Closing Recap

Monday, October 24, 2022

Equity Market Recap

·     US equities reversed an early dip to enjoy another day of gains, building on Friday’s bounce. Investors carried over optimism regarding the potential for less aggressive Fed moves at coming meetings despite a big week of earnings ahead. We also see GDP and PCE data later in the week which is sure to weigh on market direction and volatility into the next Fed meeting. 

·     Today’s move, while broad from a sector perspective, most definitely lacked aggressive buy-in with breadth only positive by about 1.2:1. Sector-wise, all S&P groups gained. Healthcare (XLV), Consumer Staples (XLP) and Financials (XLF) were upside standouts with moves in the +1.5-2.25% range. Laggards included Materials (XLB) and Real Estate (XLRE) with gains of less than 0.5%. After an early gap favoring Value, the gap closed as the day progressed and both Growth and Value enjoyed similar gains

·     China’s Shanghai dropped and Hong Kong’s Hang Seng tumbled 1,000 points, or 6%, dragging US listed China stocks lower overall BABA, BIDU, BILI, JD, NTES, TCEHY, etc. as investors dumped Chinese assets after President Xi confirmed an unprecedented 3rd term, indicating there will not be any imminent policy changes/raised fear of favoring state over private sector growth.

·     Busiest week of earnings with 46% of the SPX by weight to be released; 159 S&P companies set to report. So far, 101 S&P 500 companies comprising 26% of index earnings have reported so far and 47% of companies beat on both sales and EPS, like last quarter’s 48% and slightly better than post-Week 2 avg. of 44%. Investors await the next batch of earnings, with tech giants Alphabet, Amazon, Microsoft, Meta, Intel, and Apple due to report this week and analysts seeing the sector in a profit slump.

Economic Data:

·     U.S. S&P global October flash composite PMI at 47.3 vs 49.5 in September; U.S. S&P global October flash services PMI at 46.6 vs. 49.3 in September

Commodities

·     December gold settled -$2.20, or -0.1%, to $1,654.10/oz after gaining 0.5% last week. After an early fade on rising yields, a mid-morning fade in yields helps the precious metals complex to recover back to flattish. All eyes will be on GDP and PCE data later in the week to dictate the next move.

·     WTI crude December futures slipped $0.47, or -0.55%, to settle at $84.58/bbl. Concerns over Chinese demand was cited as the primary driver of crude performance. Brent crude also eased a bit to settle -$0.24, or -0.26%, to $93.26. Natural gas, conversely, enjoyed a bit of recovery after last week’s heavy losses on warm weather concerns, with the November contract settling at $5.199/MMBtu (+$0.24, or +4.8%).

Sector News Breakdown

Consumer

·     Auto sector: TSLA cut prices for its China-made cars for the first time this year, as it reduced the starter price of its Model 3 sedan by around 5.3% and cut the cost of its Model Y by 9%, just days after its third quarter earnings; TSLA shares could rebound in three months, after Elon Musk finishes selling stock in the carmaker to fund his purchase of Twitter Inc., Barron’s reported. But if the shares fail to hold around $200 through that sale, the downside risk is immense; auto supplier VC upgraded from Underweight to Neutral at JPMorgan saying it stands out as a pure play on the expected growth in cockpit electronics content per vehicle, including both driver information systems and infotainment systems; Chinese EV names NIO tumble with the rest of other US listed China stocks on government elections

·     Consumer Services/Rental: AAN downgraded to underperform and PRG named top pick in Q3 preview for lease space at Bank America. Said they remain bullish on PRG & RCII’s long-term growth potential as reiterate our Buy rating on both, – but especially cautious on AAN’s BrandsMart segment, a ten-store, big box consumer electronics retailer

·     Housing & Building Products: strength in home improvement retail with HD, LOW, TSCO all outperforming in retail; in home furnishing, WSM downgrade from Hold to Underperform at Jefferies and cut tgt to $100 from $160 saying as a discretionary retailer serving upper-middle income consumers whose EBIT% is 2x vs. ’19 thanks in part to over-earning, see WSM shares underperforming ahead of a softer macro.

·     Consumer Staples & Restaurants: KO, KMB, KDP, MO, CL, CHD, NWL among consumer staples set to report earnings this week) – RBC said in beverages, expect strong underlying results at KO with topline upside (particularly in the US) driven by increased mobility and strong pricing, but we believe FX will drive guidance at the low end of the range, like PG. We also expect solid KDP results on packaged beverage strength and limited currency impact. In HPC, we expect potential topline upside at CL but lower guidance on FX; TTCF downgrade to Market Perform at Cowen and cut tgt to $4.5 from $10 noting slowing sequential sales despite distribution gains; BYND launched the Beyond Steak, launching at Kroger and Walmart, stores nation-wide

·     Casinos, Gaming, Lodging & Leisure sector: casinos with exposure to China’s Macau region (MLCO, WYNN, LVS) hit hard, along with other US listed Chinese stocks as investors dumped Chinese assets after President Xi confirmed an unprecedented 3rd term, indicating there will not be any imminent policy changes/raised fear of favoring state over private sector growth; GENI extends bet365 Partnership with explorative launch of next generation betting products powered by second spectrum tracking technology

Energy, Industrials and Materials

·     Aerospace & Defense: HEI upgraded from Sector Perform to Outperform at RBC Capital and raise tgt to $175 from $150 based on the results of their 3Q22 commercial aero MRO survey, as believe HEI’s aftermarket business is poised for continued strong performance; RKLB, AVAV, SPIR among top Aerospace & Defense picks right now at Canaccord saying all share robust demand environments, strong government exposure (which is generally more resistant to recession headwinds), an entrenched competitive moat and relatively high barriers to entry vs. peers

·     Transports: FDX downgraded to EW from OW at Wells Fargo saying while Fed-Ex has pivoted away from growth (rightly in their view) and toward efficiency, they don’t believe the revenue implications are fully captured in consensus; CAR was upgraded from Neutral to Overweight at JPMorgan with $231 tgt as believe Avis is well positioned to leverage growth in the industry and represents an attractive investment opportunity – said they see several tailwinds for business

·     Utilities & Solar: EONGY downgraded to Market-Perform due to earnings headwinds from energy retail risks and higher refinancing costs at Bernstein; GPRE downgraded to a Market Perform rating at BMO Capital as a lower ethanol margin environment and potential delay in margin contribution from Ultra-High Protein may pressure EBITDA below consensus; SO downgraded to Underperform from Neutral at Bank America and MDU downgraded to Underperform from Neutral at Bofa as well with a price target of $26, down from $30 citing the stock’s recent outperformance relative to the sector at a time when its peer valuations have struggled as it prepares to spin off its Knife River construction materials business

Financials

·     Bank movers: financials among the top S&P sector performers, with the XLF rising 1.7% with strength in big banks and regionals; Money managers such as JHG and investment firms including OWL are weighing potential offers for Credit Suisse Group AG’s (CS) U.S. asset management unit, people familiar with the matter said on Friday. https://reut.rs/3gBJuqN .

·     Bitcoin news: DA Davidson said after several negative developments, they’re increasingly concerned about the Bitcoin miners. Despite stagnant BTC, high power prices, and heavy financial stress, network competition has risen sharply, further straining profitability and liquidity – said it’s time to be even more selective as the pain of a sustained bear market has stressed all but the best positioned. As a result, we are lowering CORZ and ARBK to NEUTRAL while keeping our BUY ratings on RIOT and MARA as both have low-cost power, funded growth plans, and ample liquidity to capitalize on the impending shakeout.

Healthcare

·     Pharma movers: ALPN said it has voluntarily ended enrollment in a pair of studies of its davoceticept drug candidate following the death of a second patient in one of the studies; TCDA shares tumble over 90% early after saying a trial testing veverimer, its chronic kidney disease treatment, failed to meet its primary endpoint; ABOS received FDA Fast Track designation for ACU193 for the treatment of early Alzheimer’s disease

·     Biotech movers: MYOV rises after Japan’s Sumitovant Biopharma is acquiring the remaining 48% stake in the company for $1.7B, which it currently does not own to take the London-based women’s health company private https://bit.ly/3gFe7fm ; PCVX rises after saying its experimental pneumococcal conjugate vaccine, VAX-24, met main goal of an early-to-mid-stage study in adult volunteers; ASMB downgraded to Hold from Buy at Truist citing recent restructuring, lowered expectations for HBV core inhibitors after vebicorvir trial failure, lack of de-risked late stage assets, and lack of near-term catalysts

·     MedTech Equipment: NVCR downgrade to Neutral at Piper and cut tgt to $70 saying while not as negative as some on the upcoming results from the company’s Ph3 LUNAR trial, remain concerned the journey to revenue recognition isn’t fully understood; DHR downgraded to Hold from Buy at Benchmark on for-ex and outlook for diagnostics; MDT says planning a separation of its combined patient monitoring and respiratory interventions unit into a new company

·     Healthcare Services: TDOC upgraded to Neutral from Sell at Guggenheim saying at current levels, think the risk/reward is more balanced with the stock pricing in our street-low estimates – sense that sentiment remains very negative on the stock and that it would take significant negative news to drive further downside

Technology, Media & Telecom

·     Media, Internet; US listed China stocks BABA, BIDU, JD, PDD, NTES and others tumble after the Hang Seng tumbled over 6% or 1,000 points overnight as investors dumped Chinese assets after Xi Jinping’s new leadership team raised fears growth will be sacrificed for ideology-driven policies; META downgraded to Neutral from Buy at Bank America and cut tgt to $150 from $196 ahead of earnings as checks have suggested stability in Meta 3Qad spend and Snap’s 3Q revs were +2% q/q – so we think 3Q will be in-line (on higher ad loads), with EBITDA upside on cost cuts; for ETSY, UBS said survey of 126 sellers suggests trends may have gotten modestly worse in the past three months, which does not surprise them as core Etsy GMS declined in 1H

·     Semiconductors: several semi’s downgraded at Barclay’s ahead of earnings, cutting QRVO to EW from OW (tgt to $90 from $120), ADI to EW from OW (tgt to $140 from $180), and NXPI to EW from OW (tgt to $140 from $200), SLAB downgraded to Underweight from EW (tgt to $95 from $140) citing pricing and said consumer exposure are large headwinds; while upgraded TXN from underweight to EW saying it should be a primary beneficiary of the Chips Act and a more muted 2022 due to supply constraints should lead to a smaller EPS correction; at JPMorgan, WOLF upgraded to Overweight and raised tgt to $160 from $130 ahead of investor event, which they believes will reinforce the capacity ramp key to delivering on the bull thesis on the shares; TSM suspended production of advanced silicon for Chinese startup Biren Technology to ensure compliance with U.S. regulations, Bloomberg reported this weekend

·     Software movers: NOW upgrade from Neutral to Buy with $510 PT at Guggenheim saying while the commercial market remains soft for ServiceNow, they believe the US Federal business was likely strong enough to more than offset this, which should carry over to 4Q revenue. I cyber security, Morgan Stanley said sees FTNT, TENB, CHKP as favorable set-ups into earnings and less so for CYBR, QLYS, VRNS noting reseller checks and survey point to a healthy security demand environment & relatively defensible budgets

·     Telecom movers: AT upgraded to Strong Buy from Outperform at Raymond James as believe the company will outpace peer Verizon over the next few months based on the current operating performance of the two businesses