30 ET
Dow -86.27 at 38381.04, Nasdaq -249.62 at 15260.28, S&P -52.14 at 4872.83
[BRIEFING.COM] The major averages faded slightly after the Fed unanimously voted to keep rates unchanged at 5.25-5.50%, as widely expected, as the FOMC noted economic activity has been expanding at a solid pace. The S&P 500 (-1.06%) is now at session lows.
Some key excerpts from the Fed's decision included:
- Inflation has eased over the past year but remains elevated.
- The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.
- The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.
Yields perked up a bit after the decision, the yield on the benchmark 10-yr note is down about five basis points at 3.980%.
Gold higher ahead of Fed decision
31-Jan-24 13:55 ET
Dow +12.17 at 38479.48, Nasdaq -185.37 at 15324.53, S&P -34.77 at 4890.20
[BRIEFING.COM] Losses remain firm for the tech-heavy Nasdaq Composite (-1.20%) ahead of the FOMC policy decision due out in about 5 minutes at the top of the hour.
Gold futures settled $16.50 higher (+0.8%) to $2,067.40/oz, aided in part by falling yields and a weaker dollar ahead of an expected dovish Fed.
Meanwhile, the U.S. Dollar Index is down about -0.2% to $103.24.
The Cigna Group aims for healthier profits with divestiture of Medicare Advantage business (CI)
Plagued by sharply rising medical expenses as members increasingly utilize their plans, the Medicare Advantage business has battered the health insurance industry and now The Cigna Group (CI) has decided to head for the exits. Before this morning's opening bell, the Wall Street Journal reported that CI was looking to sell its Medicare unit to Health Care Service Corporation (HCSC), following a Reuters report from early last November that stated a deal for the unit could be in the works.
That possibility turned into reality with CI confirming that it entered into an agreement to sell its Medicare business and CareAllies to non-profit health insurer HCSC for approximately $3.7 bln.
- Looking back, perhaps the writing was on the wall that CI was aiming to move away from the Medicare business. Recall that on December 11, CI and competitor Humana (HUM) decided to scrap their merger plans, providing a sigh of relief for CI shareholders.
- Not only would that deal have been dilutive to CI's earnings since it would have largely been financed with stock, but it also would have substantially increased its exposure to the profit-squeezing Medicare business.
- With over 5.4 mln members, HUM is the country's second largest Medicare insurer. In contrast, CI only has about 600,000 members and it generates the majority of its revenue from corporate health insurance and its pharmacy benefits business.
- Simply put, the relatively small size of the Medicare Advantage business is no longer worth the hassle for CI -- especially as medical costs are going through the roof. CEO David Cordani touched on this premise, stating, "... While we continue to believe the overall Medicare space is an attractive segment of the healthcare market, our Medicare businesses require sustained investment, focus, and dedicated resources disproportionate to their size within The Cigna Group's portfolio..."
- The Medicare space is indeed growing due to demographic trends, but there seems to be no relief in sight on the cost side. When HUM issued its dismal Q4 earnings report last week, it also slashed its FY24 EPS guidance and pulled the plug on its FY25 outlook due to rising Medicare Advantage utilization rates and changes in federal payments for some Medicare plans.
- Considering the stiff headwinds facing the Medicare Advantage business, it's sensible for CI to sell it off and use the proceeds on earnings enhancing initiatives. That is precisely what the company intends to do, stating that it will use the majority of proceeds for share repurchases, which is music to investors' ears.
- This comes on the heels of CI increasing its share repurchase program to $10 bln on the day that it walked away from the HUM deal.
The main takeaway is that while the divestiture of the Medicare Advantage business will create a void in its portfolio, CI's earnings should benefit in the long run as it steers clear of rising medical costs in that business and as it buys back stock from the sale proceeds. On that note, CI reaffirmed its FY24 EPS guidance less than one week after HUM drastically reduced its EPS forecast.
Starbucks runs low on caffeine, wipes out earlier gains after DecQ results (SBUX)
Starbucks (SBUX) is running low on caffeine as it returns its initial gains today, following relatively underwhelming Q1 (Dec) results. The coffee retail behemoth originally gapped higher despite missing earnings and sales estimates in the quarter. Even during the company's conference call, when it merely reiterated its FY24 EPS growth forecast while reducing its revenue and comp estimates, the market continued to like what it saw. However, upon further digestion, investors are beginning to take greater notice of the mild headline results in Q1, as well as some concerning remarks over the underlying factors in SBUX's unappetizing growth.
- Adjusted EPS did climb 20% yr/yr to $0.90 on a 130 bp improvement in global operating margins to 15.8%, a testament to the ongoing success of SBUX's "Reinvention" savings plan. The company is amid a three-year $3.0 bln cost-savings plan, helping offset some of the adverse effects of a relatively challenging global economy.
- However, speaking of economic challenges, revenue growth dipped back to single-digit territory in Q1 after three straight quarters of double-digit growth. SBUX registered total sales growth of 8.2% yr/yr to $9.43 bln, below its previous FY24 (Sep) outlook. Meanwhile, comps edged +5% higher globally, comprised of a +5% jump in North America and +7% in International. Global comp growth landed toward the lower end of SBUX's prior full-year forecast.
- Headwinds began to crop up in November, halting the positive momentum SBUX experienced throughout August, September, and October. Management pointed to three primary issues, starting with the Middle East conflict. The events that unfolded in the Middle East not only hindered demand for SBUX locations around the area but also led to a material drop in demand in the U.S. due to misperceptions about the company's position. Finally, China's economic recovery is materializing slower than SBUX anticipated.
- Further on China, SBUX still recorded +10% same-store sales in the region, consistent with its previous remarks, aided by a 21% jump in comparable transactions, partially offset by a 9% decrease in average ticket. However, the company did lower its FY24 comp target to low-single-digits, down from +4-6%.
- SBUX immediately took the appropriate actions to remedy these headwinds, implementing offers to nudge occasional customers into its loyalty program and activating new advancements in its data analytics tools to identify and incentivize Rewards members. Nonetheless, it will take time before these actions result in tangible benefits.
- As a result, SBUX lowered its FY24 revenue and comp projections, targeting +7-10% and +4-6%, respectively, down from +10-12% and +5-7%. On the flip side, SBUX reiterated its EPS and global store growth estimates of +15-20% and +7%, respectively.
SBUX's Q1 results were lacking, especially compared to Q4 (Sep) numbers which were underpinned by robust upward momentum heading into Q1. While this momentum was halted toward the end of the quarter, we view the headwinds that plagued Q1 performance and, subsequently, FY24 estimates as surface issues that can be resolved relatively quickly as opposed to deeper structural problems.
Alphabet fails to meet AI-fueled high expectations, spelling out to a profit-taking pullback (GOOG)
Expectations were sky-high heading into Alphabet's (GOOG) 4Q23 earnings report as the anticipation of improving advertising demand and the rollout of AI technologies, including the company's new Gemini large language model, drove shares to record highs this week. In many ways, it was indeed a strong quarter for GOOG as growth accelerated in both its core advertising and cloud businesses, leading to its fourth consecutive top and bottom-line beat.
However, the upside performance was not enough to stave off a sell-the-news reaction as investors lock in profits. In addition to taking some risk off the table ahead of today's FOMC decision, there are a couple items from the earnings report that may be causing the weakness.
- Although revenue growth did improve for Search and Cloud, increasing by 12.7% and 26%, respectively, compared to growth of 11% and 22% last quarter, there was some cause for disappointment. Search revenue of $48.0 bln slightly missed expectations, and Cloud's growth still lagged behind Microsoft (MSFT) Azure's growth of 30%.
- Rewinding to Q3, Cloud's slowing growth was under the spotlight, fueling concerns that it was falling further behind Azure. The reacceleration in growth this quarter is reassuring in our view, especially since operating income jumped by over 200% qtr/qtr to $864 mln, but the slight divergence in growth relative to Azure may again be contributing to the stock's decline.
- Furthermore, a major catalyst underlying the stock's 55% yr/yr gain is tied to GOOG's expanding AI capabilities and how that will reignite the company's growth. Both Gemini and Bard, GOOG's conversational AI tool, were focal points during last night's earnings call, with CEO Sundar Pichai commenting that GOOG is seeing strong interest from advertisers for its AI-powered solutions. The problem, though, is that there is little clarity regarding the future financial impact of these products.
- Compounding the issue, GOOG is significantly ramping up its capital expenditures to develop AI technologies and that is expected to continue this year. In fact, capital expenditures increased by nearly $3.0 qtr/qtr in Q4 and CFO Ruth Porat commented that capital expenditures in 2024 will be "noticeably larger" compared to 2023.
There were still some notable positives from GOOG's earnings report.
- Bolstered by ongoing strength in the retail vertical, especially in the APAC region, the advertising business was healthy with revenue up 11% yr/yr to $65.5 bln. YouTube particularly stood out as revenue growth accelerated to 16.5% from 11.3% in Q3.
- Another key highlight from the earnings call was the revelation that paid subscriptions now generate $15.0 bln in revenue annually. This is up 5x compared to 2019 and is driven by the success of YouTube Premium Music and Connected TV, which offers NFL Sunday Ticket.
Overall, GOOG delivered a solid earnings report as EPS surged by 56% yr/yr on stronger revenue growth across the business. However, with shares trading at all-time highs ahead of the report, there's a sense that the stock may have gotten ahead of itself as GOOG's AI technologies aren't quite ready to move the needle on the top-line.
Microsoft ticks lower despite another impressive quarter, led by Azure (MSFT)
Microsoft (MSFT -1%) is trading roughly flat despite posting an impressive Q2 (Dec) report last night. The software giant reported its fourth consecutive double-digit EPS beat with nice revenue upside. The Q3 (Mar) revenue guidance was in-line. This was Microsoft's first quarter to include its recent Activision Blizzard acquisition.
- Let's start with Azure. It grew +28% CC (constant currency), which was above prior guidance of +26-27% CC. This includes six points of growth from AI services. However, both AI and non-AI Azure services drove the outperformance. A few things stand out. First, Azure's CC growth rate had been getting smaller for many consecutive quarters. That was not entirely unexpected as Azure has grown in size. However, Azure has now posted back-to-back +28% CC quarters in DecQ and SepQ. This finally halted its downward growth trend: +27% CC in JunQ, +31% in MarQ, +38% CC in DecQ.
- Another thing that stood out with Azure was solid guidance for MarQ. Management expects it to be "stable" with Q2's outperformance. We interpret this as +28% CC guidance. On the last call in October, MSFT had said that Azure CC revenue growth in 2H should remain roughly stable compared to Q2 (Dec) and that is playing out thus far. It's good to see the growth rates stop their downward trends and settle in the high-20% range. We thought there would be more compression.
- In its commercial business, strong demand for Microsoft Cloud, including AI services, drove better-than-expected growth in large long-term Azure contracts. In its consumer business, the PC and advertising markets were generally in line with expectations. PC market volumes continued to stabilize at pre-pandemic levels. Activision contributed approximately four points to total revenue growth with a two-point drag on adjusted operating income growth, and a negative $0.05 impact to EPS.
- In terms of segment performance, MSFT reported upside in Productivity and Business Processes and Intelligent Cloud, while its More Personal Computing segment was on the high end of prior guidance. IC was particularly strong with better-than-expected results across all businesses. Its PBP upside was primarily driven by better-than-expected results at LinkedIn. In MPC, a stronger-than-expected performance from Activision was offset by a weaker-than-expected console market.
Overall, this was another impressive quarter for MSFT. All of its segments performed well, but Azure was the star of the show yet again. We think this report bodes well for Amazon's (AMZN) AWS segment, set to report tomorrow night. In terms of the muted reaction, it's possible the smaller upside and in-line guidance vs upside guidance last time, is having an impact. However, we think it is mostly related to the stock having already run 28% just since early October. This strikes us as more of a good quarter already being priced in.
Advanced Micro's soft Q1 revenue outlook spurs profit-taking today; AI demand remains robust (AMD)
Against relatively high expectations, Advanced Micro's (AMD -3%) Q4 performance fell flat. The chip maker, whose two biggest competitors are NVIDIA (NVDA) and Intel (INTC), did deliver earnings and sales consistent with analyst forecasts, aided by buoyant demand for its data center and PC GPUs and CPUs.
However, downbeat Q1 revenue guidance dampened the mood. AMD forecasted Q1 revs of $5.1-5.7 bln, just under 1% growth yr/yr at the midpoint and meaningfully below analyst expectations. It also marks a considerable deceleration from the 10.2% improvement to $6.17 bln registered in Q4. AMD noted that the current demand environment is mixed and will likely remain as such throughout 2024.
- Keeping a lid on AMD's Q1 guidance were its two more minor segments: Gaming and Embedded. Both segments have been dealing with contractions across their respective end markets.
- In Gaming, revenue has not had a positive quarter since 3Q22, falling by 17% yr/yr to $1.4 bln in Q4. While sales of Radeon GPUs did increase in the quarter, it was more than eclipsed by lower semi-custom revenue, underpinning weaker gaming console demand, those produced by Microsoft (MSFT) and Sony (SONY).
- Embedded revenue fell by 24% yr/yr to $1.1 bln. These chips are used across multiple verticals, including automotive and industrial, both of which have seen continuously weakening demand dynamics.
- Helping to offset these weaknesses were AMD's larger segments: Data Center and Client, the underlying growth factor being AI.
- Data Center sales soared by 38% yr/yr to $2.3 bln in Q4. AMD noted that it gained CPU server share in the quarter, which it is likely stealing from Intel, given its rival recorded a 10% drop in revenue within its Data Center and AI segment in Q4. AMD's data center GPU business also performed strongly in the quarter, with revs exceeding the company's previous $400 mln expectation, driven by a faster ramp for MI300X GPUs, highlighting the rapid push to implement AI.
- Client sales growth rocketed 62% higher to $1.5 bln as AMD lapped dismal performance when sales plummeted by over 50%. AMD is optimistic about a broader recovery across the PC landscape in 2024, albeit not until the second half of the year as AI PCs ramp.
- AMD did not issue formal FY24 guidance but did provide color. Management hiked its FY24 data center GPU revenue outlook by $1.5 bln to exceed $3.5 bln and noted that overall Data Center sales will enjoy positive growth yr/yr. Likewise, Client revs should see growth in the year. Conversely, Gaming revenue will likely decline by a significant double-digit percentage. Meanwhile, Embedded demand will remain soft through 1H24 due to normalizing inventory levels.
AMD's Q4 results reflected the mixed economic conditions it is working through. Still, we view the sustained demand for AI as the real story behind AMD's longer-term growth potential. However, shares became overextended in recent trading, climbing by roughly 70% since November, making them ripe for a pullback today.
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