Homebuilders are missing out on the secret sauce fueling the stock market

Lenah Mill by Toll Brothers in Aldie Virginia

(Benjamin C. Tankersley/Getty Images)

Profit margins are expanding for the S&P 500, but not for homebuilders.

One of the best arguments for why US companies can sustain lofty valuations is high profit margins.

Simply, the companies that populate the S&P 500 are better than ever at efficiently turning sales into profits. Margin expansion is the US stock market’s secret sauce. And while most companies — in particular, mega-cap tech stocks — have it, homebuilders are one pocket of the market that doesn’t.

Case in point: Toll Brothers, which fell about 5% at the open on Tuesday after reporting quarterly results after the close on Monday.

Toll said its first-quarter adjusted home-sales gross margin would be 26.3%, a full percentage point below Wall Street’s estimate.

High interest rates continue to wreak havoc on the US housing market. Even the luxury homebuilder — whose customers are better positioned to grapple with high borrowing costs — has had to buy down mortgage rates to entice would-be buyers, along with other incentive programs.

That’s not a company-specific problem, but rather a broad industry issue: as the S&P 500’s expected profit margin in 12 months’ time has continued to climb, the Dow Jones US Select Home Builders Index has seen its presumptive profitability roll over.

During a conference call, Toll’s management said that the low margin in Q1 was “a bit of an anomaly from both a mix and incentives perspective.”

It’s clearly an issue that’s front of mind for the C-suite.

“We want to reiterate our focus on returns and what we’ve been able to accomplish with return on equity through the combination of elevated gross margins, high gross margins, good operating margin, and capital redeployment through dividends and repurchase,” Martin Connor, Toll’s chief financial officer, said.

US stocks slump as tech and momentum selloff continues

The S&P 500 slumped for the second straight day, dropping 0.3%. The Nasdaq 100 also gave back 0.3%, while the Russell 2000 fell 0.4%.

Real estate, tech, and materials were the worst-performing S&P 500 sector ETFs, each off more than 1%. Communications services was at the top of the leaderboard, thanks to Alphabet.

Google was the best-performing Magnificent 7 stock, up over 5% after its quantum computing breakthrough. While other quantum computing-linked stocks initially fell on the news, most recovered later. Notably, Rigetti Computing spiked after announcing that a joint project with Quantum Machines that used AI to automate how a quantum computer is calibrated was successful.

Walgreens Boots Alliance soared following reports that the embattled pharmacy chain may soon be acquired, making it the best-performing S&P 500 constituent.

A judge blocked Kroger’s acquisition of Albertsons, sending the former higher and the latter lower.

Homebuilders had a rough day after Toll Brothers’ mediocre earnings report, with the iShares US Home Construction ETF down 2.3%.

TSMC tumbled 3.6% despite announcing massive sales growth in November

Oracle tanked 6.7% after posting lower-than-expected sales with an underwhelming earnings guidance, its worst day since the company released quarterly results one year ago.

Moderna was the worst performer in the S&P 500 with the drugmaker facing eviction from the Nasdaq 100.

The jump followed a Wall Street Journal report that the pharmacy chain is in talks to sell itself to private equity firm Sycamore Partners. Walgreens Boots is still down roughly 60% for the year, which puts it neck and neck with with Intel for the worst performer of the year.

Marathon Digital said this morning that it has purchased another 11,774 bitcoin. The bitcoin miner paid about $1.1 billion for the coins, and said the most recent buy brings its total BTC stash up to 40,435 coins valued at $3.9 billion.

Using the proceeds from its zero-coupon convertible notes offerings, MARA has acquired 11,774 BTC for ~$1.1 billion at ~$96,000 per #bitcoin and has achieved BTC Yield of 12.3% QTD and 47.6% YTD. As of 12/9/2024, we hold 40,435 BTC, currently valued at $3.9 billion based on a… pic.twitter.com/2uvnrhbxaP

— MARA (@MARAHoldings) December 10, 2024

The announcement came a day after MicroStrategy — an enterprise-software business that’s basically become a de facto bitcoin-holding company — said it’d purchased another $2.1 billion worth of BTC, bringing the value of that company’s stockpile up to a staggering $41 billion.

Google’s quantum leap sends shares soaring

Solving a problem that would take today’s best supercomputers 10 septillion years is worth at least a few tens of billions of dollars.

That’s the not-so-early verdict from traders on Alphabet’s alleged quantum-computing breakthrough, with the company saying its Willow quantum chip ran a complex computation in under five minutes.

Though Google announced the news yesterday, the stock didn’t really get much of a bid amid the meltdown in momentum stocks. But the stock is the best premarket performer in the S&P 500 on Tuesday, up nearly 4% as of 8:40 a.m. ET.

Introducing Willow, our new state-of-the-art quantum computing chip with a breakthrough that can reduce errors exponentially as we scale up using more qubits, cracking a 30-year challenge in the field. In benchmark tests, Willow solved a standard computation in <5 mins that would…

— Sundar Pichai (@sundarpichai) December 9, 2024

Other stocks in the quantum-computing biz — like IonQ, D-Wave Quantum, Quantum Computing, and Rigetti Computing — are selling off on Alphabet’s mic-drop moment.

After demonstrating the power of this fully armed and operational computer station, Alphabet plans “to step into the realm of algorithms that are beyond the reach of classical computers and that are useful for real-world, commercially relevant problems.”

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