Mid-Morning Look

Tuesday, July 16, 2024

U.S. stocks open higher and extend gains, particularly in Small caps and Transports, as the market euphoria remains high on rising expectations for interest rate cuts in September by the Fed, data showing the U.S. economy staying steady, and hopes for less uncertainty heading into the November elections. The failed assassination attempt of Republican Presidential candidate Donald Trump this weekend sparked a market rally on Monday amid increasing expectations it will propel him in November over President Biden, and after announcing his running mate JD Vance of Ohio as VP as Trump is seen pro-business and less regulation. In stock news, managed care names get a bounce after Dow component UNH quarterly results and guidance, while financials/bank earnings results were mixed as BAC shares rose, while MS and SCHW shares declined. Retail industry with more disappointing commentary as Hugo boss (BOSSY) cut guidance overnight following Burberry weakness the day prior weighed on luxury. Transports surging in recent days as the Dow Transports jumped back above the 16,000 level (rises more than 1,000 points last 5-days – highest level in 3-months). After leading markets higher yesterday, Energy (XLE) declines today along with technology (XLK), while Industrials (XLI) and Healthcare (XLV) lead in the S&P (rotation). Healthcare and Financials extend record highs as investors add to other sectors outside of the Technology (XLK) and semi (SOX) sectors. After jumping 10% on Monday, Bitcoin holding those levels above $63,000. Treasury yields got a boost from better-than-expected U.S. retail sales in June. Overall sales were flat over May, while economists forecast a -0.3% contraction. May’s number was revised up to 0.3% from 0.1%. June sales, ex-auto, increased 0.4%, compared to consensus of 0.1%. The previous month’s figure was also revised up to 0.1% from a negative 0.1%. Odds of three 25bps of Fed cuts by December were at 90%, while traders fully priced in the likelihood of two BOE 25bps cuts this year. Oil futures are lower for a third consecutive session after bearish economic data out of China on Monday, including lower refinery activity, continue to raise demand concerns.

• June import prices were unchanged M/M (better vs. est. -0.1%) and vs May upwardly revised (-0.2%) from prior (-0.4%) while June export prices tumbled (-0.5%) vs. consensus (-0.1%) and vs May -0.7% (prev -0.6%). U.S. June year-over-year import prices +1.6%, export prices +0.7%.
• May Business Inventories rose +0.5% vs. consensus +0.4% and compared to April +0.3%; May inventory/sales ratio 1.37 months’ worth vs April 1.37 months; May business sales unchanged vs April +0.2% (prev +0.3%); May retail inventories ex-autos unrevised at unchanged (prev unchanged).
• July NAHB Housing market index 42 (consensus 43) versus 43 in June; July index of current single-family home sales 47 versus 48 in June; July index of home sales over next six months 48 versus 47 in June; July index of prospective buyers 27 versus 28 in June.

• In Banks: BAC Q2 profit fell as its income from interest on loans shrank; Q2 EPS $0.83 vs. $0.88 a year earlier and vs. $0.80 estimate; net interest income (NII) fell -3% to $13.7 billion; raises quarterly dividend by 8%; said Q2 provision for credit losses was $1.5B; said sees Q4 NII about $14.5B, ahead of analyst estimates for $14.33B. MS Q2 EPS $1.82 tops $1.65 as profit increased 41% y/y to $3.08B (prior $2.2B), revenue rose 12% y/y to $15.02B vs. est. $14.3B; Q2 Investment banking revenue rose 51% y/y to $1.62B, while wealth management revenue rose 2% to $6.79B (vs. est. roughly $6.8B); Q2 net new assets fell to $36.4B from $89.5B y/y; Q2 equity underwriting revenue jumped 56% to $352M, fixed income underwriting surged 71% to $675M and advisory revenues also climbed 30% to $592M. PNC Q2 EPS $3.39 vs. est. $2.98 as revs rose to $5.41B from $5.29B (and vs. est. $5.41B); Q2 tangible book value per share $89.12; Q2 Average deposits came in at $417.2B, down from $425.7B; Q2 net interest income (NII) was $3.3B and on quarter, NII rose by $38M, reflecting higher yields on interest-earning assets. SCHW reported mostly in-line Q2 results (EPS $0.73/$4/69B vs. $0.72/$4.68B), while noting Q2 bank deposits fell 17% year over year to $252.4B and net interest revenue also fell, dropping 6% to $2.16B for the quarter.
• In Software: Mizuho made a few ratings changes: DDOG was upgraded to Outperform from Neutral and raised tgt to $155 from $135 as believes DDOG appears to be solidifying its position as a clear leader in the observability market with multiple product areas at scale and newer products growing rapidly. PLTR was downgraded to Underperform from Neutral at Mizuho saying while the company has performed generally well in recent quarters, they remain concerned by the lack of visibility into Palantir’s business. Lastly ZS was downgraded to Neutral from Outperform at Mizuho saying they are not confident that ZS can continue to close large, transformative deals at a steady pace, particularly given the macro environment coupled with what it believes is an increasingly competitive SASE market.

• CHGG +15%; Morgan Stanley upgraded to equal weight from underweight though cuts tgt to $3.25 from $6.50, saying its earlier restructuring announcement and cost reduction plans represented CEO and CFO’s strategic review of the business and vision for path ahead.
• DHI +5%; as homebuilders continue recent surge given lower rate cuts by the Fed in September.
• EPAM +4%; was upgraded to Buy from Hold at Jefferies and raised tgt to $237 from $202 as believes the co is well-positioned to capitalize on artificial intelligence.
• MTCH +6%; after the WSJ reported the company has drawn the attention of another activist investor, Starboard Value. The hedge fund has built a big stake in the online-dating company and is pushing for a possible sale if a turnaround isn’t successful, according to people familiar with the matter. https://tinyurl.com/yu5urhmc
• SILO +99%; enters into a global exclusive licensing agreement to further develop, manufacture and commercialize the Alzheimer’s drug SPC-14.
• UNH +4%; reported Q2 adj EPS $6.80 vs. est. $6.66 as revs rose 6.4% y/y to $98.9B vs. est. $98.84B and backed its FY24 adj EPS view $27.50-$28.00 (est. $27.59); Q2 medical cost ratio of 85.1% vs analysts’ estimates of 84.4% and was above the 83.2% level a year ago period; Q2 UnitedHealthcare revenue up 5.3% to $73.9B and Optum revenue 11.7% to $62.9B.

• FCX -3%; as handful of materials/metal names pressured – weaker China data having modest impact.
• RDDT -6%; was downgraded to Hold from Buy at Loop Capital saying shares are now trading at 10x LOOP’s 2025 estimated revenue and are approaching its $75 price target; does not believe the upside reward meaningfully outweighs the downside risk.
• SCHW -6%; in-line Q2 results (EPS $0.73/$4/69B vs. $0.72/$4.68B), while noting Q2 bank deposits fell 17% year over year to $252.4B and net interest revenue also fell, dropping 6% to $2.16B for the quarter.