NVDA - Wall Street Lunch: Equities Nightmare

2023-10-02 12:50:00 ET

Summary

• Equities among worst-performing assets in Q3, energy stocks an exception.
• Nvidia up after EU regulators said no "formal investigation" into AI processors.
• Capital deployment "a key factor" when choosing top stocks in software and internet sector - Jefferies.

Listen below or on the go on Apple Podcasts and Spotify

October is traditionally strong for stocks , but it's no sure thing. (0:15) Goodbye, Kellogg (K). (3:13) Will a Tesla Cybertruck arrive in Q4? (3:45)

This is an abridged transcript of the podcast.

Our top story so far

Equities were among the worst-performing assets in the third quarter, and those counting on October's seasonal resilience to recover the ball may want to think again.

In the Deutsche Bank global review of Q3, strategist Henry Allen says, "When it came to financial assets, the biggest story... was the massive bond sell-off, which sent yields up to multi-year highs around the world."

"For instance, the 10-year Treasury yield (US10Y) ended the quarter up +73.5 bps at 4.57%, and at the intraday peak on September 28, it was as high as 4.686%, which we haven’t seen since 2007."

You can always see how Treasury yields are trading across the curve at Seeking Alpha’s bond page, which also includes figures on TIPS and corporate and government bond ETFs. I’ll put that in Show Notes.

Along with tumbling sovereign bonds, equities were down across the board, “with declines for the S&P 500, the STOXX 600, and the Nikkei.

Allen notes that the “main exception to this pattern were energy stocks (XLE), with those in the S&P 500 up +12.2% over the quarter."

Among the winners, oil prices rebounded after four consecutive quarterly declines. Brent crude (CO1:COM) ( BNO ) was up +27.2%, and WTI (CL1:COM) ( USO ) rose +28.5%.

The dollar index ( DXY ) strengthened by +3.2%, which Allen says was “aided by a sharp rise in US real yields.”

BTIG’s technical strategist says he “wouldn't be surprised to see the inverse of last year with October starting off weak."

"We also continue to see many blindly assuming the fourth quarter will be higher based on the 'average' seasonal pattern,” he adds. “While October is a strong month on 'average', it has been down 10 of the last 30 years, with 8 of those years being (down) 1.77% or worse."

In today’s trading

Stocks are kicking off October struggling for firm direction. Growth is doing the best, with the Nasdaq ( COMP.IND ) in the green, up less than +0.5%.

The S&P (SP500) is lower, and the Dow ( DJI ) is trailing, off -0.5%.

Among S&P sectors, only Info Tech ( XLK ) and Communication Services (XLC)—two of the three megacap homes—are in the green.

The September ISM Manufacturing index came in at 49 vs. the consensus of 47.7. The employment and new orders components came in above forecasts, while on the inflation front, prices paid were lower than expected and down from August.

Still, the march higher in bonds continues. The 10-year Treasury yield bounced back above 4.6%. Yields had declined going into the weekend in anticipation of a government shutdown.

Among active stocks

Nvidia ( NVDA ) shares rose after regulators in the European Union said that there is no " formal investigation " into artificial intelligence processors. Last week, the French antitrust regulator reportedly raided Nvidia's offices over concerns of anticompetitive practices.

Piper Sandler upgraded Datadog (DDOG), citing " signs of stability " as well as a boost from artificial intelligence. Analyst Rob Owens raised his rating to Overweight from Neutral with a $115 price target. He noted that the concerns over the cloud have "largely played out" and there are "broad signs of stabilization in infrastructure and DevOps software demand."

And goodbye, Kellogg’s (K)—at least on the Big Board. The cornflakes company announced it had completed the separation of its North American cereal business into a new company called WK Kellogg and renamed itself Kellanova.

Kellanova is described as a global snack-led powerhouse with a portfolio of iconic brands, including Pringles, Cheez-It, Pop-Tarts, Rice Krispies Treats, MorningStar Farms, Incogmeato, Gardenburger, Nutri-Grain, RXBAR, and Eggo.

WK Kellogg will focus and integrate its commercial strategy and execution around breakfast cereal brands.

In other news of note

Tesla ( TSLA ) did not launch sales of the Cybertruck model in Q3 after Elon Musk had suggested earlier in the year that a delivery event was likely to occur during the quarter.

Musk foreshadowed a possible Cybertruck delay over the summer after skipping around specific questions about the electric truck's pricing and delivery schedule. But the arrival of Cybertruck Launch Team apparel in the last two weeks has created some buzz that the public delivery event could finally happen in Q4.

The complexity of the model is believed to be behind the long road to customer deliveries. And the delay for the highly anticipated electric truck has raised more questions about the specific reasons for the holdup and added to some near-term concerns about the breadth of Tesla's lineup after several years of no new models being introduced.

And in the Wall Street Research corner

Capital deployment is a key factor when choosing top stocks in the software and internet sector. That’s according to a joint study by the Jefferies quant and equity research teams.

The teams looked at 10 years of data on 45 stocks, with research coverage and market caps topping $1 billion.

Analyst Brent Thill says the best factor was “total spend to invested capital ratio."

"Companies with above median spend to IC had superior stock performance (36% over 2 years and 58% over 3 years compared to companies with below median spend) and faster sales growth."

Among the current spenders that have been rewarded in the past are Fortinet (FTNT), DocuSign (DOCU), Meta (META), and Etsy (ETSY).

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