Bears Engulf Buyers As Yields Jump

The stock market reversed sharply today, and many are pointing to treasury yields as the cause. Let’s find out why. 👇

Last week we discussed how much of the stock market’s gains since October have come from multiple expansion, not earnings growth. Essentially, investors have been willing to pay more for every dollar of earnings S&P 500 companies generated. However, that was primarily driven by the belief that interest rates and inflation had peaked and rates would come down.

Yesterday’s Federal Reserve press conference reiterated that the committee remains open to another rate hike before the end of the year. It will depend on the data, which is mixed right now. Core and headline inflation continues to trend lower (albeit slowly), and the housing market has stalled. But the labor market remains historically strong and is buoying consumer confidence and spending. 💪

Today’s second-quarter GDP report came in at 2.4%, showing that the economy remains more resilient than even the Fed anticipated. And if that’s the case, rates may have to adjust higher than they are. That’s why Treasury Yields across the curve pushed higher today, with the U.S. 10- and 30-year yields topping 4% again. 

The chart below shows that longer-term rates have held steady since October as the market bet on a Fed pivot. But the economy never weakened, and the Fed hasn’t changed its tone materially. As a result, we may be witnessing the early stages of a breakout in yields. That’s at least what shook the stock market today. 📈

Stocks across the board have rallied significantly, and earnings haven’t been there to support them. Many companies have said their pricing power is diminishing as inflation comes down, but costs remain elevated due to the tight labor market. And if interest rates continue to move higher from here, then it will only be more difficult for companies to generate better margins and earnings. 🐻

As a result, some market analysts believe today was the start of a short-term pullback. Many are pointing to the “bearish engulfing candles” taking place in the major indices like the Russell 2000 and many individual stocks. 🐻

This technical analysis pattern is the opposite of its bullish counterpart and essentially signals the start of a potential trend change. However, this signal requires downside follow-through in the days after to confirm that sellers have taken control. 📉

Overall, after a strong run in the stock market, bulls are looking for the next catalyst to take the market higher. With high valuations and prices rallying sharply since October, many fear that there are more potential bearish catalysts than bullish ones. Time will tell, but at least now you know the prevailing narrative. 🗫

HeyDude, Crocs shares are falling 15% today despite better-than-expected results. 🤔

The footwear company reported adjusted earnings per share of $3.59, topping the $2.98 expected. Revenues rose 11.2% YoY to $10.72 billion, outpacing the $1.044 billion consensus view.

Looking ahead, the company expects full-year 2023 earnings of $11.83 to $12.22 per share and revenues of $4.00 to $4.065 billion. Wall Street expected $11.57 per share on $4.019 billion in revenue.

On its surface, everything looked great. However, it ran into problems when walking through its HeyDude brand numbers. The company acquired the casual footwear brand for $2.5 billion nearly 1.5 years ago, and growth is already beginning to slow. 🔻

Overall revenues grew just 3%, while wholesale revenue fell 8.4% to $148.8 million. Direct-to-consumer (DTC) sales did rise 30% YoY, but that wholesale weakness caused the company to lower its full-year revenue growth guidance from the mid-20% range down to 14% to 18%. 📉

CEO Andrew Rees told analysts that the company’s wholesale partners are “pretty cautious on the back-half of the year,” citing three primary reasons: caution about overall consumer spending, overstock in some other brands, and a lack of good history with HeyDude in the second half of the year.

As a result, the company is shifting toward a more direct-to-consumer approach as it uses for its Crocs brand. But that transition will take time. ⏱️

Given the slowing growth, investors pushed shares of $CROX to new year-to-date lows. If the company is going to maintain its significant premium over other footwear brands, it will have to deliver premium sales and earnings growth. And today’s earnings cast doubt on its ability to do that. 😟

Enphase Energy develops and manufactures solar micro-inverters, battery energy storage, and EV charging stations for residential customers. However, today the only thing it produced was losses for its shareholders. 😬

The company reported adjusted earnings per share of $1.47, which topped the $1.28 expected. Revenues fell short, though, at $711.1 million vs. the $726 million consensus view. 🔻

Executives expect third-quarter revenues of $555 to $600 million. That was well shy of the $749 million Wall Street expected.

The revenue miss and weak guidance were enough to send $ENPH shares down another 13% after hours. 📉

Meanwhile, competitor First Solar jumped after beating both revenue and earnings expectations. $FSLR shares jumped 8% toward the 15-year highs set earlier this year. 🌞