Closing Recap

Wednesday, May 17, 2023

Index	Up/Down	%	Last
DJ Industrials	409.09	1.24%	33,421
S&P 500	48.91	1.19%	4,158
Nasdaq	157.51	1.28%	12,500
Russell 2000	38.31	2.21%	1,774

 

 

 

 

 

 

 

 

 

A new round of optimism regarding US debt-ceiling negotiations and a positive update last night from WAL on bank deposit trends combined to push US equities higher through the morning. Also lifting the mood, US housing starts up and relatively in-line on a month/month basis, though year/year continued to see declines. Into midday, both the S&P 500 and NASDAQ were about +0.5% but pushed through to best levels in two weeks. The early move was more broad-based than we’ve seen recently, with advancers leading decliners by a little more than 2:1. Sector leaders were Consumer Discretionary (Target earnings and guidance not dramatically worse than anticipated), Financials (WAL deposit update lifting regionals) and Energy, all gaining by more than +1.9%. Sector laggards were Consumer Staples, Healthcare and Utilities.

 

Data-wise, in recent polls, 22 of 41 economists see higher risk of US default over debt ceiling versus prior negotiations, 34 of 46 economists expect a US recession during 2023 and 75 of 116 economists expect the Fed Funds rate to be 5.00-5.25% at year-end 2023. For reference, the implied rate in the market is currently about 4.54% with rate cuts built in for 2H23. Consistent with the recession outlook, @charliebilello notes US housing starts declined 22% over the last year, marking the 12th consecutive year/year decline and longest string since 2009 in what many will view as another potential recession signal. Also on the subject of housing, @LizAnnSonders notes the Atlanta Fed GDPNow model for 2Q23 has growth up to +2.9% (q/q ann.). The new development being that housing is no longer expected to subtract from growth. On a different note, @timmerfidelity highlights what many have noticed in the current market: the big are getting bigger relative to everyone else. Setting aside pure price driving index gains, the top 50 in the S&P 500 have widened their valuation gap (trailing P/E) versus the rest of the pack from two points at the top to seven points now.

 

Heading into the final hour of trading, US equities were off their highs but still held onto healthy gains more than +1% apiece for both the S&P 500 and NASDAQ. Sector leadership remained generally the same as the morning, with Consumer Discretionary (XLY, +2.1%), Financials (XLF, +2%) and Energy (XLE, +2%) still pacing the gainers. Utilities (XLU, -0.55%) and Consumer Staples (XLP, -0.05%) remained in the red, while Healthcare (XLV, +0.05%) also lagged but managed to go green. Both Growth and Value also held nice gains of just over +1%, with no significant differentiation between the two styles. As in the morning, breadth continued to favor advancers to decliners but at an extended ratio of 2.75:1.

 

Economic Data

·     Housing starts for April rose +2.2% to 1.401M unit rate (in-line w ests) vs March -4.5% as 1.371M units as single-family starts +1.6% to 846,000-unit rate and multifamily +3.2% to 555,000-unit rate; April housing permits 1.416M unit rate vs. est. 1.437M and March 1.437M unit rate.

 

Commodities

·     June gold futures continued to slip, settling -$8.10, or -0.41%, to $1,984.90/oz. The settlement marked the lowest in seven weeks (March 29), as expectations continue to shift regarding future Fed policy and inflation. A recent recovery in the US Dollar also has weighed on gold recently, but the primary driver remains expectations for inflation and recession in 2H23, particularly with the debt ceiling issue unresolved for now.

·     Following little movement overnight, June WTI crude futures followed the market higher, settling +$1.97, or +2.78%, to $72.83/bbl, the highest in over a week. Brent also gained +2.74%, or +$2.05, to $76.96/bbl. Optimism over the US debt ceiling discussions and expectations supply will struggle to meet demand in 2H23 helped push prices higher despite a second consecutive build in crude inventories per EIA. The SPR saw a seventh straight weekly draw, with the drain now 11.6Mm barrels since the start of April.

 

 

Macro	Up/Down	Last
WTI Crude	1.97	72.83
Brent	2.05	76.96
Gold	-8.10	1,984.90
EUR/USD	-0.0025	1.0836
JPY/USD	1.25	137.62
10-Year Note	0.04	3.589%

 

 

Sector News Breakdown

Consumer

Autos:

·     TSLA annual shareholder meeting recap: Elon Musk said it remains on track to achieve first deliveries of the Cybertruck this year and then ramp to 250K-500K units per year; it would reconsider its stance on traditional advertising, produce a new kind of drivetrain that uses less silicon carbide and rare earth elements, and switch to a lower-voltage architecture in its vehicles.

·     Ford (F) is hosting a Capital Markets Day this Monday, May 22, where it plans to update investors on progress and expectations for its Ford+ plan.

·     EVGO announced a $125M stock offering.

·     Auto supplier VC was upgraded to Buy at Guggenheim with $161 tgt saying focus areas of the meetings generally centered on the following: 1) VC positioning in the automotive transition to EVs, digitization, and next-generation architectures; 2) supply chain risks and opportunities; 3) new and existing product growth opportunities and competitive positioning; and 4) macro.

 

Retailers, Consumer Staples & Restaurants:

·     TGT reversed pre-mkt losses after mixed Q1 (EPS beat/revs miss), weaker Q2 guide (EPS $1.30-$1.70 below the $1.91 estimate) but maintained year outlook; inventories also improved but margins below trend – co said says sales slowed in March, decelerated further in April.

·     TJX Q1 sales rise +3.3% to $11.78B but miss ests $11.82B as comp store sales at HomeGoods fall by (-7%); forecasts Q2 sales and profit below Wall Street estimates – for Q2 EPS $0.72-$0.75 vs. est. $0.79 and comp sales +2%-3% vs. est. 3%; maintains year revs view and boosts year EPS.

·     AMZN announced it has introduced a new lineup of Echo products, including the all-new Echo Pop, Echo Show 5 and Echo Show 5 Kids, and all-new Echo Buds.

·     ONON was downgraded to Sell from Hold at Williams Trading a day after earnings results.

·     TCS shares fall on miss and guide; 4Q adj EPS $0.18 vs est. $0.16 on revs $259.7Mm vs es.t $265.7Mm, comps -13.1%; guides 1Q net sales $200-210Mm vs est. $257.71Mm, comps -23% to -19% and unexpected 1Q EPS loss.

·     In restaurants: JACK Q2 adj EPS $1.47 vs. $1.20 est. and revs rose 23% y/y to $395.7M vs. est. $384.2M; Jack company comp sales +10.8% vs. est. +8.5% and franchise comp sales +9.4%.

Homebuilders, Building Products, Home Furnishing:

·     Housing starts data was better than last month and mostly in-line, supporting continued strength in homebuilders with many holding at or near 52-week highs.

·     Weekly MBA mortgage data shows the US mortgage market index fell -5.7% in week ended May 12, purchase index falls -4.8%, refinance index falls -7.7% as the average 30-year mortgage rate rises 9 bps to 6.57%

·     In Home retail preview: TD Cowen said they are cautious on trends & set-ups at both but prefer RH over WSM as thinks FY23 will be a beat & raise year, especially if RH can launch key catalysts on time. At WSM, TDCowen models 1Q & FY23 below Street, but its work suggests good promo control, and shares are trading at a deep discount to historical S&P 500 spreads.

 

Energy

·     Latest API data showed crude oil inventories rose by 3.69 mln barrels vs expectations of a 1.3-million-barrel draw; Gasoline inventories fell by 2.46 million barrels; Distillate inventories fell by 886,000 barrels. EIA data also bearish as Weekly crude stocks went up 5.0 mln barrels to 467.62 mln, vs forecast of 0.9 mln bbl draw.

·     In solar: MAXN 7.5M share secondary priced at $28.00. CSIQ said CSI Energy Storage, part of Canadian Solar’s majority-owned subsidiary CSI Solar, expands supply agreement with Blackstone-backed Aypa Power.

·     In Industrials/materials: TGI shares rose after the Q4 sales and profit topped analysts’ expectations and better FCF. In lithium, LAC rises as U.S. Interior Department removed one of the last remaining obstacles to co’s Thacker Pass mine project in Nevada.

 

Financials

Banks, Brokers, Asset Managers:

·     Banks paced today’s market gains as regionals jumped across the board. Gains started with WAL as shares rose after saying deposits have grown by $2 billion during Q2. As of May 12, the bank said it had about $50B in deposits, up from $47.6B as of March 31, according to a filing late Tuesday/is also nearing the completion of about 50% in sales of the $6 billion of loans reclassified to held-for-sale in the first quarter, as part of its balance sheet repositioning. The update helped boost regionals early (CMA, ZION, KEY, FITB, PACW and many others).

 

Healthcare

Biotech & Pharma:

·     ICPT shares fell (FDA AdCom today): FDA staff concluded that the companies OCA can cause significant drug-induced liver injury and there is uncertainty about how magnitude of changes observed on surrogate endpoints for intercept’s OCA may translate to meaningful changes in clinical outcomes. FDA staff said despite the modest treatment effect over placebo, cannot justify OCE use in NASH subjects with stage 2 or 3 fibrosis.

·     DOCS reported 4Q results that came in in line in terms of revenue and were ~6.9% above consensus on adjusted EBITDA, but 1Q revenue and profit guidance came in short of current consensus expectations ($107M vs. est. $112M).

·     PTCT announces APHENITY trial achieved primary endpoint with Sepiapterin in PKU patients.

·     RNA said the FDA eases partial clinical hold on muscle disorder drug trial.

 

Industrials & Materials

Transports

·     In truckers: KNX downgraded to Neutral from Outperform at Credit Suisse as sees limited upside to the company’s earnings given the tougher macro environment and cyclical exposure, while firm cut WERN to Neutral as well saying downside risks include moderating consumer demand, prolonged downturn in macro conditions, falling freight rates, and persistent inflationary cost pressures. ODFL was upgraded to Outperform at Evercore/ISI saying does "not want to miss investment inflection points in high-quality names amid maximum short-term uncertainty (Evercore also upgraded NSC to Outperform in the rail sector).

 

Technology

Hardware & Software movers:

·     AGYS fell as Q4 results better as posted record bookings growth, but analysts note the record F4Q:2023 bookings performance did not lead to higher consensus revenue estimates for FY2024.

·     DT Q4 EPS $0.31 vs. est. $0.22; Q4 revs $314M vs. est. $304.9M; Q4 Total ARR of $1.247B, and adjusted ARR growth of 29% y/y; guides Q1 revs $325M-$328M vs. est. $319.2M.

·     KD shares slid as Q4 revenue fell ~4% to $4.26B and net loss widened to $737M, or (-$3.24), from a net loss of $229M y/y and forecast a FY24 revenue decline of 6%-8% due to accelerated actions by it to reduce certain low-margin revenue streams.

·     KEYS reported F2Q23 revenues that were largely in-line with expectations (+3% yoy), with better gross margins driving a more sizable 9-10% beat on Operating income and non-GAAP EPS.

·     NOW announced a $1.5B stock buyback and trimmed its subscription rev growth target for ’24 and ’26 (to $10.4B and $15B vs. prior $11B and $16B and cons $10.4B and $15.5B, respectively).

·     CRM price tgt raised to $250 from $235 at Bank America saying channel suggests stable Q1; next quality GARP software stock, a top pick.

·     APP Upgraded to Buy at Bank America saying Y/Y pricing surge vs peers down Y/Y implies machine learning advantage; ad spend momentum to carry through Q2 & FY23.

·     TOST director Yuan bought 635k shares between 5/12 & 5/15 (initiated long).

 

Semiconductors:

·     Philly semi-index (SOX) rises as much as 2.75% initially to 3,130, more than 150-point bounce off Monday lows as investors continue to pile into chips/AI related plays.

·     ON maintained structural revenue growth, improving margins (both GM & OM), and increasing FCF at Analyst Day yesterday – Bank America raised price tgt to $110 from $100 for top autos pick; EV content is king after Analyst Day noting they outlined a mid-teens sale, 20%+ EPS, 35%+ FCF 5-yr growth CAGR, compelling @ just 15x PE.