Closing Recap

Wednesday, August 02, 2023

Index	Up/Down	%	Last
DJ Industrials	-347.79	0.98%	35,282
S&P 500	-63.28	1.38%	4,513
Nasdaq	-310.47	2.17%	13,973
Russell 2000	-26.70	1.34%	1,967

 

 

 

 

 

 

 

 

 

US equities slumped overnight following the Fitch downgrade but were off the lows by around 7am before rolling again. The downgrade from AAA to AA+ was downplayed by most market watchers and White House economic adviser Bernstein noted: it made no sense, was punishing the clean-up crew and the quality & safety of US debt remains as pristine as ever. Also in play this morning was the ADP employment change which reported a rise of 324K versus the expected 190K. By late morning, markets had rolled again with the S&P about -1.3% and the NASDAQ roughly -2%. Looking at sectors, Technology, Communications and Energy were the biggest decliners, losing between 1.5% and 2.15%, while Consumer Staples and Healthcare were the only gainers. Breadth favored decliners by almost 5:1 but expectations for a Fed pause at the September meeting remained around 80%.

 

Data-wise on a day when stocks were rolling and the US 10-year yield hit the highest level since November, @KobeissiLetter again gave us multiple reasons to be cautious and/or confused, including: mortgage rates passing 2008 highs at 7.2%, credit card debt set to hit $1T for first time ever, Fed raising rates to highest since 2001 and last night’s US credit downgrade; yet the S&P is up 700 points this year. Separately, even Tom Lee is sounding a bit more restrained, saying August could be messy even though he still sees a strong second half overall. He also mentioned we’re in a period where we’re going to be nervous about good news (out y’day). On rates, @charliebilello notes the Fed Funds rate is 2.4% above the US inflation rate, marking the tightest monetary policy since August 2007, while @bespokeinvest highlights the 2s/10s inversion is now 81.5bps versus 110bps just a month ago. Lastly, @DataTrekMB points out US Google search for “recession” have been almost perfectly negatively correlated to S&P returns over the past 18 months and continue to fall. Something to watch.

 

US equities held near lows heading into the final hour of trading. Only Consumer Staples held in the green (XLP, +0.27%), with Utilities flattish (XLU, -0.02%) and Healthcare also generally outperforming (XLV, -0.16%). Laggards remained Technology (XLK, -2.68%) and Communications (XLC, -2.05%), with Consumer Discretionary also underperforming (XLY, -1.9%). Both growth and value reflected the risk-off tone of the day, with value the outperformer (Russell 1000 Value -0.84% versus Russell 1000 Growth -1.95%). Small-caps were performing in-line with the S&P with IWM -1.6%. Breadth improved modestly versus the mid-morning level, at just better than 4:1 decliners.

 

Economic Data

·     ADP National Employment Report for July showed Private Sector Employment Increased by 324,000 Jobs in July above the estimate of 189,000 while annual pay was up 6.2%

 

Commodities

·     WTI September crude futures declined 2.31%, or -$1.88/bbl, to settle at $79.49. Brent also slid 2.01%, or -$1.71, to $83.20/bbl. The US credit downgrade and general risk-off tone of the market pulled oil lower with equities despite a big weekly draw as reported by the EIA. Weekly US crude inventory declined by a record -17.0Mm bbls vs. expectations for a draw of just 1.4Mm.  Inventories in the US SPR held steady at 346.76Mm as the US again passed on offers to replenish depleted supplies. Macro sentiment is driving price at this point as expectations are that the recent draw was more a timing issue with summer refining activity coinciding with strong exports. Natural gas prices dropped -3.2% to $2.477/MMBtu, the lowest settlement price since mid-June and marked its 3^rd straight daily decline after a -6% decline in July.

·     August gold futures slipped -$3.80/oz, or -0.19%, to settle at $1,975 after the US credit downgrade and strong report on private payrolls from ADP. Moves to the upside in both US Treasury yields and the Dollar also pressured gold. Current expectations appear to be for ongoing pressure as the yield curve, “re-steepens.” The 10-year yield hit highs above 4.12% before paring gains to 4.07% while the dollar index (DXY) rose +0.3% to 3-week highs 102.60.

 

 

Macro	Up/Down	Last
WTI Crude	-1.88	79.49
Brent	-1.71	83.20
Gold	-3.80	1,975.00
EUR/USD	-0.0041	1.0941
JPY/USD	-0.06	143.26
10-Year Note	0.024	4.0072%

 

 

Sector News Breakdown

Consumer

Autos:

·     PAG will replace UNVR in the S&P MidCap 400 effective prior to the opening of trading on Friday, August 4. Apollo Global Management Inc. acquired Univar Solutions in a deal that closed today.

·     RACE beat earnings expectations in the second quarter and hiked its full-year guidance as demand for its luxury cars remained robust, but shares slipped early.

 

Consumer Staples & Restaurants:

·     BLMN downgraded to Market Perform at William Blair as new Brazilian tax legislation, combined with comparisons against 53-week 2023, appears likely to create muted top-line growth in 2024.

·     DENN reported 2Q23 revenue and adjusted EPS results that were below consensus expectations, while adjusted EBITDA results were largely in line with its estimate.

·     ELF reported 1Q24 results that significantly beat expectations again as sales were up +76.5% to $216.3M vs Street at +52.0% and adj. EPS was $1.10 vs Street at $0.57, gained +280 bps of mass cosmetics share to 9.5% share and raised guidance.

·     FRSH reported better-than-expected 2Q23 results and guidance, with revenue of $145M consensus $141M), up 19% y/y (20% cc), a deceleration from 20% y/y growth (23% cc) in 1Q; and billings of $159M

·     KHC Q2 sales of $6.72B above last year $6.55B but below est. $6.82B on better EPS; reiterates FY.

·     SBUX Q3 results included above cons EPS of $1.00 driven by better-than-expected operating margins in both the N.A. and International segments; but N.A. SSS growth was slightly lower than expected and the Company sees China SSS growth slowing to the low to MSD range in F4Q23.

·     YUM tops profit estimates for the second quarter as revenue falls short for the Taco Bell parent.

 

Retailers & Leisure:

·     AMZN is making several changes to revamp its grocery business, including letting people who aren’t Prime members make grocery orders; unifying online grocery carts from Whole Foods, Amazon Fresh and Amazon.com; and deemphasizing its pricey “Just Walk Out” system in physical stores – Bloomberg reported (AMZN earnings Thursday night).

·     COLM reported 2Q23 diluted EPS of $0.14, $0.10 ahead estimate as benefited from some early distributor shipments to wholesale partners, globally but a more muted US Wholesale env’t and challenges in Korea are leading to a more conservative top-line posture heading into 2H23.

·     CWH falls as Q2 adj EPS $0.73 vs est. $0.78 on revs $1.9B vs est. $1.97B, same-store used vehicle units +8.8%, same-store new vehicle units -23.7%; gr mgn 30%.

·     VFC reported a 1Q24 adjusted EPS loss of $(0.15), below ests and revs declined 7.7% to $2.09 billion, above estimate, predominantly driven by softness in the US wholesale. Consistent with management’s expectations, Vans was down 22% in constant currency.

 

Energy

·     CHK Q2 EPS $0.64 tops $0.40 consensus as production was 608k boed vs. street at 605k boed and Q2 adj. EBITDAX $524mn vs. $510.9mn which was driven by higher oil price realizations and lower cash costs.

·     DVN reported adj EPS/EBITDA of $1.18/$1.730B compared to consensus of $1.18/$1.717B as volumes, mainly gas/NGLs, beat consensus by 1%. However, oil production from the franchise asset, Permian, was sequentially lower.

·     MGY 10% cash flow beat. Production was ~2-3% above consensus on higher gas/ngls while drilling capex was 15% below.

·     PXD reported adj EPS/EBITDA of $4.50/$2.144B compared to consensus of $4.15/$2.072B as beats across-the-board; production by 3% vs consensus, costs and FCF exceeded expectations as capex came in at the low end of guidance.

·     Solar weaker after: SEDG reported in-line 2Q and released below-Street 3Q guidance, noting the same channel inventory issues that were already telegraphed by ENPH last week. Also, SHLS Q1 EPS and revs above consensus while mid-point of guidance was below ests. RUN and PCG expand collaboration on distributed power plants to share critical solar energy with California’s grid.

·     WEC reported 2Q EPS above guidance and consensus, fueled by rate base growth and slightly lower O&M than expected.

 

Financials

·     KEY upgraded from Underweight to Neutral at JPMorgan with $13 tgt on the basis that with the new capital proposals out it sees less risk of an imminent dividend cut.

·     FIS Q2 profit beat Wall Street estimates on strong consumer spending.

·     MLNK downgraded from Buy to Neutral at BTIG after reported 2Q23 results that missed expectations and mgmt reduced its outlook for the remainder of the year.

 

Insurance & Services:

·     AFL Q2 EPS $1.58 tops $1.46 est. on favorable claim trends in Japan (+$0.11) and the U.S. (+$0.06), partially offset by Corporate (-$0.06). Expenses were also a bit lower than forecast.

·     AIG Q2 EPS beat $1.75 vs $1.69 est. on a better core loss ratio +.05, lower cats +.02, higher investment income +.01, higher other operating income +.01; partially offset by lower reserve release -.09 and higher expenses -.02, as per KBW.

·     ALL Q2 EPS loss wider than expected on the core loss ratio -.24 and worse reserve development ratio -.03; partially offset by lower expenses -.12, and higher P&C investment income +.02. Mgmt also suspended the buyback.

·     AXS reported 2Q23 operating EPS of $2.23/share, beating consensus of $1.95 driven by lower-than-projected catastrophe losses ($32 mln vs. $48 mln est.; $0.13 beat), higher NII

·     ERIE will replace PDCE in the S&P MidCap 400 effective prior to the opening of trading on Tuesday, August 8. CVX is acquiring PDC Energy in a deal expected to be completed soon pending final conditions.

·     PRU Q2 EPS $2.90 misses $2.95 est. on higher expenses partially offset by better group results. PRU further normalizes for lower VII (-$0.11 vs. -$0.21 est.), unusual expenses (-$0.22), PGIM other revenues (-$0.04), underwriting experience (-$0.01), and seasonality (-$0.06) said KBW.

·     UNM Q2 EPS $2.06 tops $1.87 est. as Core business underwriting experience was broadly favorable, including a Group Disability benefit ratio of 59.4% vs. 60.5% est. Growth metrics were also strong, with core business premiums +4.7% vs. +3.7% est.

·     VOYA Q2 EPS $2.21 tops $1.92 est. primarily driven by very favorable Health underwriting while Wealth missed on weaker spread income.

 

Healthcare

Biotech & Pharma:

·     GSK sued PFE in Delaware federal court on Wednesday, accusing Pfizer’s respiratory syncytial virus (RSV) vaccine Abrysvo of violating GSK’s patent rights in its rival RSV shot Arexvy.

·     PCRX Q2 EPS $0.78 misses $0.81 Est. and sales $169.5M miss $175.6M est.

·     TEVA posts upbeat Q2 profit, boosted by a jump in sales of its Austedo treatment for Huntington’s Disease; Q2 EPS is $0.56 vs. $0.68 a year earlier, beating ests. by $0.03 and revises rev forecast to $15.0B-$15.4B above prior $14.8B-$15.4B.

·     TGTX upgraded from Sell to Neutral at Goldman Sachs and lowered its 12-month price target to $12 noting shares closed -50% (vs. XBI -1.2%) following 2Q23 EPS, which included revenue of $16.0M, well below GS/consensus expectations of $26.0M/$17.4M.

·     UTHR reported 2Q results, with revs and EPS ahead, with Tyvaso well ahead of consensus with $319M (vs. $260M consensus).

 

Healthcare Services & MedTech movers:

·     ABC Q2 Revenue, Operating Income and EPS were all ahead of street; raised its guidance, now expecting revenue growth of at least 8% (vs. +6%-8% prior) and EPS of $11.85 to $11.95 (vs. $11.70 to $11.90 prior).

·     CVS Q2 EPS $2.21 tops $2.11 est. on better revs $88.9B on strength in its pharmacy benefit management unit and lower-than-expected medical costs in its health insurance business.

·     EXAS downgraded from Buy to Hold at Benchmark noting it turned in a another strong showing for 2Q and boosted guidance for the remainder of the year, but cuts rating on valuation.

·     HUM Q2 EPS tops estimates helped by a lesser increase in medical costs than expected of 86.3% for Q2, up from 85.8% a year earlier, but lower than analysts’ estimates of 86.50%.

·     NVRO shares fell as Q2 revenue was $108.8M, in line with consensus of $108.2M while FY23 guidance was lowered, given the changes that new CEO Kevin Thornal is implementing to NVRO’s commercial organization.

·     PEN delivered another strong 2Q result as sales beat and co raised its 2023 revenue guidance from $1.04 billion-$1.06 billion to $1.05 billion-$1.07 billion (+24%-26%).

·     STE reported quarterly sales of $1,285 mln, representing notable organic growth of 11% y/y (currency neutral) and outpacing consensus of $1,210 mln (6% beat) and adjusted EPS of $2.00 (compared to $1.90 in the prior-year period) similarly topped Street expectations.

 

Industrials & Materials

Industrials

·     EMR posted Q2 beat and raise, driven by strength in Control Systems and Software along with Measurement and Analytical with outlook also raised ahead of consensus.

·     GNRC Q2 adj EPS $1.08 misses the $1.15 estimate on revs $1B vs. est. $977.15M; cuts FY23 revenue view to (12%)-(10%) vs. prior (10%)-(6%) citing the softer-than-expected consumer environment.

·     JCI forecast lower Q4 profit, sending shares lower by over 8% late day.

·     SPR shares tumbled over 20% after Q2 results and lowered its 737-delivery prediction after strike impact; said will deliver 370-390 narrowbody 737 fuselages to Boeing in 2023, down from the 390-420 fuselages expected last quarter.

·     TEX reported 2Q EPS of $2.35 vs. consensus of $1.66 and revs beat consensus by 11% while margin beat was driven by strong demand, pricing actions, and disciplined expense management; increased its FY23 guide to $7.00, above both FY23 and FY24 consensus.

 

Materials, Metals & Mining

·     AXTA reported 2Q23 EBITDA of $227M, compared to consensus of $235M and relative to Keybanc’s model, the Company missed in both Performance Coatings and Mobility Coatings.

·     DD Q2 adj EPS $0.85 vs. est. $0.83 and revs $3.09B vs. est. $3.03B but sees Q3 adjusted EPS 84c on revs $3.15B below consensus 93c/$3.18B and cuts FY23 adjusted EPS view to $3.40-$3.50 from $3.55-$3.70 while raises year revs outlook.

·     MOS Q2 adj EPS adj $1.04 vs. est. $1.09 as sales declined to $3.39B from $5.37B the prior year but above consensus $3.13B; said Q2 selling, general, and administrative costs were $129.9M vs. $108.2M y/y.

·     SMG tumbles after it missed consensus profit and revenue targets due to weaker-than-expected results in its core lawn products business and a 40% decline at its Hawthorne unit, which sells equipment for growing pot. Q3 EPS $1.17 on sales $1.12B vs. est. $1.46/$1.15B.

 

Technology

Internet, Media & Telecom

·     MTCH 2Q results and 3Q guidance were better than expected, and 2023E margin commentary was revised positively.

·     PINS 2Q revenue came in modestly ahead of expectations while continued operating efficiencies drove Adj EBITDA outperformance ($107mm vs. $71mm est.); 3Q rev outlook (HSD growth) and non-GAAP operating expense (LSD growth) was generally in line with Street expectations.

·     VRT Q2 beat driven by better margins and topline with guide also raised ahead of consensus; 2023 adj EPS in the range of $1.54-$1.64, up from $1.22-$1.32 expected earlier.

·     In Cable & Telecom: CHTR upgraded to Buy at Wolfe research and CMCSA upgraded to Hold. DXT announced a new multi-year agreement to provide AT end-to-end support for a portion of its IT infrastructure operations.

 

Hardware & Software movers:

·     AZPN reported mixed F4Q results, with ACV coming in slightly above expectations, while annual spend and FCF both were below Street expectations; the FY24 ACV guide, however, came in much better than feared.

·     CDW Q2 was stable and better than feared with the PC server exposure.

·     CMBM tumbles as guided to 3Q23 EPS of $0.13-$0.25 (prior $0.32) on revenues of $62M-$70M (prior $85M) and gross margins of 50.3% were below estimate by 70 bps.

·     CVLT exceeded both F1Q consensus Total ARR and non-GAAP EBIT, while all full-year guidance metrics were maintained and F2Q guidance in line with Street numbers.

·     EA Q1 net bookings of $1.58B slightly miss estimates of $1.59B, due to high competition, muted spending by gamers while sees Q2 net bookings of $1.70-$1.80B, below estimates of $1.81B.

·     PAYC slides as reported Q2 results ahead of consensus but beat of 0.7% was smaller than the company’s historic average beat of 2.5% and recurring revenue ex-float (est.) grew 20% Y/Y vs 30% in the year-ago quarter and 22% last quarter.

 

Semiconductors:

·     Semiconductors hammered on the day in a big day of profit taking in tech, with the SOX index falling around -3.5% or 140 points off recent 52-week highs of 3,875. AMD guidance weighed on sentiment after a good quarter, but overall tech hit by rising yields hitting growth stocks.

·     AMD posted in-line 2Q results and guided 3Q lower, as a recovery in PCs was offset by weaker server demand. Server was weaker due to soft enterprise demand and the cannibalization of traditional server from increased AI spend.

·     QCOM earnings tonight.