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Vice President At the end of July, Fed Chair Jerome Powell set the stage for rate cuts by announcing “the time has come for policy to adjust”, the only question is now by how much. The bond market has been stuck in this nowhere land between expectations of 25-basis point rate cut or 50-basis point rate cut. This week the economic data generally showed weakening that steadily moved the needle higher but probably not high enough. The holiday shortened week started on a concerning note as the ISM New Orders showed a marked slowdown and sparked broader fears of a slowing economy. With new orders faltering, concern switched to the labor market. Wednesday’s JOLTS report (Job Openings and Labor Turnover Survey) showed there are much fewer job openings available than expected. This is unwelcome news for anyone seeking a job and indicates the economy could be cooling too fast. The ADP Employment Change reported on Thursday supported this view as it too came in much weaker than expected. The final and most important economic data print came out on Friday. The Employment report or as it is officially called, Change in Nonfarm Payrolls, also came in weaker than expected. This is the last major data print remaining before the Fed’s September 17th and 18th meeting. The weaker than expected number caused yields to initially fall but even after all the weakness reported this week, we have no clear path to how aggressive the Fed will be in cutting rates on September 18th. Expectations priced into the market remain firmly in the middle between a 25-basis point cut or a 50-basis point cut. The Fed usually moves in 25 basis point increments so with 36 basis points cut priced in, they are going to have to pick a side. For the week, Treasury yields fell between 17 and 28 basis points. September 6 2024 Index Current Last Week Wk Chg Last Year Yr Chg Tax-exempt MMF 3.09% 3.19% -.10% 3.68% -.59% Taxable MMF 5.30% 5.31% -.01% 5.38% -.08% 2-Year Treasury 3.64% 3.92% -.28% 4.95% -1.31% 5-Year Treasury 3.48% 3.70% -.22% 4.38% -.89% 10-Year Treasury 3.70% 3.90% -.20% 4.25% -.54% 30-Year Treasury 4.02% 4.20% -.17% 4.34% -.32% 5-Year Exp. Inflation 1.88% 2.03% -.15% 2.28% -.39% 2-Year Corporate* 4.24% 4.40% -.16% 5.36% -1.12% 5-Year Corporate* 4.18% 4.35% -.17% 5.12% -.94% 10-Year Corporate* 4.64% 4.81% -.17% 5.38% -.74% 30-Year Corporate* 5.09% 5.25% -.16% 5.54% -.45% 2-Year Municipal** 2.47% 2.56% -.09% 3.25% -.78% 5-Year Municipal** 2.50% 2.57% -.08% 3.09% -.59% 10-Year Municipal** 2.83% 2.87% -.04% 3.17% -.34% 30-Year Municipal** 3.84% 3.87% -.03% 4.20% -.36% 10-Year German Govt Bond 2.17% 2.30% -.13% 2.61% -.44% 10-Year U.K. Govt Bond 3.88% 4.01% -.13% 4.45% -.56% 10-Year Japanese Govt Bond .84% .88% -.04% .65% .19% 10-Year Spanish Govt Bond 2.99% 3.13% -.14% 3.64% -.65% 10-Year Italian Govt Bond 3.62% 3.70% -.08% 4.34% -.72% Fed Funds 5.50% 5.50% .00% 5.50% .00% Prime Rate 8.50% 8.50% .00% 8.50% .00% Dollar*** $101.21 $101.70 -$0.48 $105.06 -$3.85 CRB $271.27 $277.03 -$5.76 $283.77 -$12.50 Gold $2,500.90 $2,504.50 -$3.60 $1,924.10 $576.80 Crude Oil $67.88 $73.55 -$5.67 $86.87 -$18.99 Unleaded Gasoline**** $1.90 $2.09 -$0.19 $2.31 -$0.41 Index Current Last Week Wk Chg Last Year Yr Chg Tax-exempt MMF 3.02% 2.78% .24% 3.38% -.36% Taxable MMF 5.33% 5.33% .00% 5.19% .14% 2-Year Treasury 4.39% 4.51% -.13% 4.93% -.54% 5-Year Treasury 4.08% 4.17% -.09% 4.24% -.16% 10-Year Treasury 4.20% 4.24% -.04% 4.00% .20% 30-Year Treasury 4.46% 4.45% .01% 4.04% .42% 5-Year Exp. Inflation 2.16% 2.19% -.04% 2.30% -.14% 2-Year Corporate* 4.88% 4.91% -.02% 5.27% -.38% 5-Year Corporate* 4.77% 4.77% .00% 4.93% -.16% 10-Year Corporate* 5.15% 5.12% .03% 5.14% .01% 30-Year Corporate* 5.54% 5.46% .08% 5.26% .28% 2-Year Municipal** 2.89% 2.92% -.03% 3.00% -.12% 5-Year Municipal** 2.86% 2.88% -.02% 2.64% .22% 10-Year Municipal** 2.97% 2.96% .01% 2.63% .34% 30-Year Municipal** 3.95% 3.93% .02% 3.84% .11% 10-Year German Govt Bond 2.40% 2.46% -.06% 2.47% -.06% 10-Year U.K. Govt Bond 4.10% 4.12% -.02% 4.30% -.20% 10-Year Japanese Govt Bond 1.05% 1.03% .03% .44% .62% 10-Year Spanish Govt Bond 3.23% 3.24% -.02% 3.47% -.25% 10-Year Italian Govt Bond 3.75% 3.77% -.02% 4.06% -.31% Fed Funds 5.50% 5.50% .00% 5.50% .00% Prime Rate 8.50% 8.50% .00% 8.50% .00% Dollar*** $104.30 $104.40 -$0.09 $101.77 $2.53 CRB $279.69 $280.36 -$0.67 $280.17 -$0.48 Gold $2,383.80 $2,399.10 -$15.30 $1,945.70 $438.10 Crude Oil $76.84 $80.13 -$3.29 $80.09 -$3.25 Unleaded Gasoline**** $2.45 $2.45 $0.00 $2.42 $0.04
Portfolio Manager
Note: Municipal yields are as of the previous business day.
* Composite A
** General Obligation AA+
*** Int'l value of the U.S. dollar (Avg. exchange rate between the dollar and 6 major world currencies).
**** Futures price per gallon
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Vice President Early month market volatility, now that sounds familiar.
After volatility spiked in the front end of August, and moderated as the month progressed, market volatility has made a comeback in early September.
U.S.
stocks traded lower in the holiday shortened week, with all major U.S.
equity indices trading in the red through Thursday’s close.
In a similar fashion to August, economic growth worries contributed to risk-off trading to open the month.
Shares of technology and small cap companies were some of the hardest hit this week with the tech heavy Nasdaq Composite and the small cap Russell 2000 Index both trading lower by more than 3% through Thursday’s close.
September has historically shown to be a difficult month for U.S.
stock performance with the 5 and 10-year average returns for the S&P 500 Index in September -4.2% and -2.3% respectively.
As of late Friday morning, U.S.
stocks were trading well into the red for the day. Coming into the week, the focus was on Friday’s August Private Nonfarm Payrolls print and the potential impact it might have on a Federal Reserve (Fed) policy move later this month.
While the market was waiting for Friday’s jobs print, economic data early in the week grabbed investors’ attention, sparking economic growth worries.
Tuesday’s August ISM Manufacturing PMI of 47.2 was lower than FactSet consensus of 47.5 and remaine in contraction territory (below 50.0).
Additionally, the New Orders Index fell to its lowest level since the first half of 2023, at 44.6, viewed as a signal of weaker demand.
The data helped to reignite early August growth concerns, sending U.S.
stocks notably lower in Tuesday trading.
Nvidia’s share price weakness (down 9.5% on Tuesday) and negative seasonality were also seen as a few additional contributors to the risk-off tone. Economic data on Wednesday and Thursday was mixed: The job openings and ADP data played into the recent uptick in growth concerns, while the ISM Services PMI and Initial Claims data helped to counteract some of those worries.
Friday’s Private Nonfarm Payrolls print for August showed a softer than expected 142k jobs were added in the month, below FactSet consensus of 160k.
The print also showed an in line with consensus unemployment rate of 4.2% though, down month/month from 4.3%.
While Friday’s jobs report did not meaningfully alter the soft-landing narrative, and seemingly was viewed as not too cool or not too hot initially, the print added to the recent uptick in growth concerns and ultimately weighed on U.S.
stocks Friday morning.
Checking in on rate cut expectations, per the CME FedWatch Tool, as of late Friday morning, traders were pricing in the chance of a 25-basis point rate cut at the Fed’s September meeting at 73%, and a 50-basis point rate cut at 27%.
This was a modest change from one week ago when the probabilities were 70% and 30% respectively. Interest rate cuts are wanted by the market, but a jumbo move by the Fed could potentially incite concerns the Fed is behind the curve.
Time will tell how the market will react to the Fed’s upcoming September decision.
Until then, the market will be on the lookout for further signals in support of the soft-landing narrative.
September remains a seasonally difficult month for U.S.
stocks with the upcoming U.S.
election posing as a potential headwind for the market as well. Index Current Week Month of Sep. YTD Dow Jones Industrial Avg. -1.91% -1.91% 9.61% S&P 500 -2.55% -2.55% 16.48% Nasdaq -3.30% -3.30% 14.66% MSCI EAFE -2.42% -2.42% 9.69% Russell Mid Cap -2.47% -2.47% 9.36% Russell 2000 -3.84% -3.84% 6.15% As of: 09/05/2024 Updates to the Equities Buy List: Reported better than consensus revenue and earnings results Thursday afternoon.
A slight miss on Semiconductor Solutions revenue and a quarterly revenue guide of $14 billion, which was just light of FactSet consensus of $14.11 billion, weighed on AVGO share performance on Friday.
AVGO showed solid results for its artificial intelligence (AI) semiconductors business and lifted its full year revenue guidance for AI chips to $12 billion from $11 billion.
VMware results were strong.
The company’s non-AI businesses remain a drag, but AVGO noted the recovery trajectory remains positive.
AVGO also increased its quarterly dividend by 1%, lifting it to $0.53/share.
Despite the guidance miss, we continue to hold a favorable view on AVGO given the momentum its AI business has shown and expectations that its more cyclical non-AI business should improve.
We keep our BUY rating on AVGO. Company Name News Event Boeing Co. (BA) Delivered better-than-feared results, reporting a smaller-than-expected quarterly earnings loss of $1.13/share vs.
FactSet consensus of a $1.69/share loss.
Revenue of $16.57 billion topped FactSet consensus of $16.24 billion and BA reported a lower than consensus cash burn of $3.9 billion.
Revenue topped expectations in two of BA’s three segments; Commercial Airplanes’ revenue fell short.
Deliveries of commercial aircraft decreased to 83 in the quarter vs.
130 in the year ago period.
Production has been slowed to focus on quality improvements.
BA noted it has seen progress and expects production to improve markedly in the back half of the year.
The company’s total backlog rose 28.5% year-over-year to ~$529 billion; Commercial Airplanes’ backlog stood at a robust $448 billion.
BA still expects to realize $10 billion in free cash flow in the 2025-2026 timeframe but pushed out expectations for that figure to be reached later in that timeframe.
Challenges remain in front of BA, but the company appears to be headed in the right direction.
We maintain our BUY rating on BA shares. Comcast Corp. (CMCSA) Posted better-than-expected quarterly revenue and earnings results Thursday morning.
Adjusted EBITDA of $9.36 billion was a little shy of FactSet consensus of $9.39 billion.
CMCSA’s Connectivity & Platforms segment’s quarterly revenue was above consensus.
Residential broadband customers totaled 29.69 million in the quarter, just short of expectations of 29.70 million.
Video customers were better-than-expected, and wireless adds were 289,000.
Turning to CMCSA’s Content & Experiences segment, revenue missed expectations, Media revenue was better, but Studios and Theme Park revenue misses weighed on the segment’s top-line performance.
Within the unit, streaming service Peacock revenue rose 54% to $1.1 billion and paid subscribers were 34 million.
Free cash flow generation and broadband revenue per customer were positives while broadband subscriber numbers and theme park growth were drags.
We maintain our BUY rating on CMSA shares at this time. Alphabet Inc. (GOOGL) Delivered first quarter top and bottom-line beats Thursday afternoon.
Quarterly revenue rose 15% year-over-year.
Search, YouTube, and Cloud revenues were all above consensus estimates with a sequential growth acceleration for GOOGL’s ad business a welcomed sight.
GOOGL also announced its first ever dividend, which will be paid in June, and intended to continue thereafter on a quarterly basis.
The board authorized an additional $70 billion in share buybacks as well.
Operating margin easily surpassed consensus with GOOGL displaying strong cost discipline.
Furthermore, GOOGL’s Cloud unit showed it is beginning to be a meaningful contributor to the company’s overall profitability.
The company expects to continue to heavily invest in artificial intelligence (AI), with capex expected to be equal to or greater than first quarter levels throughout the remainder of the year.
AI investments are providing a boost to both GOOGL’s ad and cloud businesses with the company’s strategy and profitability focus positioning it well for profitable growth moving forward.
Despite the significant increase in capex expected, operating margins are impressively still anticipated to expand in 2024; we maintain our BUY rating. L3Harris Technologies Inc. (LHX) Posted above consensus first quarter revenue and earnings results Thursday afternoon.
LHX lifted its earnings per share guidance with the midpoint above FactSet consensus; the midpoint of LHX’s revenue outlook was below consensus.
The company reaffirmed full year free cash flow of ~$2.2 billion and raised operating margin guidance to greater than 15% from ~15%.
Sales in all of LHX’s segments topped expectations, and its funded book-to-bill was 1.06x; LHX’s total backlog stood at $32 billion.
LHX topped margin expectations with the company noting margin expansion was driven in part by improved program performance and NeXt savings.
We maintain our BUY rating on LHX shares at this time. Meta Platforms Inc. (META) Reported above consensus first quarter revenue and earnings Wednesday afternoon.
Revenue grew 27% in the quarter and META’s family daily active people grew 7% in the quarter to 3.24 billion.
The company also reported ad impressions rose by 20% and average price per ad was higher by 6% with artificial intelligence (AI) supportive of growth.
Operating margin was 37.9% and free cash flow was above consensus.
META provided second quarter revenue guidance, which was a little short of FactSet consensus at the midpoint, $37.75 billion vs.
$38.25 billion.
The company provided full year expense and capital expenditure guidance, which was raised from its previous outlook of $94-$99 billion and $30-$37 billion to $96-$99 billion and $35-$40 billion respectively.
Given META’s AI optimism, its need to build out infrastructure in support of future opportunities is driving the investment ramp.
Capital expenditures in both AI and META’s Reality Labs unit are expected to show significant increases.
Given the still unknown returns from META’s AI investment cycle, in conjunction with the second quarter guidance miss, META shares traded markedly lower in Thursday’s session, down 10.6%.
Despite the guidance miss and higher investment outlook, we continue to view the name well positioned to ultimately monetize on its AI investments via ads and premium features, amongst other items.
We maintain a favorable long-term view on META shares and keep our BUY rating. Merck & Co Inc. (MRK) Delivered above consensus first quarter results Thursday morning.
Sales growth in the quarter was supported by growth in oncology and vaccines.
Keytruda sales rose 20% year-over-year and Gardasil sales were higher by 14%; sales of both topped consensus estimates.
MRK lifted its full year earnings per share outlook, with a midpoint of $8.59, above FactSet consensus of $8.56, and provided an update on its treatment pipeline, showing solid progress.
We maintain our BUY rating on MRK shares. Microsoft Corp. (MSFT) Posted quarterly top and bottom-line beats Thursday afternoon.
MSFT reported a 17% year-over-year revenue growth and earnings per share of $2.94, $0.12 better than FactSet consensus.
Operating margins were above expectations by 150 basis points.
Revenue in each of MSFT’s three segments topped expectations with the Intelligent Cloud unit pacing revenue growth at 21%.
Within Intelligent Cloud, Azure revenue growth was 31%, a sequential acceleration in growth, and easily above consensus.
MSFT noted seven percentage points of Azure growth was attributed to the incorporation of artificial intelligence (AI), which was a sequential improvement from the six percentage points reported last quarter.
The company also mentioned that Azure growth attributed to AI was ultimately limited in the quarter given capacity constraints.
Productivity and Business Processes revenue rose 12% and More Personal Computing revenue was higher by 18%; the latter was boosted by MSFT’s Activision Blizzard acquisition.
Although MSFT’s June quarter revenue guide of $64 billion was shy of the $64.5 billion consensus figure, the company’s Intelligent Cloud revenue growth forecast was above, paced by Azure growth expectations.
Capex is expected to ramp higher as MSFT focuses investment on AI and Cloud infrastructure.
Despite the expected uptick in spending, MSFT’s operating margin outlook was better than consensus.
Remaining performance obligations stood at $235 billion, a 20% year-over-year increase.
Strong demand for, and adoption of, MSFT’s AI services stands as an attractive tailwind for the name.
Additionally, MSFT continues to exhibit strong margins despite a significant increase in capex spending.
We maintain our BUY rating on MSFT. ServiceNow Inc. (NOW) Reported better-than-expected first quarter revenue and earnings Wednesday afternoon.
Subscription revenue in the quarter was better-than-consensus, growing 24.5% in constant currency.
NOW posted current remaining performance obligations (cRPO) of $8.45 billion, which was also above expectations; cRPO represents contracted revenue to be recognized over the next 12 months.
Gross and operating margins both topped expectations.
NOW provided second quarter and full year subscription revenue growth guidance with the midpoint of its second quarter’s just light of consensus and its full year’s just above.
The company noted customers with annual contract values more than $1 million were 1,933, representing 15% year-over-year growth.
We maintain our BUY rating on NOW. Roper Technologies Inc. (ROP) Delivered better-than-expected first quarter results Friday morning.
ROP provided second quarter earnings guidance that was a little light of FactSet consensus with full year earnings guidance of $18.15/share at the midpoint above FactSet consensus of $18.11/share.
Total revenue is expected to increase ~12% for full year 2024.
Sales topped expectations in all three of ROP’s segments, and the company posted organic growth of 8% in the quarter, better than the 6.9% expected.
ROP’s Technology Enabled Products segment posted 17% organic growth.
Free cash flow was $513 million.
We maintain our BUY rating on ROP. Valero Energy Corp. (VLO) Posted a first quarter earnings beat Thursday morning, handily surpassing expectations.
Refining throughput was 2.76 million barrels/day, above consensus for 2.68 million barrels/day.
Gross margin/barrel was $14.07, which was in-line with expectations.
Renewable diesel sales volumes averaged 3.7 million gallons/day and ethanol production in the quarter was 4.5 million gallons/day.
VLO noted light product demand remained strong.
We maintain our BUY rating on VLO shares. Exxon Mobil Corp. (XOM) Delivered mixed quarterly results Friday morning, revenue of $83.1 billion was better than consensus of $79.7 billion but earnings were short of expectations.
XOM reported production in the quarter averaged 3784 Mboe/day, below consensus for 3808 Mboe/day; liquids production was better while natural gas was light of expectations.
Earnings for XOM’s Chemicals and Specialty Products segments topped estimates while quarterly profits for Upstream and Energy Products were short.
XOM noted it had achieved $10 billion in structural cost savings.
The company also stated it anticipates upstream earnings will growth by 50% by 2027.
The Pioneer Natural Resources acquisition is expected to close this quarter.
We maintain our BUY rating on XOM.
Senior Portfolio Manager
Broadcom Inc.
(AVGO)
