Closing Recap

Thursday, April 03, 2025

Another brutal day on Wall Street sends markets to lowest levels of 2025 following more aggressive than expected global tariffs by the Trump administration on trading partners. Amid the sharp pullback in global stock markets, recession fear expectations surged, putting downward pressure on global equities and other asset classes (oil, gold, Bitcoin, the dollar all declined). President Donald Trump’s sweeping tariffs on major trade partners ignited fears of an all-out trade war and with today’s decline, the benchmark S&P 500 index is now down more than 12% from its record close while the Nasdaq composite is down about 17% from its record close. The Dow Jones Industrial average fell as much as 1,680 points, the Nasdaq was down over 5.9% or 1,000 points, the Russell 2000 Smallcaps declined over 6% in a broad, and S&P 500 -4.8%, its worst session since June 2020. With today’s reaction to tariffs, does tomorrow’s nonfarm payroll report even matter at this point (ests for 135K jobs and 127K private payrolls)? Few places to hide today outside of utilities, bonds, consumer staples (foods) and some pharma.

Given the impact on stock markets and the general uncertainty about the economy, US short-term interest-rate futures are pricing for the Fed to cut interest rates 4 times this year, starting in June (up from prior views of 2-3). Fitch noted today that US growth in 2025 is likely to be slower than 1.7% that we had projected in March, given higher-than-anticipated tariffs and tariff hikes will result in higher consumer prices and lower corporate profits. Ironically as rate cut chances rose, Fed speakers were not as dovish as the Fed’s Cook stressed policy should be on hold given risks to the dual employment and inflation goals. She also reiterated that the FOMC can afford to be patient but will be attentive to developments. The Fed’s Vice Chair Philip Jefferson said that with the economy in solid shape, tariffs already pushing upward on goods inflation, and higher-than-usual uncertainty over the outlook, he is inclined to leave the U.S. central bank’s policy rate at its currently modestly restrictive level.

At this point the US means business after all U.S. imports will be subject to a 10% tariff, effective Saturday April 5^th and said it is non-negotiable for the time being. Trump said he will impose even higher rates on some nations that the White House considers “bad actors” on trade with Japan facing a 24% duty and the European Union faces a 20% levy, effective April 9^th. China was hit the hardest among top trade partners, including a new 34% tariff, adding to previous duties, like the 20% tariff Trump imposed over fentanyl. That means the base tariff rate on Chinese imports will be 54%, before adding pre-existing levies! Canada and Mexico are excluded from the reciprocal tariff regime. They are still subject to plans to impose 25% tariffs on most imports to the U.S., though the administration has given an exemption for autos and many other goods.

The tariffs are pegged to amounts Trump says other countries impose on the U.S. (though he said he used half the tariffs charge). Some global leaders are vowing to retaliate, while others are hopeful there is still time to strike a deal with the U.S.  Jefferies this morning noted the proposed tariff rates are likely to decrease as countries negotiate bilateral deals, potentially helping the equity market rebound. The tariff rates reported by the administration are far higher than countries’ Most-Favored Nations rates. Bank America suggested a country like Taiwan will likely offer to buy more US products (weapons, energy and agricultural products), increase investment in the US to help with manufacturing reshoring, and lower some agricultural tariffs on US products after the country expressed regrets toward the latest US tariffs announcement on April 3. It remains to be seen how countries will respond at this point, but the uncertainty that it brings is keeping stock markets under pressure.

Investor Sentiment remains weak – keep in mind these figures do NOT consider today’s market action: 1) This week’s NAAIM Exposure Index number declined from last week’s reading (new YTD low and lowest since the 29.17 reading on 11/1/23): 49.37 (from 57.55) – a recent peak of 99.24 from 12/11. 2) The bull-bear spread in the American Association of Individual Investors (AAII) weekly survey was -40.1 vs -24.8 last week. Bulls fall to 21.8% from 27.4%, Neutrals fall to 16.3% from 20.4%, and Bears rise to 61.9% from 52.2%. 3) Fear/Greed Index: 11/100 = Extreme Fear.

• U.S. February trade deficit -$122.7B (consensus -$123.5B) vs Jan deficit -$130.7B; U.S. Feb goods deficit $146.99B, services surplus $24.33B; US Feb exports +2.9% vs Jan +1.5%, imports 0.0% vs Jan +10.0%; U.S. Feb exports $278.46B vs Jan $270.51B, imports $401.12B vs Jan $401.16B; US/China Feb trade deficit $21.17B vs Jan deficit $31.74B.
• ISM report on U.S. non-manufacturing sector shows PMI 50.8 in March (consensus 53.0) vs 53.5 in February; ISM non-manufacturing business activity index 55.9 in March vs 54.4 in February; prices paid index 60.9 in March vs 62.6 in February; new orders index 50.4 in March vs 52.2 in February.
• S&P Global March final composite PMI at 53.5 (vs flash 53.5) while U.S. S&P Global March final services PMI at 54.4 (vs flash 54.3).

• Despite a massive decline in the US dollar and Treasury yields, June gold falls -$44.50/oz, or -1.4% to settle at $3,121.70 an ounce, pulling back off record highs the day prior.
• Treasury prices increased, sending yields lower and the US dollar plunged on recession concerns. The 10-year note yield briefly drops below 4.00% for the first time since October 2024 before finishing just above. The U.S. dollar index (DXY) plunged over 2% falling to its lowest levels since October 2^nd (around 101.26 low) – with a 2% move higher vs. the Japanese yen to 145.20 lows before paring, while the euro also moved around 2% before paring gains to 1.1046 (off highs 1.1134).

• Food earnings: LW shares rose after Q3 sales grew to $1.52B, above prior $1.46B and above consensus $1.49B saying top-line growth benefited from growing volume as it fully replaced the combined regional, small, and retail customer volume lost in the prior due to its transition to a new enterprise resource planning system in North America; CAG reported a top and bottom line Q3 miss, but rallied with broader defensive food sector (GIS, KHC, KO, MDLZ, PEP, others). KR and ACI both hit 52-week highs in grocers today.

• Keybanc said they belie Dollar/Discounters (DLTR and FIVE) have heavy China exposure, and operate more fixed-type pricing models, which hamper price increases. Dollar stores and WMT have more exposure to the low-income consumer but could benefit from trade-down if overall consumer spending slows. High tickets are more at risk if sentiment weakness and a recession are to unfold (RH, WSM, LZB, ETD, SGI, SNBR, PRPL, BBY).
• Stifel noted the supply chain for lifestyle brands is entrenched in Asia and not easily relocated. Most challenged are those with Southeast Asia manufacturing concentration, high U.S. revenue exposure, and thin margins including COLM, NKE, and UAA. Both WWW and VFC face added challenge from levered balance sheets. Directionally better insulated are those with diversified geographic revenue bases and higher operating margin including BIRK, LEVI, and LULU though profitability could be impacted significantly for these businesses as well. Multi-branded retailers and e-commerce platforms like DKS and RVLV have less direct exposure.
• Footwear shares (ONON, NKE, ADDYY) hit very hard on tariffs as Evercore/ISI said today based on estimated sourcing exposures, Evercore estimate before it considers levers like pricing and elasticity, the current tariffs would destroy all of ONON’s EBIT in 2026, and 80% of Nike’s EBIT in FY27. Bank America noted tariffs run to 46% in Vietnam (88% of On sourcing in the US on BAML’s estimates, 39% for Puma and 31% for adidas).
• Retail research: BBY downgraded to Neutral at Citigroup as believes the tech replacement cycle, new AI innovation, and margin execution are positive attributes to the story, but the external backdrop is making for a more challenging environment to execute. BJ upgraded to Buy at Citigroup as likes the defensive growth appeal of the business, especially in the current consumer landscape with tariff concerns and defensive exposure. In off-price retail, ROST and TJX upgraded to Buy at Citigroup saying a potentially weakening consumer env’t will mean more consumers are likely to trade down to the off-price channel in search of value.
• Home Improvement Retail: RH shares tumbled (prior to the tariff news) after Q4 net revenues, $812.4M were below consensus $829.6M and EPS $1.58 vs. consensus of $1.91; guides FY25 revenue growth of 10%-13% (implies $3.5B-$3.59B vs. est. $3.64B) and Q1 revenue growth of 12.5%-13.5% saying expects higher risk business environment this year due to uncertainty caused by tariffs, market volatility & inflation risk.

• In the Leisure sector: seeing a big hit in shares today including cruise lines (CCL, RCL, NCLH), lodging (HLT, MAR, H), leisure products (BC, HOG, PII), casinos (WYNN, MGM, LVS) on fears that the impact of tariffs on companies will force price increases and slow consumer discretionary spending.
• In Autos: The Trump Administration on Wednesday announced 25% tariffs on imported vehicles, which is roughly half of all new vehicles sold in the U.S. last year. These tariffs also include related vehicle components. Deutsche Bank said they believe the announcement has meaningfully positive implications for used car prices, which in turn could boost profits at CAR and HTZ at least for the next several months as they should begin to see an immediate increase in pricing achieved on resale vehicles.

• In Chemicals (CE, CC, DOW, EMN, SHW): Weakness here on tariff implementation as well given the high fixed cost nature of chemicals production, lower volumes would have an outsized impact on profits, which could lead to another year of declining profits if widespread tariffs are implemented.
• In Solar sector (ENPH, CSIQ, RUN): stock prices weak after new reciprocal tariffs on countries that the U.S. imports from – like Vietnam, Malaysia, Thailand and Cambodia which are seen leading costs heading higher. Vietnam will see tariffs of 46% on its exports to the U.S., Thailand 36%, Cambodia 49% and Malaysia 24% FSLR could come out on top said Jefferies through its domestic manufacturing in the longer term, but in the near term the company might not be able to benefit since it is mostly sold out through 2027. RBC Capital said FLNC should be negatively impacted near term due to higher cost imports but could be a relative beneficiary over time as foreign competition will be more negatively impacted. ENPH and SEDG both manufacture domestically but use varying degrees of domestic content and will need to evaluate the ability to pass tariffs onto the end customer. NXT and ARRY both source domestically and should be insulated to the extent industry demand and development timelines are not disrupted.
• In the Transportation sector Dow Transports fell more than 8% below 13,800 on recession fears (UPS, FDX, JBHT, ODFL, CHRW, UNP, NSC, CSX): UBS suggested that the tariffs drive risks of weaker volumes and margin pressures and exacerbate the uncertainty faced by transport companies and their customers. UBS expects the large tariffs announced on Wednesday in addition to the previously announced 25% auto tariffs will drive pressure on international trade volumes but also to drive weakness in domestic activity
• In Industrials/Distributors: Wolfe Research with a few ratings changes as they upgraded FAST to Peer Perform from Underperform saying while stock’s multiple gives them pause, there is little reason for a near-term de-rating as the company is a defensive play; GWW downgraded to Underperform from Peer Perform with a $966 price target saying they see a tough set-up for Grainger, with more risk to the fiscal 2025 outlook from tariffs and Department of Government Efficiency. PH was downgraded to Peer Perform from Outperform with a $512-$735 fair value range saying the risk/reward is balanced at current levels. Lastly, HAYW was downgraded to Peer Perform from Outperform saying increasing risks to U.S. consumer spending and the "deterioration" in housing fundamentals push out its expectations for a recovery in the pool market.

• In FinTech: Payment and FinTech stocks (PYPL, XYZ, AFRM, UPST) were weak on fears consumer spending started to slow in 1Q, which would impact economic growth, and inflation could rise with tariffs. XYZ was upgraded to Overweight at Morgan Stanley given compelling valuation and low expectations for reaccelerated Square Seller growth and says scenario analysis suggests a 3:1 bull-to-bear skew.
• In Credit Cards (AXP, MA, V): Bank America said total card spending per Household was up 0.1% y/y in the week ending Mar 29, according to aggregated credit & debit card data. The slowdown relative to last week was likely due to unfavorable base effects from Good Friday timing (3/29/24 vs 4/18/25). Total card spending growth in the DC area remains weaker than the rest of the country, likely due to the impact of DOGE cuts.

• In Medtech: RXST tumbles as cuts FY25 revenue view to $160M-$175M from $185M-$197M (est. $190.2M) while seeing FY25 operating expenses in the range of $150.0M-$160.0M, down from prior $165M-$170M and now representing an implied increase of 10% to 18% compared to 2024.
• Medical Device stocks (DXCM, GHHC, BSX, ABT) under pressure after Trump imposed an additional 34% tariff on China, 20% tariff on EU which imposed on these geographies could hurt R&D spending, availability of certain devices and cause supply chain disruptions for these device manufacturers, as per Citi
• ALDX shares tumbled after saying the FDA declined to approve its treatment for dry eye disease, reproxalap, after it failed to show efficacy; the FDA asked the company to conduct at least one additional trial to show positive effect of the treatment; no manufacturing or safety issues with reproxalap were identified

• Data Center names weak again on Bloomberg report that MSFT has pulled back on data center projects around the world, suggesting the company is taking a harder look at its plans to build the server farms powering artificial intelligence and the cloud – Bloomberg (watch shares of VRT, CRWV, ETN, SMCI, DELL and other power plays like VST, SMR, OKLO, NRG, CEG). Just fear in general with unknown of tariff impact, slower or freezing of spending on data centers remains a concern.
• Philadelphia Semi Index (SOX) dropped more than -8% to lowest levels since Jan 2024 below the 4,000 level on tariff impact: AMD, ARM, NVDA, AVGO, LSCC, MU, MCHP, QRVO, TSM, STM and many others were broadly lower as well as equipment names ASML, AMAT, LRCX, KLAC. Tariff impact on semis: Mizuho noted takeaways include: 1) China tariff rate at 34%, likely affecting many analog/RF/handsets/iPhones, 2) 32% rate on goods imported from Taiwan, raising prices on AI GPUs/CPUs, Custom silicon/ASICs, and HDD/NAND (Japan/Malaysia at 24% tariffs and South Korea at 25%), 3) EU countries hit with 20% tariffs, though auto imports only subject to the previously announced 25% rate. Said ear-term positive for Chip suppliers with onshore manufacturing benefiting names such as INTC, TXN, ON, MU and potentially ARM.