Mid-Morning Look

Thursday, July 28, 2022

U.S. stocks slip on the open, erasing modest gains initially as GDP shrinks for a second consecutive quarter, raising recession fears, but also reducing expectations that the Fed will remain aggressive in its interest rate hike cycle after yesterday’s 75-bps hike. Another sharp roll in Treasury yields as 10-yr dumps below 2.66% (lowest since mid-April), down over 6-bps and the 2-yr down -14bps to 2.83% while the dollar slumped after the weaker GDP data. Gold prices benefit early amid the drop in the buck and yields, recovering off recent 15-month lows. In earnings, bleak looking day with META weighing on Internet names after slowing rev growth, CMCSA weighs on cable on slowing trends, LUV softer outlook impacts travel names, QCOM results hit chip names. Standouts to the upside today in solar, alternative energy and EV sector after news that Senator Joe Manchin reached an agreement with Senate Majority Leader Chuck Schumer at supporting alternative energy. Defensive utilities and REITs among early S&P 500 top gainers as well. Volatility continues as investors weigh the weaker corporate outlooks from companies this quarter so far (qtr results generally been okay), impacted by several factors (FX, Russia impact, inflation, rising costs), while also weighs the Fed outlook after mixed data points (inflation still near 40-yr highs, while jobs situation remains solid, but manufacturing, housing, and confidence data remains weak). A huge night ahead with AAPL and AMZN headlining another round of earnings results.

Economic Data

·     Gross Domestic Product (GDP) contracted for the second straight quarter from April to June, hitting a widely accepted rule of thumb for a recession (2 straight quarters of contraction). GDP fell 0.9% for the period, following a -1.6% decline in Q1 and was well below the expected gain of +0.3%. GDP Price Index (2Q A) 8.7% vs 8% expected, Core PCE QoQ 4.4% vs 4.4% expected

·     Weekly Jobless Claims fell to 256,000 in latest week from 261,000 and vs. est. 253,000; the 4-week moving average rose to 249,250 from 243,000 prior week; continued claims fell to 1.359M in latest week from 1.384M prior and unemployment rate unchanged at 1.0%

Sector Movers Today

·     Semiconductors: The Senate passed the CHIPS+ bill, sending it to the House, where it is expected to pass quickly. It provides $52B for domestic semiconductor manufacturing, tax incentives for new facilities and authorizes federal funding for advanced technology R&D; QCOM Q3 results slightly better to in-line but issues weak guidance of 4Q adj EPS $3.00-3.30 vs est. $3.23, revs $11-11.8B vs est. $11.9B and now expects smartphone sales to fall 5% this year, vs. previous forecast of flat growth; chip equipment maker LRCX reported a strong JunQ and guided SepQ better to $4.9B (cons. $4.6B), with better Foundry/ Logic at 46% of Systems revenue, up 12ppts q/q; ~$2.2B of deferred revenue remain; STM boosted its year revenue outlook after qtr beat; MXL delivered another solid quarter, with 2Q revs ~in-line with expectations

·     Software movers: NOW reported mixed Q2 results as EPS beat but revs missed estimates and lowered FY22 subscription revenue to grow by 24% versus its previous forecast of 26% growth; PTC delivered strong results despite investor concerns of challenging macros with +15% organic cc ARR growth at $1,610M that was above the $1,588M midpoint of guidance; PEGA slides as reported mixed results, with a notable deceleration across leading indicators, driven by FX and macro and guided year lower; SSNC missed 2Q22 consensus and lowered 2022 EPS guidance; CTSH lowers guidance due to supply issues and FX

·     Aerospace & Defense; NOC Q2 adjusted EPS $6.06 vs. est. $6.10; Q2 revenue $8.8B vs. est. $9.07B; backs FY22 transaction-adjusted EPS view $24.50-$25.10 (est. $24.83) and backs FY22 revenue view $36.2B-$36.6B (est. $36.54B); TXT Q2 EPS $1.00 vs. est. $0.88 on revs $3.15B vs. est. $3.22B; reiterated its full year earnings per share expectation of $3.80 to $4.00 vs. est. $4.01 and expects 2022 cash flow from continuing operations of manufacturing group before pension contributions to be in range of $800 – $900 mln; CARR 2Q adj EPS $0.69 vs est. $0.62 on revs $5.2B vs est. $5.17B; guides FY adj EPS $2.25-2.35 vs prior $2.20-2.30 and est. $2.28, sees FY sales including Toshiba Carrier $20.8B vs est. $19.8B

·     Transports; in airlines, JBLU to acquire SAVE at $33.50 per share in cash or $7.6B enterprise value, including a prepayment of $2.50 per share in cash payable upon Spirit stockholders’ approval; LUV posts Q2 beat but says continues to experience inflationary pressures in Q3, particularly higher cost of labor and benefits, as well as airport costs and that 2022 capacity, or available seat miles, is expected to be down about 4% compared with 2019; in truckers, CHRW 2Q EPS $2.67 vs est. $1.98 on revs $6.8B vs est. $6.8B, adj op margin 45.5%

·     Casinos, Gaming, Lodging & Leisure sector; in leisure space, HOG posted a rise in Q2 profit boosted by a surge in leisure-related activities while also reported a fall in quarterly revenue, hurt by a two-week production shutdown in May that delayed shipments; boat retailers active on earnings as HZO posts mixed Q2 ($3.17/$688.5M vs. est. $3.03/$768.2M) while boosts its FY22 EPS view to $8.05-$8.45 from $7.90-$8.30 (est. $8.21) and BC with a top/bottom line beat and raises year profit view to $10.00-$10.30 from $9.80-$10.30 (est. $10.16) on better rev outlook; in cruise lines, RCL rises after posting smaller than expected quarterly loss and says its entire fleet has returned to operations

Stock GAINERS

·     BLNK +8%; electric vehicles, charging station names also benefit from the climate change spending bill news last night in Washington – CHPT, EVGO also active

·     ETSY +9%; reported generally in-line 2Q consolidated GMS results and better-than-expected revenue / adj. EBITDA margin performance – betterer-than-feared

·     F +3%; posted a stronger-than-expected earnings result and reaffirmed full-year targets

·     FSLR +17%, along with gains in solar and other clean energy stocks (RUN, BLDP, SEDG, SPWR, BE) after Democratic Senator Joe Manchin told Senate Majority Leader Chuck Schumer, he will now support proposal for new climate change spending as the bill would invest in hydrogen, nuclear power, renewables, fossil fuels and energy storage, and contains tax credits for solar panels

·     HTZ +14%; rises after Q2 earnings beat, while revs slightly missed and announced a $2B share buyback

·     PI +12%; as handily beat Street expectations and provided September quarter guidance well ahead of expectations

Stock LAGGARDS

·     CMCSA -9%; on broadband slowdown as had 32.16 million subscribers at the end of the second quarter, the exact same number at end of Q1; Refinitiv notes Comcast added at least 100,000 net new broadband subscribers every quarter over the past 20 years, except for a single instance during the 2008-09 financial crisis

·     COUR -26%; reported revenue growth below consensus and provided a growth outlook for the remainder of the year that was materially below prior guidance

·     CYH -37%; tumbled after posting an unexpected Q2 loss on a sharp y/y decline in Ebitda, falling well below estimates

·     FMS -14%; shares slide as sees FY22 adj revs at the low end of forecast and withdraws 2025 targets due to up headwinds

·     META -7%; after missing Q2 EPS and revs as revs slowed on a y/y basis ever and guided next quarter revs $26-28.5B below est. $30.5B as competition from TikTok weighs on the industry

·     NOW -8%; mixed Q2 results as EPS beat but revs missed estimates and lowered FY22 subscription revenue to grow by 24% versus its previous forecast of 26% growth

·     PEGA -14%; as reported mixed results, with a notable deceleration across leading indicators, driven by FX and macro and guided year lower

·     QCOM -6%; issues weak guidance of 4Q adj EPS $3.00-3.30 vs est. $3.23, revs $11-11.8B vs est. $11.9B and now expects smartphone sales to fall 5% this year, vs. previous forecast of flat growth

·     TDOC -23%; after Q2 net loss widens to $3.1B from $133.8M a year ago and sees 2022 revenue and adjusted EBITDA outlooks at the lower end of those ranges