Wall Street Lunch: Lilly In Limelight

Summary:

• Eli Lilly’s tirzepatide reached main goals in two Phase 3 trials for patients with obesity and obstructive sleep apnea.
• Abbott posts Q1 results beat, Travelers earnings hurt by elevated catastrophe losses.
• Mortgage servicing within housing-finance will benefit from a higher-for-longer rate environment – Wedbush.

Listen below or on the go on Apple Podcasts and Spotify

Zepbound sees positive outcomes in Phase 3 clinical trials for sleep disorder. (0:16) Walmart teams up with Jessica Simpson. (3:25) Cathie Wood’s flagship ARRK ETF falls below key technical level. (3:42)

This is an abridged transcript of the podcast.

Our top story so far

Eli Lilly (NYSE:LLY) announced that its weight loss therapy tirzepatide reached its main goals in two Phase 3 trials for patients with obesity and obstructive sleep apnea, a sleep-related breathing disorder.

Citing topline data, Lilly said tirzepatide, marketed as Zepbound, significantly reduced the trials’ primary endpoints compared to a placebo.

Lilly’s SURMOUNT-OSA program, which involved 469 adults with moderate-to-severe OSA and obesity across multiple countries, also reached a key secondary endpoint based on the percentage change in AHI.

Stocks to watch include CPAP device makers ResMed (RMD), Inspire Medical Systems (INSP), and Philips (PHG), as well as sleep apnea drug developer Jazz Pharmaceuticals (JAZZ).

Eli Lilly and its Danish rival Novo Nordisk (NVO) dominate the market for weight loss therapies with their FDA-approved GLP-1 agonists, tirzepatide and semaglutide.

In today’s trading

The market looks to be taking a breather, with stocks slightly higher and rates easing back.

Both the stock and bond markets look to be adjusting daily to a new fed funds rate landscape in 2024. Following Fed Chairman Jay Powell’s remarks on Tuesday, fed funds futures are now pricing in just two rate cuts this year, starting in September. But traders are nearly evenly split on the possibility of that second cut, and strategists are already touting markets adjusting to no cuts until 2025.

ING says the 10-year yields (US10Y) “has a trend back to the 5% area written all over it” and the “funds strip now has the funds rate bottoming in the 4% area.”

“That’s the new implied floor in terms of market discount, and the rest of the curve gets built on top of that. Contextualized against that, the 10-year yield in the 4.65% area and likely heading to 5% is not out of sync.”

But BMO strategist Brian Belski says stock “investors should not fear higher rates, despite current conventional thinking to the contrary.”

“In fact, we found that some of the strongest periods of S&P 500 performance have coincided with rising or higher levels of interest rates over the past few decades,” he said. “However, the era of ‘easy money’ investing is likely behind us, and the transition to a more ‘normal’ rate structure is likely to be challenging, causing many fits and starts for market performance in the coming months as it adjusts to this reality.”

Looking to earnings and active stocks

Abbott Laboratories (NYSE:ABT) posted better-than-expected Q1 2024 results on Wednesday as sales from its Medical Devices division exceeded Wall Street forecasts while its Diagnostics business underperformed, driven by a decline in COVID-19 testing.

However, Abbott (ABT) narrowed its full-year 2024 organic sales growth guidance to 8.5%–10.0%, excluding the impact from COVID-19 testing sales, and projected $4.55–$4.70 in diluted adjusted earnings per share, an increase in the midpoint from the prior forecast.

First-quarter earnings for Travelers Companies (TRV) were dinged by elevated catastrophe losses caused mostly by wind and hail storms.

Q1 core EPS of $4.69, trailing the average analyst estimate of $4.85, dropped from $4.11 in Q1 2023. Revenue of $11.2 billion, matching the Visible Alpha consensus, increased from $9.7 billion a year ago.

And Walmart (NYSWMT) announced on Wednesday a new collaboration with the Jessica Simpson brand that will include a collection of women’s apparel, swimwear, and jewelry just in time for summer. The retail giant noted that many of the items are designed exclusively for Walmart.

The collection is said to feature boho-chic styles and cool classics.

In other news of note

Cathie Wood’s flagship ARK Innovation ETF (ARKK) saw another bearish technical signal as it fell below its 200-day moving average for the first time since Nov. 13, 2023.

ARKK now trades in negative territory over a 5-year timespan, and only eight of the 30 holdings in the ETF are higher on the year. Meanwhile, investors are also pulling funds, with outflows of $1.4 billion this year.

For the better part of two years, ARKK has traded between $34 and $54. It is now lower by 71.6% from its record high of $159.70 hit in February 2021.

The ARK Autonomous Technology & Robotics ETF (ARKQ), ARK Genomic Revolution ETF (ARKG), and ARK Space Exploration & Innovation ETF (ARKX) are also below their 200-day moving averages.

And in the Wall Street Research Corner

Wedbush says mortgage servicing is the one group in the housing-finance space that will benefit from a higher-for-longer rate environment.

Those stocks include Mr. Cooper Group (COOP), PennyMac Financial Services (PFSI), and Rithm Capital (RITM).

Analysts said: “In addition to the positive impact on (Mortgage Servicing Rights) values from higher rates, lower refinance levels open the doors to lower MSR amortization costs and higher overall operating margins.”

A yield below 4.5% for the 10-year Treasury would allow most companies under Wedbush’s housing and housing-finance coverage to operate with an “acceptable (though less than stellar)” level of origination volumes, gain margins, and operating margins. But with the 10-year above 4.5% and no signs of easing in rate volatility, the firm now foresees incremental pressure on single and multifamily origination volumes and incremental stress on multifamily credit metrics.

For originators, including Guild Holdings (GHLD), Rocket Companies (RKT), and UWM Holdings (UWMC), climbing rates will likely slow the purchase market and “kill any emerging signs of life in the refi market,” which could lead to a lower gain on sale margins.

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