Mid-Morning Look

Thursday, April 03, 2025

U.S. stocks crumbling across the board in the U.S., Asia and Europe after President Donald Trump unveiled global reciprocal tariffs during an event at the White House as promised that was steeper than Wall Street was expecting, leading to a massive “risk-off” on more uncertainty. The U.S. said to set baseline tariff rate of 10% for all countries and said these are not negotiable at this time, not looking to strike deals, but the direct additional tariffs to what the US called the “worst actors” is what is causing market concern. China tariff portion stands out above all else (reciprocal rate at 34% along with prior tariffs in place), along with big hits to Japan (23%), Taiwan, Vietnam, Cambodia and other Asian countries that several retailers have large exposure to. Massive pullbacks in Technology (XLK) and Consumer Discretionary (XLY), Energy (XLE) are all down over 5% and more than 3% declines for Materials (XLB), Financials (XLF) and Industrials (XLI). Very few places to hide today outside of Treasuries as prices jump and the 10-year note yield briefly drops below 4.00% for the first time since October 2024. The US dollar mostly lower (DXY -2.2% to 101.50) down sharply against the Euro, up against the Yen down against the British Pound; VIX +29% to 27.75.

There are several sectors feeling the short-term pain of the tariff imposed by the US on trading partners last night (more aggressive than many on Wall Street had expected/hoped with some of the biggest felt by: 1) footwear and apparel companies (NKE, ONON, DECK, ADDYY) facing a shock to their supply chains after new tariffs on Vietnam and other critical production hubs. Also watch luxury stocks (BURBY, TPR, RL, CRFUY, LVMUY) on the tariff news. 2) IT Hardware names hammered (DELL, HPQ as well as chips Morgan Stanley called the reciprocal tariffs “calamitous” to IT Hardware makers given nearly all such hardware products sold into the U.S. are now subject to 25%-54% import tariffs, including Apple iPhones. 3) Semiconductors (SOX) falls over 6% on the tariffs to Asian countries. So many others like leisure sector (travel, cruise, casinos) hit on slowing spending fears. On a positive, the lack of inclusion in the reciprocal tariffs and a ‘wait-and-see’ dynamic on the Pharma specific tariffs seems to be enough at the moment to allow the space to rally/outperform in this tape (AZN, GSK, SNY, NVO) as well as US pharma JNJ, BMY, MRK, ABBV).

Not much commentary thus far overseas thought China vows countermeasures if US doesn’t immediately cancel latest tariffs – CNBC expanded retaliation could include counter tariffs, export curbs on key minerals, blacklisting for US companies and potential investigations into US companies (as per CNBC). Taiwan called the tariffs unfair. Mexican President Claudia Sheinbaum said on Thursday that dialogue and cooperation remain ongoing with the United States. More countries will likely weigh in, the question remains what is the near-term outcome? It tariffs forces our trading partners to the table, and we get deals this could be quick n-t pain, and the economy can start to focus on tax cuts and deregulation. Though it could be a long, rough slog if that doesn’t happen with more global pain. The bottom line was the President’s tariffs are far more aggressive than expected and the market is panicking as uncertainty remains as with a massive spike in input costs, companies/countries will likely pause, freeze capex, delay hiring and adjust ests/guidance on fear of unknow as prepare for a version of the world that’s structurally different.

• 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).

• 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.
• 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.
• JP Morgan lowered tgts and ests on banking sector (C, CFG, FITB, KEY, WFC, USB, others) saying expects the tariffs announcement will increase concerns about the impact on the economy and pressure markets overall. Banks would be impacted with a fallout on investment banking, consumer spending, and loan growth plus wealth management. JPMorgan points out consumer spending started to slow in Q1, which would impact economic growth, and inflation could rise with tariffs. USB was downgraded to Underweight from Neutral at JP Morgan relative to peers because near term it will likely face greater impact from the environment.

• FSLR +6%; RBC said believes near-term FSLR could underperform given the implications of tariffs on its import strategy from India, Malaysia, and Vietnam; but firm says longer-term they could be a beneficiary given its U.S based supply chain and manufacturing strategy.
• JNJ +2%; along with gains in other defensive healthcare stocks.
• KO +2%; as defensive food and staples outperform CLX, CPB, GS, KHC, MDLZ as investors add.
• LW +9%; after Q3 sales grew to $1.52B, above prior $1.46B and above consensus $1.49B saying top-line growth benefited from growing volume

• ALDX -75%; 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.
• EL -10%; shares of beauty companies fall after Trump slaps reciprocal tariffs (ULTA, ELF)
• LYFT -10%; was double downgraded to underperform from Buy at Bank America given the substantial AV risk, especially Waymo’s rapid expansion in SF & LA, and a lack of scalable AV partnerships launching n-t for Lyft.
• ONON -15%; among hardest hit from tariff impact – Bank America notes tariffs run to 46% in Vietnam (88% of On sourcing in the US on BAML’s estimates, 39% for Puma and 31% for adidas, on its estimates). 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 NKE’s EBIT in FY27
• RH -40%; 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.
• RXST -42%; 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.