Closing Recap

Wednesday, August 14, 2024

Following a nice market up day on better PPI readings yesterday, US equity futures hugged the unchanged line overnight and into this morning’s CPI data. Investors had priced in not whether the Fed would reduce rates in September, but by how much. The pre-data probabilities were 46.5% for a 25bps cut and 53.5% for a 50bps move lower with an implied rate for June, 2025 of 3.307%. High expectations in an environment where every data point is the “next most important” one often is not a great recipe for success. Perhaps that makes today’s in-line mo/mo and yr/yr Core CPI results the best possible outcome. Little to get overly excited or too disappointed about here. Interestingly, the Supercore number (ex. food, energy and housing) was a bit higher and likely contributed to the shift in rate-cut probabilities, with 56.5% for a 25bps cut and 43.5% for a 50bps cut in September post-data. After a small, early relief rally, stocks turned lower as investors continued to carry a health does of uncertainty around the potential for recession. Today’s Fear and Greed Index was still just 26/100 (Fear), a big change versus last year’s 64/100 (Greed) but up from last week’s 19/100 (Extreme Fear). Small caps were early underperformers with IWM -0.8% versus QQQ -0.34$ and SPY just -0.03%. Early sector performance was led by Financials, Real Estate and Consumer Staples amongst the gainers, while Energy, Materials, Consumer Discretionary and Communications were all in the red.

In data of note today, while the Fear and Greed Index may still register Fear, @bespokeinvest notes major US equity index ETFs are no longer oversold with large caps only slightly below their 50dma and some small and mid-caps slightly above. Some interesting figures from @charliebilello on CPI day: the cost of health insurance has declined 30% over the past two years, auto insurance rates have risen by 50% over the last three years (largest 3-yr rise since the mid-70’s) and shelter CPI has been above 5% for the past 28 months (longest since early 1980’s).

Heading into the final hour of a muted trading session, large cap US equities were supporting better afternoon performance in the indices as the S&P gained 0.39% and Nasdaq had climbed back to flat. Small caps continued to underperform after a brief mid-day rally attempt with the IWM -0.50% following multiple earlier tests of the $206 support pivot. Sector-wise, Communications (XLC, -0.6%) and Consumer Discretionary (XLY, -0.5%) were the only S&P Sector ETFs remaining in the red, while Financial (XLF, +1.3%) and Energy (XLE, +0.7%) were upside leaders. Value was outperforming growth, though both enjoyed gains. The Russell 1000 Value was +0.55% versus its Growth counterpart at +0.12%. Tomorrow brings US retail sales, jobless claims and more Fed speculation. Stay tuned

• U.S. mortgage market index +16.8% in latest week ended Aug 9 as the average 30-year mortgage rate falls 1 bp to 6.54%; mortgage purchase index climbs 2.8% and refinance index climbs 34.5% as per weekly MBA data.

• September WTI crude futures faded on the EIA data showing a surprise build of 1.357M versus the expected draw of 2M and never really gained a foundation to rally. Futures finished lower by $1.37/bbl, or -1.75%, to $76.98. Brent similarly slipped 1.15%, or -$0.93/bbl, to settle at $79.76. Despite ongoing turmoil in the Middle East having propped up oil for the past five sessions, recent commentary and today’s price action have been driven more by supply concerns as evidenced with the EIA data. Recent comments from Macquarie, for example, forecast a possible Q4 correction on expectations of a supply surplus in what they framed as a tepid demand environment. 

• In Restaurants: EAT shares tumbled after Q4 EPS $1.61 missed the consensus $1.72 (revs better at $1.21B vs. est. $1.16B) on better comp sales rising 13.5% vs. est. 7.6%, with an increase in comparable restaurant sales of 14.8% for Chili’s and 2.5% for Maggiano’s; guides year EPS below views and revs above consensus views. CMG upgraded to Outperform from Neutral at Wedbush and raised tgt to $58 from $54 as continues to believe CMG can sustain market share gains in a more challenging macro backdrop for restaurants.
• In Retail: VSCO shares rally after guiding prelim Q2 adj EPS to $0.34-$0.39, above est. $0.16 and prelim ADJ operating income $57M-$62M above the consensus est. $40.7M and sees Q2 net sales change -1% to -2% vs. prior -1% to -3% and named Hillary Super as its CEO (her most recent post as CEO of Savage X Fenty, a fashion line launched by Rihanna).
• In Consumer Staples: in Beauty, Jefferies said they view the >20% pullback since the 8/8 print is overdone for ELF and has created an attractive entry point for investors believes the FYQ2 EBITDA guide calling for a ~40% Y/Y decline caught people by surprise due to an earlier than expected rollout of Rossman in Germany. Loreal (LRLCY) was upgraded to Hold from Underperform at Jefferies caution on slowing beauty market growth is increasingly priced into the shares.

• In Theme Parks: Keybanc said their Domestic geolocation data tracking DIS and Universal Theme Parks (CMCSA) appears negative and supports recent cautious commentary by both. Y/y results were -10% for Disney and -9% for Universal in July, and on m/m basis, Disney was -3%, while Universal was flat, which were both below seasonal averages. We think in a more challenging price conscious consumer environment, paired with elevated pent-up demand last year and increasingly more competition going forward, Theme Park growth is likely to be challenged in the intermediate term

• In Financial Services: INTU downgraded to EW from OW at Morgan Stanley saying along with the increased volatility from recently acquired CK and Mailchimp, they fear pushing too hard on price may be contributing to share losses at TurboTax and introduces risk at QuickBooks.
• In FinTech: NU Q2 adjusted net profit of $563M vs. est. $451.5M; Q2 revs rose 65% y/y to $2.8B vs. est. $2.92B; Q2 return on equity of 28%; added 5.2M clients; bank hit a total of 104.5 million clients at the end of the quarter, with the vast majority of those in Brazil. XP Q2 EPS R$2.03 vs R$1.83 last year; Q2 revenue R$4.22B, up 19% y/y; Q2 active clients grew 15% y/y and 1% q/q, totaling 4.6 million in 2Q24; Q2 Client Assets totaled R$1.2 trillion, up 14% y/y and 2% q/q; said year-over-year growth was driven by R$113 billion net inflows and R$30 billion of market appreciation.

• GILD said the FDA approved its liver disease treatment, Livdelzi, which it gained through a $4.3 billion buyout of CymaBay Therapeutics earlier this year.
• GRAL reported its first quarter as a standalone public company, with revenue of $32M (43% y/y growth) and adj EBITDA of -$139M. The company sold more than 215K Galleri tests in the quarter. The company also announced a 30% headcount reduction and a significant decrease in investment in product programs beyond Galleri
• ILMN upgraded to Buy from Hold at TD Cowen after Strategy Day highlights and raised tgt to $144 from $126, following the company’s strategy update as sees Illumina as a combination of a self-help and product cycle story (shares also upgraded to EW from UW at Barclays saying strategy day achieved a key goal as mgmt laid out plans for EBIT mgn. expansion of 500bps ’25-’27 & sales growth accelerating).
• NKTX upgraded to Strong Buy from OP at Raymond James after results, noting ended the quarter with $427M, including cash, cash equivalents and investments and says the most impactful catalysts will be preliminary clinical data from Ntrust-1 and Ntrust-2 guided for 2025.
• RNA announces $250M common stock offering.
• SLRN’s anti-inflammatory drug succeeded in a Phase 3 trial for a common skin disorder called hidradenitis suppurativa, but the results didn’t show a clear edge over competing products.
• In Healthcare Services: CAH shares rise on earnings as the Pharma services co reported a beat/raise quarter (Q4 adj EPS $1.84 vs. est. $1.73; Q4 revs rose 12% y/y to $59.87B vs. est. $58.54B) and raised its FY25 EPS outlook to $7.55-$7.70 from the preliminary outlook of at least $7.50.
• In MedTech: MDT was downgraded from Buy to Hold at Stifel and cut tgt to $85 from $100 saying based on the current company outlook, it finds it difficult to articulate the “what’s next” incremental fundamental catalyst that might have the possibility of driving more-meaningful growth-acceleration and long-term share appreciation.

• In Industrials: JCI was upgraded to Sector Perform from Underperform at RBC Capital and raised tgt to $69 saying the recently announced portfolio pivot/leadership transition and evidently constructive dialogue with Elliott Management have sufficiently de-risked the story and balanced risk-reward. EMR was downgraded to Neutral from Overweight at JP Morgan saying stock cheap, but sales are slower to come and while orders came in line during the quarter, guidance was lowered as the signs of discrete recovery that they saw in April/May took a step back in June.

• MRCY shares jumped after reported better than expected Q4 results, with adj. EBITDA of $31.2M, well ahead of consensus estimates of $14M on better revs $248.6M vs. $230.7M est. and called out a 4Q24 B2B of 1.14x.
• RBC Capital recaps Q2 results for A&D sector as downgraded HXL to Sector Perform from Outperform (tgt to $68 from $76) saying their confidence in the 2H24 pace of improvement in aircraft deliveries has softened; RBC downgraded LHX to Sector Perform from Outperform (tgt to $240 from $250); the firm said GD and LMT remain their top defense picks.

• In Paper & Packaging Sector: IP was upgraded to Buy at Argus with new $52 tgt saying views International Paper as a well-run company with a strong track record in its industry. Although IP’s earnings have been hurt by higher input costs and lower demand, Argus expects demand and pricing to recover into 2025.

• In Hardware & Equipment: OUST shares fell after reported Q2 revenue that was in-line with consensus estimates on strong demand for REV7 sensors and software sales in the smart infrastructure and robotics verticals, but guided Q3 FY24 revenues below ests citing customer project delays and customer struggles with software development.
• In Software: NCNO upgraded to Buy from Neutral and raised tgt to $42 from $34 at Goldman Sachs saying nCino is likely to overcome the various business headwinds it has faced into peaking interest rates in relatively short order. INTA Q4 results exceeded consensus with a $7.3M ARR beat and cloud ARR growth stable at 33% y/y with RPO growth accelerating to 40% y/y from 23% aided by new G2M structure put in place CQ1. GLBE shares fell after the application software company cut its full-year forecasts for both revenue and gross merchandise value (cuts FY24 revenue to $710M-$750M from $733M-$773M).
• AAPL supplier Foxconn’s profit beats forecasts as it rides AI boom as Q2 net profit T$35.05B vs T$33B previous year; Foxconn says development on track for Nvidia GB200 chip; forecasts AI servers to be next trillion-dollar revenue product
• ByteDance, BIDU, and China Mobile have been testing Huawei’s latest AI processor, called Ascend 910C, in recent weeks; Huawei told potential clients that the new chip is comparable to NVDA’s H100, WSJ https://tinyurl.com/4tbs78wc