Closing Recap

Friday, July 22, 2022

Equity Market Recap

·     The recent stock market rally took a breather on Friday, pulling back from 6-week highs for major averages, but still end the week with strong gains led by technology ahead of the busiest week of earnings this quarter (roughly 1/3 of the S&P to report) and the FOMC meeting midweek. Defensive asset classes such as utilities, consumer staples, and REITs were among the leaders while other sectors fell, led by communication technology and tech. In addition to key earnings next week including AAPL, META, AMZN, GOOGL, PFE, MRK and others, investors now await the U.S. central bank’s July 26-27 policy meeting where it is expected to raise interest rates by 75 basis points to combat stubbornly high inflation. A bad day for economic calendar added to other worsening data points this week: Worsening Jobless Claims (at 8-month highs), composite PMIs in the 47s (below 50 contractions, and Philly Fed survey deteriorating further (worse than expected at -12.3 vs. -2.5 estimate). Not much for Bulls to grab on to today other than the S&P closed the week above its 50-day moving average (roughly 3,920) even after today’s slide. Disappointing earnings, revs or forecasts from VZ, SNAP, STX, SIVB, and others were too much to overcome after a week of mixed results and more cautious outlooks. European markets fell on soft data as well: Russia slashed its key interest rate by 150 basis points in a surprise move. In Europe, weaker PMI readings overnight as the UK July Flash Manufacturing PMI 52.2 vs. Est 52, Eurozone July Flash Services PMI 50.6 vs. Est. 52; Germany July Flash Services PMI 49.2 vs. est. 51.4 and Germany July Flash Manufacturing PMI 49.2 vs. Est 50.7.

Commodities

·     Oil prices were volatile, tumbling despite a pullback in the dollar, with WTI crude down -$1.65 or 1.71% to settle at $94.70 per barrel (lowest since early April) and Brent crude futures settle at $103.20/bbl, down 66 cents, 0.64%. Gold gains $14.00 or 0.8% to settle at $1,727.40 an ounce, boosted by a decline in U.S. Treasury yields, but prospects for further rate hike from the Fed next week limited gains. Gold prices fell to 15-month lows this week before rebounding ($1,680.25 on Thursday), finishes the week higher.

Currencies & Treasuries

·     Treasury yields extended the week’s declines as the 10-yr drops below 2.74%, down as much as 16bps before paring losses while remains inverted vs the 2-yr, which was down 10.8bps to 2.97% and 3-yr down -12bps to 2.945%. The drop in yields and rally in bonds came following another weak economic data point, with PMI manufacturing falling into contraction. The move also sunk the dollar ahead of next weeks FOMC meeting where a 75-bps rate hike is expected, with a minor chance for a 100-bps hike (though chances have narrowed since the weaker data). The euro was little changed after its bounce Thursday post the ECB 50-bps rate hike. U.S. 10-year Treasury yields fell to their lowest level in over two months 2.732%.

Economic Data:

·     Weaker data, raising expectations the Fed will ease back on aggressive rate hikes: July U.S. PMI Composite Index (Flash): 47.5 vs. 51.2 in June; Manufacturing PMI: 52.3 vs. 52.0 expected and 52.7 prior; Services PMI: 47.0 vs. 52.6 expected and 52.7 previously

Sector News Breakdown

Consumer

·     Retailers: toy retailer MAT beats estimate for Q2 sales and profit as shoppers shrug off higher prices, but margins shrunk to 45% from 47.5% due to higher supply costs; GME 4 for 1 stock split goes into effect today; retail space generally lower, but better than the broader market

·     Auto sector; TSLA made it an 8^th straight day of gains, following up its 9% move yesterday after earnings; ALV Q2 adj EPS $0.90 vs. est. $0.36; Q2 revs $2.08B vs. est. $2.04B and said remain confident in our medium-term adjusted operating margin Target of 12%; GNTX posts Q2 EPS, margin, and sales miss and lowers the top end of its year rev outlook to $1.87B-$1.97B from $1.87B-$2.02B; GPC outperforms trading to new all-time highs

·     Consumer Staples & Restaurants: defensive sector outperformed with food names K, CPB, CAG, SJM, MDLZ and beverages PEP, KO higher; SAM troubles continue as Q2 EPS $4.31 vs. est. $4.43 on weaker margins and cuts FY22 adjusted EPS view to $6.00-$11.00 from $11.00-$16.00 (est. $11.67); CAG raised its quarterly dividend; BJRI posts Q2 EPS miss and sales beat

Energy

·     Energy stock movers: today marked the 37^th straight day in which prices at the pump fell, as the national average -2.2c to $4.419/gallon; the last of the oil service major players SLB reported a top and bottom-line beat ($0.50 vs. est. $0.40 and revs $6.8B vs. est. $6.28B) as logged higher revenue in both its international and North American markets, driven by higher activity and improved pricing; oil names were mixed on day wit oil while defensive utility stocks outperformed as investors looked to dividend plays. Baker Hughes reports that the U.S. rig count is up 2 from last week to 758 with oil rigs unchanged at 599, gas rigs up 2 to 155. Natural gas prices end the session 4.6% higher at $8.299/MMBtu, the highest closing price since June 13 and rises 18.3% for the week, marking the largest one-week percentage increase since late January.

Financials

·     Banks, Insurers: SIVB slides on Q2 EPS miss ($5.60 vs. est. $7.68), while its provision for credit losses rises to $196M vs. $35M a year ago; ASB post earnings fundamental trends were broadly solid, with highlights including stronger loan growth, good margin expansion, and very clean credit said RBC; RF Q2 EPS $0.59 vs. est. $0.53; Q2 revs $1.7B vs. est. $1.69B; in insurance: WRB reported Q2 2022 EPS of $1.12 vs. consensus of $0.86 driven by stronger net investment income, better results in the Insurance segment and lower corporate expense

·     Consumer Finance; COF reported higher revenue and net income slightly above analysts’ expectations for Q2 but EPS of $4.96 missed the $5.09 analyst estimate and non-interest income fell short of analysts’ expectations as well $1.72B vs. $1.75B est. (follows weaker results from DFS the day prior); DFS downgraded to Underweight at Citi due to increased uncertainty surrounding its newly announced independent internal investigation into its student loan servicing practices; AXP raises FY rev outlook to +23% to +25% up from prior +18% to +20% after better Q2 revs of $13.4B vs. est. $12.51B while reaffirms EPS views, driven in large part by T&E spending returning to pre-pandemic levels – still boosted its reserve for credit losses by $410M

·     Fintech, Bitcoin news; Credit Suisse downgraded RPAY, NVEI, and GPN to Neutral from Outperform saying despite the re-rating across the sector, we find it more difficult to recommend companies with greater relative risk to estimates in the event of economic weakness (due to factors such as mix and end-market exposures, FX, etc.) and/or a lack of a near-term catalyst

Healthcare

·     Pharma movers; AUPH reported a positive CHMP opinion for Lupkynis (voclosporin) for the treatment of adults with active lupus nephritis in Europe; VRTX advances VX-548 in acute and neuropathic pain into pivotal development for people with acute pain; Phase 3 program to initiate in Q4 2022 – Phase 2 dose-ranging trial in neuropathic pain expected to initiate by year end; VTGN said its experimental drug, PH94B, failed to meet the main goal in a late-stage trial

·     MedTech Equipment; ISRG slides after a top and bottom-line miss (2Q adj EPS $1.14 vs est. $1.19 on revs $1.52B vs est. $1.56B and placed 279 Da Vinci surgical systems, a decrease of 15% compared with 328 y/y

·     Healthcare Services: hospital operators outperform after THC posted mixed qtrly results as EPS beat ($1.50 vs. est. $0.82) while revs fell short of consensus but issues year guidance where the mid-point is above views $5.80-$7.00 vs. est. $6.15; HCA spikes as beats revenue estimates for the second straight quarter, with revenue of $14.82B above $14.7B estimate and posts Q2 profit beat of $4.21 vs. est. $3.90 (CYH, UHS moved in sympathy)

Industrials & Materials

·     Metals & Materials; CLF slides after posting a lower-than-expected Q2 adjusted profit of $1.13, missing the $1.32 estimate while says it expects FY22 average selling price to be ~$1,410 per net ton; in April, CLF had raised its FY22 avg selling price expectation by $220 to $1,445/ton; in Chemicals; SMG was downgraded from Buy to Neutral wat UBS and cut tgt to $92 from $125 as believe limited top/bottom line recovery coupled with a levered balance sheet will keep shares range bound until the next lawn & garden season; in coatings, PPG 2Q EPS $1.81 vs est. $1.73 on revs $4.7B vs est. $4.6B; guides 3Q adj EPS $1.75-2.00 vs est. $2.05 with aggregate sales volumes flat to down low-single-digit %

Technology, Media & Telecom

·     Internet movers: SNAP tumbles 30% after a top and bottom line miss for Q2 and said it is not issuing guidance for Q3 growing just +13% y/y, the lowest on record – Adjusted Ebitda fell -94% y/y to $7.19M, while daily active users of 347M did beat the 343.2M estimate (shares of TWTR, SPOT, META, GOOGL among names falling in sympathy initially); TWTR misses quarterly results as Adj EPS loss was ($-0.08) vs. est. $0.13 on revs $1.18B vs. est. $1.319B and ad revenue $1.08B below est. $1.23B with Q2 Average Monetizable DAU 237.8M vs. est. 237.5M; Barron’s speculated that GOOGL and AMZN could replace DOW and TRV in the Dow Jones Industrial Average after their respective recent stock splits.

·     Media movers: ad tech stocks APPS, PUBM, TBLA, TTD declined following the SNAP results on ad spending slowdown; in media, PARA downgraded to Underperform at Moffett and slash tgt to $18 from $30 as have difficulty looking at DTC revenues and investments in a silo even with execution of its broader playbook and the continued momentum at Paramount+

·     Semiconductors: HDD makers and memory names tumble after STX Q4 adj EPS $1.59 below consensus $1.88 and revs $2.63B vs. est. $2.78B while guides Q1 EPS $1.20-$1.60 below consensus $2.27 and revs $2.35B-$2.65B also well below consensus $3.03B (WDC, MU falls); MU also downgraded to Underweight at Morgan Stanley saying they are seeing material volume weakness in all markets, including hyperscale; profit taking in the semi sector that still saw over 11% gains this week

·     IT Services, Software & Hardware movers; CRSR slides after issued preliminary results for 2Q, missing expectations as sees Q4 revenue $284M vs. est. $348.9M and sees Q4 adjusted EBITDA loss of $10M to $11M; AKAM cut from Buy to Neutral at Citigroup as see a balanced risk/reward, where FX-related guide risk to CY22E

·     Telecom movers; VZ hits 5-year lows after posted mostly in-line top/bottom line results though sub adds and guidance disappoint – adds 12,000 net phone subscribers, below Street est. of 150,800 additions while lowers 2022 EPS view to $5.10-$5.25 from prior $5.40-$5.55 view and said wireless revenue growth will be between 8.5%-9.5%, down from previous guidance between 9%-10% (recall yesterday, shares of AT tumbled after cutting its annual free cash flow forecast by about $2B); ATwas downgraded to equal weight from overweight at Barclays with its results seen likely to revive concerns about its management team’s credibility