Closing Recap

Monday, July 10, 2023

Index	Up/Down	%	Last
DJ Industrials	211.37	0.63%	33,946
S&P 500	10.77	0.24%	4,409
Nasdaq	24.77	0.18%	13,685
Russell 2000	30.59	1.64%	1,895

 

 

 

 

 

 

 

 

 

U.S. stocks bounced between small gains and losses most of the day before finishing higher for the S&P 500 and Nasdaq, while Smallcaps outperformed in what appears to be yet another waiting game for investors, with several potential market catalysts in coming days. The June Consumer Price Index (CPI) inflation report is due Wednesday morning, the PPI inflation report on Thursday morning, and earnings season is underway Friday with big banks. No big bets made today heading into those events, with the S&P 500 holding around 4,400 for the SPX most of the day. There were plenty of Fed comments today (Mester, Daly, Bostic, Barr), but not saying anything new (inflation too high, more rate hikes likely needed, etc.). NYSE breadth was firmly positive by more than 2:1 margin over decliners and most S&P sectors were higher. Industrials, Energy, and Healthcare were the top movers in the S&P while Utilities and Communications lagged. In Tech: The Nasdaq 100 index is set to adjust the weighting of its 100 components, with the "magnificent seven" stocks (AAPL, AMZN, GOOGL, META, MSFT, NVDA, TSLA) currently accounting for more than half the index’s weight. The Nasdaq 100 special rebalance will take place before the market opens on Monday, July 24, to "address overconcentration in the index by redistributing the weights."

 

Strategy calls today/weekend: 1) Citi downgraded U.S. stocks to Neutral while upgrading Europe to Overweight. The European market is trading at a record discount to the US and is pricing in a more reasonable EPS growth path. Citi said they continue to forecast a 5% global EPS contraction this year and a modest 5% expansion in 2024 (vs. bottom-up consensus of 0%/11% in 23/24). Our forecasts imply a modest EPS slowdown, rather than a full EPS recession. 2) Goldman Sachs noted: 2Q 2023 earnings season will begin next week and consensus expects a 9% year/year decline in S&P 500 EPS driven by flat sales growth and margin compression. We expect companies will be able to meet the low bar set by consensus. Negative EPS revisions for 2023 and 2024 appear to have bottomed out and revision sentiment has improved.

 

Economic Data

·     Wholesale sales fell -0.2% in May vs. consensus +0.2% and vs April unchanged (prev +0.2%), while May wholesale inventories revised to unchanged vs. consensus -0.1%; U.S. may stock/sales ratio 1.41 months’ worth vs April 1.40 months.

·     New York Federal Reserve: one year-ahead expected inflation at 3.8% in June vs 4.1% in May; NY Fed: one year-ahead expected inflation at lowest level since April 2021; NY Fed: five-year ahead expected inflation at 3% in June vs 2.7% in May.

·     Total consumer credit rose $7.2B in May, down from a revised $20.3B gain in April, the Federal Reserve said Monday. That translates into a 1.8% annual rate, down from a revised 5% gain in the prior month. It is the lowest monthly increase in consumer borrowing since November 2020.

 

Commodities, Currencies & Treasuries

·     U.S. WTI crude oil futures settle at $72.99/bbl, down 87 cents, 1.18% and Brent Crude futures settle at $77.69/bbl, down 78 cents, 0.99%, ending near lows. Oil demand from China and developing countries, combined with OPEC+ supply cuts, is likely to keep the market tight in the second half of the year despite a sluggish global economy, the head of the International Energy Agency (IEA) said on Monday.

·     Gold prices slip -$1.50 to settle at $1,931 an ounce, despite a dip in the dollar (DXY -0.25% to 102 to 3-week lows) and weakness in Treasury yields (10-yr back below 4% off overnight highs 4.09%) while the 2-year yield fell over 7-bps to 4.85%. Overall, markets just positioning ahead of this Wednesday CPI inflation report, with expectations of a softer reading.

 

 

Macro	Up/Down	Last
WTI Crude	-0.87	72.99
Brent	-0.78	77.69
Gold	-1.50	1,931.00
EUR/USD	0.0026	1.0993
JPY/USD	-0.70	141.37
10-Year Note	-0.041	4.006%

 

 

Sector News Breakdown

Consumer

Autos:

·     In Auto Retail: Manheim June used-vehicle price index falls -4.2% vs. May & down -10.31% Y/Y as June ended at 45 days’ supply, down 4 days from 49 days at the end of May but 7 days lower than how June 2022 ended at 52 days (CVNA, KMX, GPI, AN among names in retail auto space). AAP downgraded to Underweight at Atlantic Equities, lowering its price target to $50, representing 28% downside as views the company’s ongoing weak performance as indicative of structural challenges and significant share losses.

·     In EV Sector: FSR announces $340 million convertible notes offering, potential to increase to $680 million and offering is expected to close on July 11, 2023; RIVN extends its recent winning streak to 9-straight days after better monthly sales data over a week ago.

·     In auto suppliers: Wells Fargo said while they expect most auto companies to slightly beat in Q2, UAW strike risk likely implies most companies hold FY 2023 guidance. For Q2, Wells sees DAN, ADNT, GM screening well, while MGA screens more cautiously.

 

Retailers, Consumer Staples & Restaurants:

·     In Online Retail: AMZN 2-day Prime Day (July 11-12th) coming up tomorrow: Bank America estimates Amazon’s two-day Prime Day event could generate $11.95bn (+12% Y/Y) in GMV, while JPMorgan said last week the event could drive incremental revs of ~$5B, up +13% Y/Y from the ~$4.4B of incremental revs they disclosed for Prime day last year. MELI was downgraded to Neutral from Buy (tgt to $1,350 from $1,680) at Bank America.

·     In retail: HELE reported top and bottom line beat as Q1 adj EPS $1.94 vs est. $1.60; Q1 revs $474.7M vs. est. $465.36M; backs FY24 adjusted EPS view $8.50-$9.00 (est. $8.49) and revs $1.965B-$2.015B (est. $2B). AAN was downgraded to Hold from Buy at Loop Capital on valuation after stock’s year-to-date rally.

·     In Food: OTLY named Marie-Jose David as CFO as of Oct. 1 as Christian Hanke has chosen to step down from his current job as CFO after taking the job in 2020. David most recently was CFO at Mars Veterinary Health International, a division of Mars Petcare.

·     In Restaurants: CAVA initiated coverage by most brokers with buy-equivalent ratings saying the focus on Mediterranean food has potential for large market demand and sees targets for 1,000 units by 2032 as achievable; DPZ rises after Opco raised tgt to $400, best levels since March.

 

Leisure, Gaming & Lodging:

·     Cruise-line (CCL, NCLH, RCL) and hotel stocks (H) could be set to grow amid a specific focus on international travel, according to Barron’s. Hyatt Hotels Corp. (H) is Truist favorite hotel stock, noting around 30% of its earnings come from packaged travel provider Apple Leisure Group. RCL can climb another 17%, to $120, according to Stifel analyst and airfares from the US to Europe are the highest in over five years, averaging $1,200 per round trip.

·     In Education preview: BMO Capital boosted price tgt for BFAM to $99 from $84 and still project further upside, while lower tgts on CHGG to $10 from $12 and STRA to $85 from $99 and favorite names are LOPE (mid-cap) and LRN (small cap). The firm expects many education companies to post accelerating growth (LOPE, STRA), or "less bad" declines (ATGE, TWOU), specifically those focusing on the postsecondary sector.

 

Energy

·     Oil & Gas Services: RBC Capital previewed 2Q, keeping estimates largely in-line, but reduced their forward estimates on lower expected North American drilling and completion activity. Preferred list includes SLB, BKR, EFX, LBRT, TCW, while upgraded PTEN to Outperform after announcing two sizeable M&A deals (NexTier & Ulterra), and downgrade HP to Sector Perform as sees fewer growth and margin expansion catalysts for the stock.

·     In refiners: IEP shares rose after the WSJ reported Carl Icahn finalized amended agreements with banks that untie his personal loans from the trading price of his company’s shares, increase his collateral and set up a plan to fully repay the borrowings in three years. TD Cowen previews the sector as DINO tgt to $40 from $42, DK to $21 from $20 and MPC to $142 from $145 as expects strength in PSX, MPC through the 2Q revision cycle vs weakness in DK, PBF. Mizuho previews as well saying DK, PBF model notable misses for qtr and modest beats for VLO, DINO.

·     In Solar: Guggenheim reduced earnings estimates and reiterate Neutral rating on ENPH as analysis suggests that consensus expectations for next year may be too high and for FSLR reiterate Buy and raise price target to $334 from $277.

 

Financials

Banks, Brokers, Asset Managers:

·     Bank preview: Earnings season around the corner, with large cap banks reporting this Friday (JPM, WFC, C, PNC, STT). RBC Capital said today 2Q23 core EPS and business trends should overshadow the disruption caused by the SBNY and SIVB failures. Key themes include: (1) net interest income levels driven by lower net interest margins partially offset by modest loan growth; (2) credit quality metrics remain strong; (3) fee revenue growth will be mixed due to continued weaknesses in the capital markets, partially offset by seasonally higher residential mortgage banking fees; (4) operating expense growth should be moderate due to the weakness in incentive compensation; (5) commercial real credit trends especially in the office category.

·     Bank News: Fed Vice-Chair of Supervision, Michael Barr said in a report this morning that he’s leading a multi-year effort to increase capital requirements for banks. Citigroup (C) said it launched its new CitiDirect platform for its Citi Commercial Bank clients, as part of its overall "significant strategic investment" to meet global needs of these clients with a "single-entry point digital platform." SCHW upgraded to Outperform at JMP Securities with $73 tgt saying recent data suggests some stabilization over the last quarter in the company’s cash sorting.

·     In Trust Bank NTRS downgraded to Neutral from Buy at UBS citing weaker deposit dynamics noting NTRS deposits down 24% since 1Q22 (vs a 13% peer decline), and with non-operating deposits up to near peak levels (42% of total vs 28.4% for BK and 20.0% for STT), deposit cost relief seems unlikely.

·     In Alternative Managers: BLK was upgraded from Market Perform to Outperform at KBW and raised its tgt to $835 from $770 noting the company is delivering good consistent organic growth and profitability, and while equity markets are hard to predict from here, BLK’s diversification yields better balance and margin resiliency than peers.

 

Healthcare

Biotech & Pharma:

·     IOVA said it reached an agreement with the FDA on a plan to use results from an ongoing Phase 2 study of its experimental cell therapy called LN-145 as the basis for a potential accelerated approval in advanced lung cancer.

·     NBTX shares soar as reached an agreement with JNJ for development and licensing rights to an experimental drug designed to enhance the effects of radiation cancer therapy. Under terms of the deal, J&J is paying $60M upfront for NBTXR3, w/potential payments of up to $1.8B.

·     NVO weight-loss medications are being investigated by the European Union’s drugs regulator after several reports of suicidal risks were referred to the watchdog – Bloomberg.

·     NVAX shares soared after said late Friday Canada will pay $349.6 million to settle the forfeiting of certain doses of its COVID-19 vaccine previously scheduled for delivery.

·     NVS said the US FDA approves expanded indication for Novartis Leqvio® (inclisiran) to include treatment of adults with high LDL-C and who are at increased risk of heart disease.

 

Healthcare Services & MedTech movers:

·     Life Science tools: Overall, in Tools Citigroup said they prefer to own names with cleaner FY23 setups citing BRKR as its preferred name for the prints. In Diagnostics and CROs CITI’s preferred names are EXAS, GH, and ICLR, respectively. Citi also downgrades CRL to Neutral from Buy as it sees minimal positive catalysts near-term, lowered its WAT tgt to $275. NSTG shares jumped following the quarterly earnings results.

·     In Medical Devices: SWAV upgraded from EW to Overweight at Morgan Stanley and raise tgt from $291 to $335 as expects a solid improvement in reimbursement to leave street growth expectations for 2024/25 as too low and with plenty of catalysts. ISRG tgt raised to $400 from $317 at Citigroup saying the upcoming Q2 may be the most "normal" quarter for U.S. medical technology since the advent of the pandemic. OM shares fall after disclosed two additional observations from FDA’s February 2023 San Jose facility audit, relating relate to Outset’s continuous renal replacement therapy (CRRT) promotion and TabloCart labeling.

·     Drug Distributors: ABC tgt raised to $205 from $187 at TD Cowen saying they remain positive on the pharma distribution group and expects all three distributors (ABC, CAH, MCK) to benefit from strong Rx sales trends, as well as strong brand inflation and the return of generic inflation. CAH was downgraded from Outperform to In Line w/ $100 PT from $95 at Evercore/ISI on valuation noting since their upgraded in 5/22, the co’s fundamentals have improved significantly across the board, including better execution in Pharma.

·     In Hospitals: HCA said some patient information, including names, emails, and phone numbers, were leaked online. The company said an unknown and unauthorized party made the information available on an online forum.

 

Industrials, Transports

·     Multi Industry: FTV positive Catalyst Watch into earnings at Citigroup and views Top Picks such as IR, ROK and EMR as well positioned into earnings. In HVAC sector: KeyBanc downgraded WSO to Sector Weight following 2Q channel work saying distributors were more cautious on outlooks for the remainder of the year following relatively weak demand through the majority of 2Q. For WSO, believes the stock now better reflects a structurally higher margin profile, and feel shares are now appropriately valued at current levels.

 

Materials, Metals & Mining

·     In Paper & Packaging: Bank America upgraded shares of SEE, SLVM, WY and downgraded AMCR, AMBP, BALL, GPK, and IP as re-position stocks into Q2 earnings. The firm said destocking bad news continues to hit stocks, one year after the retail inventory reduction trend began. Bank America said they favor beaten-up stocks if the bad news is nearly over; Wood/timber improved with the upward move in housing.

·     In Chemicals: FMC cuts FY23 revenue view to $5.2B-$5.4B from $6.08B-$6.22B (vs. consensus $6.11B) and guides Q2 revs below views saying an abrupt and unprecedented reductions in channel inventory by customers in North America, Latin America and EMEA started in late-May and materially impacted volumes in the quarter; shares of CTVA fell in sympathy.

 

Technology

Internet, Media & Telecom

·     In social media: META’s Twitter rival Threads now has 100 million signups; By comparison, ChatGPT took two months to get to 100 million users, while TikTok took nine months.

·     In Online Services: BMBL shares rally early after Barron’s positive this weekend noting shares have broken hearts, but the business looks like a winner, said Barron’s noting the stock is down almost 40% since Barron’s recommended it last November.

·     In Media: FOXA downgraded to Underweight at Wells Fargo saying earnings are mostly Fox News earnings, and Fox News is facing viewership and share pressures. With ecosystem risks also elevated Wells finds its estimate outlook more negative and below the Street.

 

Semiconductors:

·     Taiwan’s Foxconn said it has withdrawn from a $19.5 billion joint venture with Indian metals-to-oil conglomerate Vedanta, in a setback to Prime Minister Narendra Modi’s chipmaking plans for India. Foxconn, which did not say why it had taken the decision, and Vedanta signed a pact last year to set up semiconductor and display production plants in Gujarat.

·     MPWR among top movers in the semi sector, after Raymond James increased its price target for the stock to $570 from $500 saying the primary driver of upside versus prior estimates is from auto, where management sees 2023 revenue growth at high end of 40-60% targeted CAGR.

·     IMOS reports 18.2% q/q increase in Q2 revenue and slight MoM decrease in June 2023 revenue.