Market Snapshot
| Dow | 41763.46 | -378.08 | (-0.90%) | | Nasdaq | 18095.15 | -512.78 | (-2.76%) | | SP 500 | 5705.45 | -108.22 | (-1.86%) | | 10-yr Note | +2/32 | 4.28 |
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| | NYSE | Adv 820 | Dec 1987 | Vol 1.1 bln | | Nasdaq | Adv 1115 | Dec 3120 | Vol 6.4 bln |
Industry Watch
| Strong: Energy, Utilities |
| | Weak: Information Technology, Industrials, Materials, Consumer Discretionary, Real Estate |
Moving the Market
-- Weakness in Microsoft (MSFT), Meta Platforms (META) after earnings weighing down mega cap space
-- Mega cap stocks and chipmakers having outsized impact on index moves
-- Rising market rates after this morning's economic data
| Closing Summary
31-Oct-24 16:20 ET
Dow -378.08 at 41763.46, Nasdaq -512.78 at 18095.15, S&P -108.22 at 5705.45
[BRIEFING.COM] The major indices logged losses across the board. The Dow Jones Industrial Average fell 0.9%, the S&P 500 dropped 1.9%, and the Nasdaq Composite registered a 2.8% decline.
Losses in Microsoft (MSFT 406.46, -26.06, -6.0%) and Meta Platforms (META 567.58, -24.22, -4.1%) weighed down the equity market after their earnings reports. Other mega caps were also influential in index performance and led the Vanguard Mega Cap Growth ETF (MGK) to close 3.0% lower.
Weakness in chipmakers was another limiting factor for equities. The PHLX Semiconductor Index (SOX) declined 4.0%. Monolithic Power (MPWR 759.30, -160.51, -17.5%) was the worst performer in the SOX Index even though the company beat Q3 expectations due to softer guidance than the market hoped for.
The S&P 500 information technology sector was weighed down by weakness in some of the aforementioned names. It was the worst performing sector by a wide margin, logging a 3.6% decline.
The consumer discretionary sector was the next worst performer, dropping 1.8%. Mega cap constituents contributed to the downside move, along with sharp earnings-related declines in Aptiv (APTV 56.83, -12.24, -17.7%), MGM Resorts (MGM 36.87, -4.54, -11.0%), and eBay (EBAY 57.51, -5.12, -8.2%).
Ongoing volatility in the Treasury market was another sticking point for equities today. The 10-yr yield, which hit 4.33% in response to this morning's economic data, settled at 4.28%. The 2-yr yield hit 4.21% in response to the data before settling at 4.16%.
The data included initial jobless claims, which were a low 216,000 and the Q3 Employment Cost Index, which was up 0.8%. Also, the fed's preferred gauge on inflation, the core-PCE Price Index, stuck at 2.7% year-over-year for the third straight month. Personal income was up 0.3% month-over-month in September and personal spending increased 0.5%.
Rate cut expectations did not changed much following the aforementioned reports, which were supportive of a soft landing scenario for the economy. The fed funds futures market sees a 96.7% probability of a 25 basis points rate cut at the November FOMC meeting next week versus 95.2% yesterday, according to the CME FedWatch Tool.
Market participants will be focused on the October Employment Situation report tomorrow at 8:30 ET and potential implications for Fed policy.
- Nasdaq Composite: +20.5% YTD
- S&P 500: +19.6% YTD
- Dow Jones Industrial Average: +10.8% YTD
- S&P Midcap 400: +11.4% YTD
- Russell 2000: +9.4% YTD
Reviewing today's economic data:
- Initial jobless claims for the week ending October 26 decreased by 12,000 to 216,000 (Briefing.com consensus 229,000). On an unadjusted basis, they totaled 200,132, a decrease of 3,349 from the prior week when seasonal factors expected an increase of 7,292. Continuing jobless claims for the week ending October 19 decreased by 26,000 to 1.862 million; however, the four-week moving average of 1,869,250 is the highest since November 27, 2021.
- The key takeaway from the report is that layoff activity remains fairly subdued, yet it has been more challenging for laid-off workers to find new employment.
- The Q3 Employment Cost Index increased 0.8% (Briefing.com consensus 1.0%), seasonally adjusted, for the 3-month period ending in September 2024. Wages and salaries increased 0.8% and benefit costs increased 0.8% from June 2024.
- The key takeaway from the report is that compensation costs for civilian, private, and state and local government workers decelerated versus the 12-month period ending in September 2023, reflecting a moderation in wage inflation.
- Personal income increased 0.3% month-over-month in September (Briefing.com consensus 0.4%) following a 0.2% increase in August. Personal spending increased 0.5% (Briefing.com consensus 0.4%) following an upwardly revised 0.4% increase (from 0.3%) in August. The PCE Price Index was up 0.2%, as expected, and up 2.1% year-over-year versus 2.3% in August. The core PCE Price Index, which excludes food and energy, was up 0.3% (Briefing.com consensus 0.2%) and up 2.7% year-over-year for the third straight month.
- The key takeaway from the report is the stickiness in core PCE inflation, which is running comfortably above the Fed's 2% target. That will wash out any expectation for another aggressive rate cut by the Fed anytime soon and it will keep the debate alive as to whether the Fed should keep cutting rates.
- October Chicago PMI dropped to 41.6 (Briefing.com consensus 47.5) from 46.6
- Weekly EIA Natural Gas Inventories showed a build of 78 bcf after last week's build of 80 bcf
Friday's economic calendar features the Employment Situation Report for October at 8:30 ET. Other data include:
- 9:45 ET: Final October S&P Global U.S. Manufacturing PMI (prior 47.8)
- 10:00 ET: September Construction Spending (Briefing.com consensus 0.0%; prior -0.1%) and October ISM Manufacturing Index (Briefing.com consensus 47.6%; prior 47.2%)
Treasuries settle with sharp losses in October
31-Oct-24 15:35 ET
Dow -284.07 at 41857.47, Nasdaq -459.69 at 18148.24, S&P -91.66 at 5722.01
[BRIEFING.COM] The three major indices trade near session lows ahead of the close.
The 10-yr yield settled two basis points higher at 4.28% and the 2-yr yield settled one basis point higher at 4.16%. The 10-yr yield jumped 48 basis points in October and the 2-yr yield rose 51 basis points.
Friday's economic calendar features the Employment Situation Report for October at 8:30 ET. Other data include:
- 9:45 ET: Final October S&P Global U.S. Manufacturing PMI (prior 47.8)
- 10:00 ET: September Construction Spending (Briefing.com consensus 0.0%; prior -0.1%) and October ISM Manufacturing Index (Briefing.com consensus 47.6%; prior 47.2%)
Oil prices jump in response to Iran retaliation news
31-Oct-24 15:05 ET
Dow -218.48 at 41923.06, Nasdaq -453.79 at 18154.14, S&P -85.95 at 5727.72
[BRIEFING.COM] The major indices moved mostly sideways in recent trading.
Oil prices jumped after news that Iran is preparing a major retaliatory strike against Israel from Iraqi territory, according to Axios. WTI crude oil futures are 2.7% higher at $70.44/bbl. Brent crude oil futures are 1.4% higher at $73.89/bbl.
Oil prices were already elevated in front of the report, turning higher in response. This price action has boosted the S&P 500 energy sector, which sports a 1.1% gain.
Huntington Ingalls, Aptiv among top laggards in S&P 500 after earnings
31-Oct-24 14:30 ET
Dow -253.54 at 41888.00, Nasdaq -493.74 at 18114.19, S&P -94.95 at 5718.72
[BRIEFING.COM] The S&P 500 (-1.63%) is in second place on Thursday afternoon, down about 95 points.
Elsewhere, S&P 500 constituents Huntington Ingalls (HII 190.68, -59.81, -23.88%), Aptiv (APTV 55.20, -13.87, 20.08%), and Teleflex (TFX 201.15, -34.07, -14.48%) pepper the bottom of the average following their earnings reports.
Meanwhile, Paycom Software (PAYC 215.27, +43.02, +24.98%) is atop the standings following last night's Q3 beat.
Gold trims monthly gains on Thursday, notching fourth positive month in a row
31-Oct-24 14:00 ET
Dow -287.23 at 41854.31, Nasdaq -484.12 at 18123.81, S&P -95.32 at 5718.35
[BRIEFING.COM] With about two hours to go on Thursday the Nasdaq Composite (-2.60%) is decidedly lower, leading the major averages to the downside.
Gold futures settled $51.50 lower (-1.8%) to $2,749.30/oz, ultimately ending up +3.4% on the month, tying a bow on its fourth consecutive monthly advance.
Meanwhile, the U.S. Dollar Index is up about +0.1% to $104.11.
Uber speeding in reverse as growth concerns return after missing Gross Bookings expectations (UBER)
At first glance, Uber's (UBER) Q3 earnings report looks quite solid as the rideshare and food delivery company drove past EPS and revenue expectations. However, the sizable GAAP EPS beat was partly due to a $1.70 bln benefit from net unrealized gains on equity investments, making the upside performance mostly irrelevant from an operational standpoint. Furthermore, while revenue of $11.19 bln came in slightly ahead of estimates, the key demand metric that most investors and analysts home in on -- Gross Bookings -- fell a bit short at $41.0 bln, putting demand and growth concerns back under the spotlight.
- For Q3, Gross Bookings grew by 20% on a constant currency (CC) basis, representing a modest downtick from last quarter's growth of 21%. The slight deceleration in growth seems trivial, and not worthy of sending the stock lower by 11%, but the issue is that the trend is pointing lower. UBER's Q4 Gross Bookings guidance of $42.75-$44.25 bln equates to yr/yr growth of 18% at the midpoint.
- The fact that it's the Mobility segment -- UBER's largest business at 51% of total Q3 Gross Bookings -- that's experiencing the slowdown is only adding to the concern. More specifically, Gross Bookings growth decelerated to 24% in CC from 27% last quarter, while Gross Bookings growth for Delivery remained steady at 17%. As such, it doesn't come as a surprise that rival Lyft (LYFT) is selling off in sympathy today ahead of its Q3 earnings report on November 6.
- By no means has business fallen off a cliff for UBER's rideshare business. In fact, trips per monthly active platform consumer (MAPC) were up 4% yr/yr, reaching an all-time high, and Gross Bookings grew across all use cases. Airport trips and weekday trips were particularly strong. What's hurting the stock, though, is the perception that conditions have softened as macroeconomic headwinds take a toll.
- Despite the nasty selloff, there are some notable positives, too. For instance, adjusted EBITDA margin expanded by one percentage point yr/yr to 4.1%, a new record for UBER, driven by strong growth in the high-margin advertising business (+80% yr/yr) and efficiency gains. For Q4, the mid-point of UBER's adjusted EBITDA and Gross Bookings guidance indicates that adjusted EBITDA margin will tick higher to 4.2%.
- UBER also believes it has plenty of runway for growth in Mobility. CEO Dara Khosrowshahi commented that about 45% of the U.S. population lives in places without reliable on-demand transportation service. Looking ahead, the company plans to expand into more suburban markets by focusing on better pricing strategies for longer distances.
The main takeaway is that growth expectations are getting reset a bit lower after UBER missed Gross Bookings expectations and guided for a further slowdown in Q4. Although UBER's rideshare business has displayed impressive resiliency, the Q3 earnings report showed that it's not completely immune to macroeconomic headwinds.
KLA Corporation slips as a decent Q1 report fails to calm lingering unease over the near term (KLAC)
Even though KLA Corporation (KLAC -4%) delivered sizeable beats on its top and bottom lines in Q1 (Sep), its shares are slipping today. The semiconductor equipment supplier also projected healthy Q2 (Dec) numbers, keeping a wide range of outcomes, which has been typical over the past several quarters. KLAC's Q1 report is reminiscent of its Q4 (Jun) report in late July that spurred a decent uptick in the stock.
So why are shares down? The broader market is one factor. Semiconductors are sliding across the board today, a similar trend from what transpired last quarter. In fact, shares of KLAC initially ticked higher following its Q1 numbers. However, more specifically to KLAC, a few concerns continue to hang over the stock.
- China, which typically comprises over 40% of KLAC's annual revs, is amid an economic downturn. The problems in the region may have already been anticipated as peers ASML (ASML) and Lam Research (LRCX) disclosed that their share of China sales will normalize over the coming months. Still, the same situation materializing for KLAC presents a headwind. The company noted that its percentage of China-related revenue will come down to around 30%, plus or minus a few points going forward.
- Export controls are also lingering in the background, adding another layer of concern regarding further sales normalization surrounding China. Management commented briefly on this concern, stating that it does not have clarity yet and will assess any impact once it does. The market is not a fan of uncertainty, and this variable may remain an overhang.
- KLAC's perspective on CY25 was mostly unchanged from last quarter, continuing to project another year of wafer fab equipment spending growth. While promising, the market may be wanting more, given the unwavering demand for all things AI. In fact, during Q1, AI remained the highlight, supporting high-bandwidth memory investments and staying a critical driver of KLAC's long-term growth.
KLAC's Q1 report was sound, boasting another round of top and bottom-line upside as well as decent quarterly guidance, projecting Q2 adjusted EPS of $7.15-8.35, a 25% jump yr/yr at the midpoint, and revs of $2.8-3.1 bln, a 19% improvement at the midpoint, consistent with the company's Q1 growth. However, after ASML sounded alarms earlier this month with its downbeat FY25 outlook, investors still feel rather uneasy about near-term prospects. KLAC's Q1 report did not do enough to squash these nerves, keeping bears in control for now.
Meta Platforms cruises past expectations, but rising spending and slowing growth clip shares (META)
Bolstered by its new GenAI tools and a relatively healthy advertising spending climate, Meta Platforms (META) delivered another strong earnings report, blowing past Q3 EPS expectations as revenue grew by nearly 19% to $40.6 bln. Like Alphabet (GOOG), which reported upside Q3 results on Tuesday night, META's substantial investments in AI are paying off, as illustrated by increases in time spent across its apps and higher ad prices. However, with shares trading near all-time highs and up by nearly 70% on a year-to-date basis, META had little room for error.
While we believe that the positives outweighed the negatives, there are a couple issues that are weighing on the stock.
- META's aggressive spending and investments on ventures outside of its core advertising business has long been under the spotlight. Over the past several quarters, those concerns had lessened as META's revenue growth reaccelerated, driving its profits higher. Now, revenue growth is slowing again with the midpoint of META's inline Q4 revenue guidance of $45-$48 bln equating to yr/yr growth of 16%, compared to 19% this quarter, 22% in Q2, and 27% in Q1.
- As META's revenue growth slows, the company intends to press even harder on the accelerator in terms of spending, raising the low end of its FY24 capex guidance range. Specifically, the company now expects capex to total $38-$40 bln this year, up from its prior forecast of $37-$40 bln. Furthermore, CEO Mark Zuckerberg reiterated that capex is set to grow significantly in 2025 due to investments in AI products, Llama 4 (the next version of its large language model), and augmented reality products such as Orion glasses.
- META also fell just short of expectations on Family Daily Active People (DAP), which measures the number of users who signed into Facebook, Instagram, WhatsApp, Threads, or Messenger during the quarter. DAP grew by 5% yr/yr to 3.29 bln, representing a slight decrease from last quarter's 7% increase.
- The advertising business, which accounts for about 98% of META's total revenue, still had a solid quarter overall and new AI tools are playing a major role in that strength. Advertisers are seeing higher ROIs, better targeted ads, and increased conversion rates as AI-driven recommendations lead to more time spent across META's apps. As a result, average price per ad increased by 11% and ad impressions grew by 7% yr/yr.
- Although capex continues to rise at a rapid rate, META is aiming to restrain operating expense growth. In Q3, opex was up by 13%, which trailed revenue growth of 19%, enabling operating margin to expand by 300 bps yr/yr to 43% and EPS to grow by 37% yr/yr to $6.03.
Overall, this was another solid performance for META as the company attempts to balance earnings growth with an expensive growth strategy that's centered on AI and virtual reality. With META's top-line growth slowing, there's a little less tolerability for those aggressive spending plans, but META remains one of the best-positioned companies to capitalize on the emergence of AI.
Microsoft heads lower following earnings as guidance was a bit light (MSFT)
Microsoft (MSFT -6%) is trading lower after reporting Q1 (Sep) results last night. The software giant returned to its pattern of double-digit EPS beats after breaking a string of five consecutive double-digit EPS beats last quarter. Revenue rose 16.0% yr/yr to $65.58 bln, which above analyst expectations. However, the Q2 (Dec) revenue guidance was a bit light of expectations.
- Let's start with Azure, which performed well but analysts seem a bit let down by the Q2 guidance. Azure grew +34% CC (constant currency), which was slightly above prior guidance of +33% CC. The better-than-expected result was due to the small benefit from in-period revenue recognition. MSFT is seeing continued growth in cloud migration. Azure saw healthy consumption trends that were in line with expectations. Azure growth included roughly 12 points from AI services, similar to last quarter.
- Azure demand continues to be higher than MSFT's available capacity. In its on-premises server business, revenue decreased 1% as MSFT saw lower-than-expected transactional purchasing ahead of the Windows Server 2025 launch. MSFT expects Azure Q2 (Dec) revenue growth to be +31-32% CC. MSFT expects the contribution from AI services to be similar to last quarter, given the continued capacity constraints, as well as some capacity that shifted out of Q2 and into H2.
- In Productivity and Business Processes, segment revs came in at $28.3 bln, which was above $27.75-28.05 bln prior guidance, driven by better-than-expected results across all businesses. M365 commercial cloud revenue increased 15% (+16% CC) with business trends that were as expected. LinkedIn revenue increased 10% (+9% CC), slightly ahead of expectations, with growth across all lines of business.
- Its More Personal Computing segment (Activision, Windows, Surface, Xbox) also performed well with revs of $13.2 bln vs $12.25-12.65 bln prior guidance. Results were above expectations, driven by Gaming and Search. MSFT saw rate expansion in addition to healthy volume growth in both Edge and Bing. And in gaming, revenue increased 43%. Results were ahead of expectation, driven by stronger-than-expected performance in both first- and third-party content as well as consoles.
In terms of why the stock is lower, we think the DecQ revs being a bit light is impacting the stock. Also, analysts seem a bit disappointed with the Azure guidance. However, MSFT is trying to build up capacity to meet strong AI demand, so there will be some variability. Another factor is that the stock has been trending higher since early August. As such, perhaps sentiment was running a bit on the high side.
eBay's downbeat Q4 sales outlook, caused by several one-off dynamics, spurs selling pressure (EBAY)
A downbeat Q4 revenue forecast from eBay (EBAY -8%) has sellers active today, clouding several bright spots from Q3 and pushing the stock down toward one-month lows. EBAY did surpass earnings and revenue estimates in the quarter on gross merchandise volume (GMV) growth above its previous guidance. The online auction platform also sustained mild growth with its active buyers, ticking 1% higher yr/yr and sequentially to 133 mln. Nevertheless, guidance was a critical metric ahead of EBAY's Q3 report, especially with shares trading only around 7% below one-year highs.
- Supporting its 1% yr/yr GMV growth to $18.3 bln -- the second straight quarter of positive growth -- was EBAY's Focus Category business, which remains pivotal to separating the e-commerce firm from the more prominent players in the market, including Amazon (AMZN) and Walmart (WMT). Focus Category GMV grew by nearly 5% yr/yr in Q3, outpacing the rest of EBAY's marketplace by around 5 pts.
- Focus Categories include collectibles, refurbished gadgets, motor parts, luxury fashion apparel, and more. Collectibles were a notable standout in Q3, with trading cards GMV accelerating to double-digit growth.
- With the assistance of Focus Categories, EBAY expanded its top line by 3% yr/yr, a decent uptick from the 1% bump last quarter to $2.58 bln. The strong sales growth trickled down to EBAY's bottom line, delivering a 16% improvement yr/yr to $1.19 per share.
- However, EBAY's sales growth momentum is projected to reverse course in Q4, targeting revenue of $2.53-2.59 bln, a 1.5% drop yr/yr at the midpoint. A few outside factors are weighing on sales guidance. EBAY continues to operate in a challenging environment, plagued by persistent inflationary pressures. Meanwhile, the company is dealing with a few one-off dynamics, such as shifting attention to the U.S. elections and a shorter holiday shopping period this year. FX impacts are also taking a bite out of expected growth.
- Another component eroding Q4 revenue guidance is EBAY's major overhaul in the U.K. The company is rolling out free selling -- similar to rival privately-held platform Mercari -- where EBAY manages shipping and charges higher buyer fees. The company believes this feature generates incremental revenue and operating income. EBAY is ramping these features during Q4 and through Q1, not introducing buyer fees until the end of Q1, causing a re-monetization lag weighing on Q4 revenue.
While Q3 was a solid showing for EBAY, Q4 is taking a step back. The company still expects around flat to +2% GMV growth for the holiday quarter and adjusted EPS of $1.17-1.22, translating to a similar uptick as in Q3. However, the projected sales decline proves too much to simply shrug off today. Still, the stable success of Focus Categories is encouraging. Also, EBAY has already seen increases in new listers in the U.K. as it rolls out its changes. This early evidence is promising that perhaps revenue will tick higher once the U.K. overhaul is complete sometime during 1H25. As such, EBAY is worth keeping on the radar.
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