Closing Recap

Wednesday, December 18, 2024

Stocks slid sharply after the Fed changed its outlook! U.S. stocks managed modest gains all morning and early afternoon, waiting patiently for the FOMC’s last policy meeting of 2024 where a 25-bps cut was widely anticipated, bring year-to-date cuts to 100bps. Well, investors and markets got exactly that, as the Federal Reserve cuts key overnight interest rate 25 basis points to 4.25-4.50% range…but it came with a few surprises. The Fed issued new projections that showed 50 bps of cuts in 2025 (compared to forecast of four cuts in September), another 50 bps in 2026 and Fed projections show Fed policy rate reaching 3.1% in 2027. Fed projections showed mixed views among Fed members as one of 19 officials forecast no cuts in 2025, 3 forecast one cut, 10 forecast 2 cuts, 3 forecast 3 cuts, one forecasts 4 cuts, one forecasts 5 cuts. In addition, Fed policymakers forecast 4.3% unemployment rate at end of 2025 versus 4.4% in September projections and forecast end-2025 PCE inflation at 2.5% versus 2.1% in September and core seen at 2.5% versus 2.2%. Fed policymakers forecast 2.1% GDP growth in 2025 versus 2.0% in September, forecast longer-run growth at 1.8%. So, the view of less rate cuts in 2025 coupled with a view of higher inflation took the “wind out of the sails” of U.S. stocks which had been rallying for 6-straight weeks, specifically Smallcap stocks (IWM -4.4%) which are more sensitive to short term rate moves. While stocks slid on the Fed comments, the dollar and Treasury yields spiked and Bitcoin slid over 5% With this afternoon’s move lower, the Dow Jones Industrial Average extended its losing streak to 10 straight days, Materials (XLB) sector extended its losing streak to 13-consecutive days and the S&P 500 advancers-decliners was negative again today, the 13th consecutive day as all eleven S&P sectors finished in the red. The CBOE Volatility index (VIX) surged over 70%, topping 27.50.

• US Q3 current account deficit (-$310.9B), the largest negative balance on record as per CNBC and above est. (-$287.1B) and vs prior (-$266.8B).
• According to the weekly Mortgage Bankers Assoc data, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) increased to 6.75% from 6.67%; refinance demand fell 3% for the week and applications for a mortgage to purchase a home increased 1% for the week and were 6% higher than the same week one year ago.

• WTI crude rose $0.50 or 0.71% to settle at $70.58 per barrel after bullish inventory data. Weekly Crude inventories fell by 934,000 barrels to 421 million barrels in the week, vs. expectations for a 1.6-million-barrel draw while Crude stocks at the Cushing, Oklahoma, delivery hub rose by 108,000 barrels last week. Refinery utilization rates fell by 0.6% to 91.8%. U.S. gasoline stockpiles rose 2.3 million barrels (est. 2.1M build) and Distillate stockpiles fell by 3.2 million barrels (bullish vs. est. build of 0.7M barrels). February gold prices fell -$8.70 to settle at $2,653.30 an ounce. New York cocoa futures hit an all-time high of $12,931 a metric ton during the session, closing +6.8% at $12,565 per metric ton.

• BIRK Q4 revenue $455.8M euros vs. est. $439.2M euros estimates on strong full-price sales of its pricey sandals in the U.S. and Asia while expects fiscal 2025 revenue to grow between 15% and 17% vs est. of 17.5% growth; says confident in ability to deliver on medium to long-term objectives for mid-to-high teens revenue growth.
• BYON was downgraded to Sell from Hold at Argus saying after a series of missteps, Beyond is again running losses, and there is little transparency on earnings growth in the future (shares ended the day higher, still -80% YTD).
• OLLI double upgraded to Buy from Sell at Citigroup with a $133 TP saying it is well-positioned to win in the uncertain retail landscape. Long-term, believe the recent success through higher sales volume and store count is proof the model is scalable across the U.S.

• Agribusiness/Protein Sector: BMO Capital said they remains selective given expected 2025 margin pressures across much of its ag/ protein coverage and lower-than-normal earnings visibility (Agribusiness in particular) as top picks are (in order) JBSAY, DAR, and BG (lowers its target to $100 and temper EPS for softer crush margins).

• In Autos: CHPT and GM plan to install hundreds of ultra-fast electric vehicles charging ports across the US by way of an incentive program with third-party operators. GNTX entered into a definitive agreement and plan of merger to acquire VOXX in an all-cash transaction purchase price of $7.50 per share.

• In Oil Services & Equipment: Barclay’s downgraded HAL to Equal Weight from Overweight (tgt to $33 from $43) and VAL to Equal Weight from Overweight (tgt to $49 from $59) while upgraded OII to Equal Weight from Underweight (tgt to $26 from $22) saying with the bearish oil macro environment weighing on global spending and investor sentiment, the firm downgraded the energy services sector to Neutral from Positive as the cycle is slowing, and global spending is projected to be flat in 2025 with downside risk. In Drillers, RIG was upgraded to Overweight from Equal Weight with $4.50 tgt noting the offshore drilling sector has underperformed from a series of downward earnings revisions.
• In Midstream: Wells Fargo downgraded shares of AM, EPD, OKE, PAA, PGAP to Market Perform from Outperform saying they remain bullish on the natural gas data center theme but is overall cautious on midstream in 2025, citing full valuations and expectations for range-bound commodity prices.

• In FinTech: BILL and QTWO both upgraded to Overweight from Sector Weight at Keybanc in industry note while saying key ideas heading into 2025 are ALKT, BILL, FI, HOOD, and INTU and highlight "tactical picks" GPN and SQ in Fintech and Software outlook. Has positive bias for 2025, including focusing on names that stand to benefit the most from macro tailwinds across consumer and SMB have identifiable sub-sector tailwinds, such as an easier regulatory and M&A environment (crypto/ brokerage and banking sector)
• In Consumer Finance/Cards: MA board reports qtrly dividend hike of 15% to $0.76 and $12B share buyback program.

• LLY said that the National Medical Products Administration (NMPA) in China has approved Kisunla (donanemab-azbt, 350 mg/20 mL every four weeks injection for IV infusion), for treatment for adults with early symptomatic Alzheimer’s disease, which includes people with mild cognitive impairment (MCI).
• MRK said it has entered into an exclusive global license agreement with Hansoh Pharma, a Chinese biopharmaceutical company, for HS-10535, an investigational preclinical oral small molecule GLP-1 receptor agonist. Hansoh will receive an upfront payment of $112 million and is eligible to receive up to $1.9 billion in milestones
• MRNA was downgraded to Hold from Buy at Argus noting its sales have fallen as the pandemic shifted to a new phase and believes that the 12-month upside for the stock is currently limited.
• VKTX shares dropped in the obesity sector after MRK acquires pre-clinical oral GLP-1 drug from China’s Hansoh Pharma (has been mentioned as a potential target for one of the larger bios).

• In Metals & Mining: WOR shares advanced on results as Q2 adj EPS $0.60 topped consensus est. $0.52, adj EBITDA $56.2Mm topped est. $52.6Mm as revs fell -8% y/y to $274Mm but above est. $273.77Mm; said sales in its consumer products business slid 2.2% as higher volumes were more than offset by a higher proportion of low-revenue sales, but the segment’s gross margin improved.
• In Chemicals: Citigroup updated its estimates, price targets, and ratings in its 2025 Chemicals Outlook as they maintain its broadly neutral view on commodity chemicals with most chains having some form of supply overhang and 1H25 earnings looking very similar to 2H24. WLK was upgraded to Buy as it believes it presents an attractive buying opportunity to get exposure to a strong building products business ahead of any US housing recovery. On the flipside, near-term choppiness in the macro and a high bar on both earnings growth and relative valuation has prompted a downgrade from Buy to Neutral for both AXTA and EMN. DOW was upgraded to Outperform from In Line at Evercore saying U.S. chemical volumes are projected to return to growth after two consecutive years of decline.
• In Paper & Packaging Industry: Jefferies upgraded PKG to a Buy as they see the company as the main beneficiary from further share gains as IP focuses on value-over-vol and shutter more capacity. They also continue to favor CCK and BALL as attractive compounders as cans continue to take share globally. Overall, Jefferies expects a more normalized inflationary environment in ’25 with potential volume upside driven by increased CPG promotional activity. They note that box demand has been showing greenshoots, as Nielsen data has showed volumes turning positive in recent months for food & beverages and believe IP is well positioned.

• In Internet: JP Morgan upgraded XMTR to Overweight from Neutral, downgraded ANGI and MTCH to Neutral from OW and downgraded both GETY, MYPS to Underweight from Neutral saying Internet SMIDs have underperformed mega/large caps for three straight years, but JPM is more optimistic on the group in 2025. The firm sees a more favorable backdrop for SMID-caps next year driven by 1) lower interest rates; 2) higher domestic revenue mix (US exceptionalism); 3) lower tariff exposure; and 4) the potential for a more active M&A environment. JPM top picks in 2025 are TTWO and XMTR, which replaces its prior top pick EVER
• In Telecom & Towers: SBAC was downgraded to Market Perform at BMO Capital saying while 2025 should see some improvement in the carrier spending backdrop, BMO expects SBAC’s full-year leasing to largely resemble 2024. While SBAC’s valuation of 16.5x 2025 AFFO/share is attractive, growth remains depressed with few NT catalysts.

• In Comm Equipment/Networking: NTGR shares jumped after the WSJ reported U.S. authorities are investigating whether a Chinese company whose popular home-internet routers have been linked to cyberattacks poses a national-security risk and are considering banning the devices. WSJ notes TP-Link is the bestselling router on Amazon—and has been linked to Chinese cyberattacks. The router-manufacturer TP-Link, established in China, has roughly 65% of the U.S. market for routers for homes and small businesses. https://tinyurl.com/54s36mnf
• In Video Game Software: EA downgraded from Buy to Hold at Stifel saying they remain positive on the stock longer term given its fundamental outlook for the company but is reducing its net booking estimates following its "review of game model." Stifel also downgraded Ubisoft (UBSFY) from Buy to Hold @ Stifel saying absent a drastic shift in strategy and/or transaction that values UBI above current prices, Stifel can’t make a compelling fundamental case here.
• In EMS Sector: JBL reported better Q1 results as EPS $2.00 topped the $1.88 consensus on revs $6.99B vs. est. $6.61B and forecasts FY net revs $27.3B, above prior forecast $27B and consensus est. $27.06B.

• JP Morgan forecasts industry semiconductor revenues to increase 10-12% in 2025 following a 6-8% increase in CY24 (ex-memory). Industry revenue growth turned positive Y/Y in Q423, which JPM believes should persist through 2024 and into 2025. 2025 outlook: Semi industry revs +10-12%, WFE up 5%+, SW up 10-15%. Increasing risks of geopolitical uncertainty, potential for global tariffs, and more export restrictions could mute the recovery profile in 2025 and drive more volatility in JPMC’s stocks. Large-cap top picks: AVGO, ADI, MRVL, MU, KLAC, SNPS; JPMC also favors NVDA, AMAT, LRCX, ARM, CDNS. SMID–cap top picks: ALAB, MKSI, SLAB.