Closing Recap

Wednesday, July 31, 2024

U.S. equity futures gained over night and were trending along resistance pivots pre-open with S&P futures having pushed through and holding just above and Nasdaq futures just below. Q2 earnings reports continue to be sufficient to soothe investors’ angst for the most part, but with a Fed decision coming in the afternoon, nothing else was likely to matter by the end of the day. Current implied probabilities see a 97% chance of no change from the Fed today and an 87.5% probability of a 25bps cut in September with a 12.5% expectation of a 50bps cut. The implied rate by June 2025 currently stands at 3.818%, so building in several cuts along the way. By mid-morning, stocks continued to gain with large caps taking control. QQQ gained 2.5%, while SPY climbed over 1% versus IWM up just modestly%. Breadth was solid at just better than 2:1 favoring advancers. Sector-wise, Technology was the big early winner with XLK +3.5%, while only Consumer Discretionary and Healthcare were in the red among S&P Sector ETFs.

In data of interest today, @DiMartinoBooth said on Bloomberg TV the recession has started in the US with real inflation down to 1.5%; says K-shape economy very tough for lower income population and the Fed needs to cut rates quick… On a side note, the consumer confidence spread remained reasonable at 55 yesterday and would disagree with the notion a recession has begun. Will check again next month. On divergences, @bespokeinvest notes MSFT down over 1% while the Nasdaq gains over 2% … hasn’t occurred since October 2008. Also, more broadly, price and breadth have not diverged as frequently as they have over the past 50 days since at least 1990. Lastly, on volatility, @KobeissiLetter notes NVDA’s market cap has swung more than $1.4T in just over a month, while adding $380B of market cap in just 18 hours.

Heading into the final hour of trading, U.S. equities were rallying to highs off Fed Chair Powell’s more dovish comments. The Fed did not surprise by keeping rates steady and the immediate impact on stocks was insignificant. Comments from the statement were fairly balanced as the Fed stated a need for greater confidence inflation is moving sustainably toward 2% before it lowers rates, but also indicated it has seen “some” progress recently. The prior statement noted “modest” progress. Separately, Chair Powell noted Q2 inflation reading have added to confidence, a rate cut could be on the table in September, there’s a broad sense at the FOMC that they are moving closer and that reducing too late could unduly weaken the economy. Breadth expanded to almost 4:1 in favor of advancers as small caps joined the rally with IWM +0.64% (off earlier highs above 2%) vs. SPY +1.6% and QQQ +2.9%. Technology continued to lead the S&P sector ETFs with up +4% on final day of July.

• Chicago PMI fell 2.1 points to 45.3 in July, vs. forecast for a 45.5 reading from the 47.4 reading in June. The index has been in contraction territory since last November.
• Pending home sales rose in June as rose 4.8% in June from the previous month, according to the monthly index released Wednesday by the National Association of Realtors (NAR), topping estimates for a rise 1% in June. Transactions were still down 2.6% from a year ago.
• China’s manufacturing activity slipped to a five-month low as the National Bureau of Statistics (NBS) purchasing managers’ index (PMI) contracted for a third month, easing to 49.4 from 49.5 in June, below the 50-mark separating growth from contraction, but just ahead of a median forecast of 49.3 in a Reuters poll.
• Euro zone inflation unexpectedly edged up in July, accelerating to 2.6% in July from 2.5% in June according to Eurostat’s flash estimate. A key measure of underlying growth in prices — which excludes energy, food, alcohol and tobacco — failed to show the expected decline and came in unchanged at 2.9%.

• Overnight, the Bank of Japan (BoJ) raised interest rates in a somewhat unexpected move to 0.25% from 0-0.1% by a vote of 7-2 on Wednesday, the highest since 2008 and unveiled a detailed plan to slow its massive bond buying, taking another step towards phasing out a decade of huge stimulus. The bank projected inflation to stay around 2% in the coming years. The BoJ decided on a quantitative tightening (QT) plan that would roughly halve monthly bond buying to 3 trillion yen ($19.6 billion), from the current 6 trillion yen, as of January-March 2026.
• Tomorrow the Bank of England is holding its meeting, with no changes expected.

• December gold futures settle higher by $21.10/oz, or +0.86%, to a new record high settle of $2,473. Expectations of rate cuts in coming months and ongoing Middle East escalation helped propel gold higher. The Gold Fear and Greed Index remains unconcerned by rising prices, coming in at 78/100, Greed versus 77 (Greed) last week and 66 (Greed) a month ago. From here, all eyes are on the Fed near-term as investors will listen closely to gauge any shifts in tone as we inch closer to the September meeting and expected cuts. US dollar to lows of day vs. Japanese yen, down 1.9% at 149.84 and Treasury yields also end day at lows with 10-yr at 4.07% to end month.

• In Grains/Foods: BG shares dropped early after misses Q2 profit estimates on lower sales at its core segment as EPS of $1.73 was below the $1.80 estimate and Q2 sales at agribusiness segment fall to $9.66B from $10.88B y/y, though raises annual adj. profit forecast to $9.25 per share from $9.00 per share. KHC cuts fy24 adjusted operating income growth view to 1%-3% from 2%-4%. MDLZ reported better than expected Q2 EPS and nudged up revenue guidance
• Retail: GPS was upgraded to Neutral from Underperform at Bank America and raised tgt to $25 from $18.50 citing the view that Gap will continue to beat on gross margin, leading to upside to FY24 consensus EPS.

• In Casino & Gaming: CZR Q2 EBITDAR of $1bn was +3% vs. consensus as the company has now generated $1bn of EBITDAR on a consolidated basis in three of the last five quarters. Las Vegas, 49% of property-level EBITDAR in 2023, was 5% ahead of expectations as cost controls. Margin strength across Vegas portfolio offset regional headwinds.
• In Cruise lines: NCLH beat 2Q guidance and raises full year guidance to around $1.53 for EPS from prior view $1.42 and said continues to experience strong consumer demand as many new bookings are pivoting to 2025 sailings.
• In Lodging: MAR shares declined as Q2 EPS topped consensus but revs of $6.44B was shy of estimates and guided 2024 earnings $9.23-$9.40 below consensus of $9.51.
• In Entertainment: a US judge rejected a the $335M UFC class action settlement over fighter pay that was brought by UFC fighters against EDR. Citigroup analyst opens a “positive catalyst watch” on EDR after the judge’s block. Endeavor shares are essentially unchanged on the day.

• In Oil Equipment & Services: RIG announced a 1,095-day contract for the Deepwater Invictus with bp in the U.S. Gulf of Mexico. The program is expected to commence in the first quarter of 2025 and is estimated to contribute approximately $531M in backlog, excluding additional services and a mobilization fee. CRK reported weaker than expected results and an operations update that highlights the impact that expensive Western Haynesville wells are having on the Company
• In Alt Energy & Solar: FSLR reported 2Q results ahead of estimates and reaffirmed 2024 guidance broadly in line with expectations. With an uncertain policy environment, FSLR saw its bookings slow down. Morgan Stanley upgraded shares of CWEN to Overweight from Equal Weight (tgt to $36 from $25) as sees upside to the company’s current guidance through 2026 and several pathways for growth in 2027 and beyond from wind repowering, battery storage colocation and remain OW rated on HASI (tgt to $44 from $30) while downgraded NEP to Underweight from Equal Weight (tgt to $20 from $31) as expects questions around funding, both from buyout obligations on the company’s convertible equity portfolio financings and new growth investment, as well as related distribution cut risk to remain overhangs on the stock.

• MGNX shares tumbled as IDMC recommended discontinuation of vobra-duo treatment for remaining mCRPC patients in the ongoing Ph2 TAMARACK study; data will be presented at ESMO (downgraded by two analysts).
• TEVA boosted the low end of its year EPS and revenue forecast.
• ALXO shares fell after topline results from ASPEN-06 trial of evorpacept.
• HUMA gained after top-line results from V007 Phase 3 clinical trial of ATEV.

• In Medical Equipment: PEN shares tumbled as Q2 results beat but cuts FY24 revenue view to $1.18B-$1.2B from $1.213B-$1.27B (est. $1.24B).
• In Healthcare Services: GEHC Q2 EPS topped consensus but total quarterly revenue of $4.84B missed analysts’ average estimate of $4.87B and cut its organic sales growth forecast to a range of 1% to 2% from about 4% prior. DH pre-released Q2 results ahead of the Street, but lowered FY24 guidance on the top and bottom line (shares downgraded at JP Morgan following preannouncement).
• In Dental Services: XRAY reported Q2 miss on top and bottom line while lowers FY24 adj EPS view to $1.96-$2.02 from $2.00-$2.10 and lowers FY24 revenue view to $3.86B-$3.90B from $3.91B-$3.97B

• TEX reported 2Q24 EPS of $2.08 vs. consensus of $2.06 on revenue of $1,382M vs. consensus of $1,427M; gross margin of 23.8% missed by 40 bps while SGA of 9.8% was 60 bps lower, leading to 14.0% operating margin, 20 bps above our estimate; took $613M in orders, down 39% y/y, and backlog decreased to $2.4B, which was down 37% y/y.
• In Trucking: LSTR Q2 earnings came in line with the firm’s forecast and expectations. 3Q guidance resets estimates lower and management doesn’t expect any material upside surprises through peak. WERN missed low 2Q expectations on TTS margin pressure. In rails (CSX, UNP), The Association of American Railroads (AAR) reported U.S. rail traffic for the week ending July 27, 2024. For this week, total U.S. weekly rail traffic was 508,496 carloads and intermodal units, up 5.3 percent compared with the same week last year. Total carloads for the week ending July 27 were 228,845 carloads, down 0.5 percent compared with the same week in 2023, while U.S. weekly intermodal volume was 279,651 containers and trailers, up 10.5 percent compared to 2023.

• In Research: Bank America upgraded RTX to Buy from Neutral with a price target of $140, up from $110 as the firm is now more confident the scale and scope of the fix has been fairly considered by the company and sees potential for further derisking as Maintenance, Repair, and Overhaul, or MRO, throughput increased 10% q/q. The firm also upgraded LMT to Buy from Neutral with a price target of $635, up from $46 saying Lockheed’s upgraded F-35s with Tech Refresh-3 packages have restarted deliveries, and demand for new deliveries in legacy programs like the F-35 and Black Hawk is rampant.

• Copper active TECK Chilean government estimates copper average price at $4.30 per pound in 2024, from previous $4.20. CCJ shares of the uranium miner were upgraded to Buy from Hold at Cantor, raising their PT to %51 from $48

• In Telecom: TMUS Q2 revenue beats estimates and boosts 2024 subscriber view to 5.4M-5.7M vs. previous forecast of 5.2M-5.6M additions and added 777,000 postpaid phone customers in Q2 vs estimates of 642,600 additions, while also boosted year FCF outlook to $16.6B-$17B from prior $164B-$16.9B.

• MSFT derivative call: Stifel noted MSFT capex continues to ramp. Jun Q CAPEX grew +26% q/q and +55% y/y to $13.9B (cash paid for PP&E) to support demand for MSFT’s cloud and AI offerings. Overall, Stifel believes MSFT’s commentary is incrementally positive for companies in its coverage with relatively higher Data Center/AI exposure (primary: ALAB, CRDO, MRVL, and MPWR; secondary: MTSI, MXL and SMTC); and net neutral for those with greater PC exposure (consumer PC demand slightly better-than-expected).
• FRSH reported better-than-expected 2Q24 results with non-GAAP EPS of $0.08 (consensus ($0.06)) on revenue of $174M (consensus $169M), up 20% y/y (but including a $3M or two-point benefit to growth from the acquisition of Device 42), flat with 20% last quarter; and billings of $185.9M (consensus $178.8M), up 17% y/y.
• In Comm & Networking: ANET a reported a beat/raise 2Q24 report and increased CY24 top-line guide to “at least 14%” for a third consecutive increase to CY24 revenue (was 10-12%, then 12-14%) this calendar year. Strength was driven by Cloud and Enterprise during the quarter.

• ASML shares benefitted from a report that the Biden administration plans to unveil a new rule next month that will expand U.S. powers to stop exports of semiconductor manufacturing equipment from some foreign countries to Chinese chipmakers, two sources familiar with the rule said. But shipments from allies that export key chipmaking equipment – including Japan, the Netherlands and South Korea – will be excluded, limiting the impact to ASML.
• MBLY downgraded to Neutral from Overweight at JP Morgan on longer term concern around SV growth and near-term concern around inventory correction in auto supply chain.
• QRVO both reported above consensus/in-line results respectively as Apple drove upside to Jun-Q results for both. Moreover, Qorvo provided a better Sep-Q outlook on share gains in upcoming IP16 vs SWKS losing $ content this year. That said, both are optimistic on $ content gains next year if Apple begins to move modem in-house.
• QRVO reported an in-line JunQ and guided SepQ top-line in line, up 16% q/q to ~$1.03B (in line with consensus $1.03B), vs peer SWKS up ~13% q/q.
• SWKS reported an in-line JunQ and guided SepQ also in-line at $1.02B (cons. $1.01B), up 13% q/q, with Handsets up ~20% q/q and Broad Markets (BM) up modestly q/q.
• US weighs new restrictions on China’s access to AI memory chips with South Korea’s SK Hynix and Samsung possibly affected by rule planned by US which could come as soon as next month.