Mid-Morning Look

Friday, August 23, 2024

U.S. stocks jumped overnight, erasing much of Thursday’s pullback ahead of Fed Chairman Powell comments this morning, only to jump further following the release of his prepared text, which was very dovish as expected. Nick Timiraos of the WSJ recapped Powell prepared comments at Jackson Hole: “The Powell pivot is complete. Powell is dovish across the board—from the same stage where he two years ago signaled the Fed would accept a recession as the price of restoring inflation: “The cooling in labor market conditions is unmistakable.” “It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon.” “We do not seek or welcome further cooling in labor market conditions.” “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” “We will do everything we can to support a strong labor market as we make further progress toward price stability.” Stocks liked the comments and pushed stocks back near prior day highs. All eleven S&P sectors green, more than 1% gains for Technology, Materials, Communications, Discretionary, Energy, and REITs and Smallcaps among best leaders.

U.S. Treasury yields fell after Federal Reserve Chair Jerome Powell gave his strongest signal yet that interest rates are coming down most likely at the next policy meeting in September, as the benchmark 10-year yield fell 6 basis points (bps) below 3.80%. Gold prices rebounded, Bitcoin prices jumped, and all eleven S&P sectors were trading “positive” as his speech concluded. He gave no surprises as markets had widely anticipated commentary about a turn to rate cuts starting September, with Fed fund futures calling for around 100bps of cuts this year still (aggressive given election). Still despite the commentary very much in-line where markets were prior, and after a massive run the last 2 weeks, major averages held near highs and the S&P about 1% from all-time records. We do get an update on several key economic indicators before the next FOMC meeting in Sept with PCE due up next week, NFP next Friday and CPI on 9/11. Stocks movers on earnings detailed below.

• In Online Services: IQ was downgraded to Hold from Buy at Benchmark citing muted 2Q results and, more importantly, reduced visibility on membership growth which would further compromise their confidence in earnings and FCF projections. BIDU was downgraded from Outperform to Market Perform at Bernstein and tgt cut to $97 from $130 saying the stock to trade sideways on greater disruption and less visibility of future success: Bernstein expects more disruption to the near-term Search results and any limited signs of success in next few quarters.
• In Casinos/Gaming: LVS was downgraded to Neutral from Buy at UBS and cut tgt to $49 from $70 as believes the recovery in Las Vegas Sands’ Macau EBITDA gets more protracted and that Macau will likely continue to grind higher, but not see a step change until the economic outlook for the mass market customer improves. GLPI was upgraded from Peer Perform to Outperform w/ $57 PT @ Wolfe saying an extension of an earnings profile to 2026 begins to capture key growth opportunities for the company.

• CAVA +17%; shares rose after beating on comp, margin & ultimately EBITDA and all components of ’24 guidance were raised, with comp up LDD in 2H24.
• FDX +1%; on track for 10th straight day of gains as transports strong.
• ROKU +10%; was upgraded to Buy from Neutral at Guggenheim with a $75 tgt, as expects investor enthusiasm for the Roku story to grow into the Q3 earnings report in November as the company makes progress toward broadening video inventory advertising sales via third-party demand-side platforms and improved home screen monetization.
• ROST +2%; following better Q2 results and raised guidance as Q2 EPS $1.59/$5.29B tops consensus est. $5.25B; Q2 comp sales +4%, vs. est. +2.98%; raises FY EPS view to $6.00-$6.13, from prior forecast $5.79-$5.98 (est. $6.01); guides Q4 EPS $1.60-$1.67 vs. est. $1.68.
• WDAY +12%; posted solid FQ2 results, with 12-month cRPO growth of 16.1% coming in ahead of estimates; however, FQ3 cRPO guidance of 14-15% growth is below expectations; now expects annual subscription revenue growth of ~15% for FY26 and FY27, and for OM to expand to 30% by FY27 (up from 25% previously); shares jump after saying would sharply increase profitability over the next three years and that adjusted operating margin will reach 30% by end of 2027.
• WRBY +12%; upgraded to Market Outperform and $20 tgt at JMP Securities saying they believe consensus estimates for Warby Parker Inc.’s 2025 and 2026 top and bottom lines are too low.

• GEV -3%; after RBC Capital noted a blade failure at Dogger Bank reignites quality concern.
• GFI %; lowered its annual output forecast a 2nd time this year citing unusually harsh winter conditions which hurt a planned ramp-up of production at a new mine in Chile; now sees 2024 output between 2-2.15 mln ounces of gold vs 2.2–2.3 mln ounces estimated in June (7% lower); said profit slumped 30% to $320.7M in 1H.
• INTU -6%; reported a strong FQ4 revenue and EPS beat, driven primarily by QB Desktop and Credit Karma, but shares fell early after guided Q1 revenue growth of 5% to 6%, below expectations of 13.1%.
• LVS -2%; downgraded to Neutral from Buy at UBS and cut tgt to $49 from $70 as believes the recovery in Las Vegas Sands’ Macau EBITDA gets more protracted and that Macau will likely continue to grind higher, but not see a step change until the economic outlook for the mass market customer improves.
• RRGB -8%; shares tumbled on wider Q2 loss and Ebitda miss while lowers FY adj. EBITDA to $40.0M-$45.0M from prior $60M-$70M; sees FY restaurant level operating profit of 11.0% to 11.5%.