Closing Recap

Thursday, December 12, 2024

U.S. stocks finished on the low, slipping late day as the S&P 500 index (SPX) and Nasdaq pulled back off recent record highs. A jump in jobless claims and another data point showing inflation is accelerating (November PPI) failed to worry investors as major averages held it together most of the day. There was some profit taking in the mega cap tech names (AMZN, GOOGL, META, NFLX, TSLA) after each touched record highs the day prior. After snapping a streak of 7-straight negative breadth days on Wednesday, decliners outpaced advancers by a more than 2:1 margin on Thursday. Smallcaps paced the declines with a more than 1.3% drop for the Russell 2000 as Treasury yields climbed all day (10-yr yield up 17bps last 4-days). The dollar was higher, oil little changed, and gold snapped its 3-day rally with a sharp decline. Overall, it was a very lackluster trading day that saw heavy weakness in Healthcare, Industrials, Discretionary and Materials while defensive sectors such as Staples posted modest gains. The Dow Jones Industrial Average also finished lower, falling for 6^th straight day, with much of the weakness from the decline in shares of UNH.

President-elect Donald Trump told business leaders at the New York Stock Exchange that he would try to cut the corporate tax rate to 15% from 21%. “But only if you make your product here — otherwise you pay 21%,” Trump said at the NYSE, where he rang the opening bell to mark his second time being named Time magazine’s Person of the Year. “For those that are running the big companies, those great big, beautiful companies, nobody is going to be leaving us,” he said. “You are going to be coming back. You are going to be bringing it back to the United States. We are incentivizing everybody to come back.”

Lots of central bank action today ahead of the FOMC policy meeting next week (where 25-bps cut expected). The European Central Bank (ECB) reduced its key interest rate to 3% from 3.25% warning that growth will be weaker than it had previously. It was the third cut in as many meetings and 4^th reduction since June as they focus on bolstering economic growth over combating rising prices as inflation bounces around its 2% target. The Swiss National Bank (SNB) cut its interest rate by an aggressive 50 bps to 0.5% from 1%, the biggest reduction in almost 10 years as it sought to stay ahead of expected cuts by other central banks. The Bank of Canada also unveiled a second straight half-point rate cut on Wednesday, to 3.25%. Brazil central bank surprised yesterday to the upside, raising their benchmark lending rate 100 bps to 12.25%, while street was only expecting 75 bps.

First cautious strategist comments in a while on Wall Street as Stifel said they believe the S&P 500 peaks 1H25 then falls to mid-5,000s 2H25 on slower GDP, sticky inflation. Stifel’s 2025 view is that U.S. real GDP decelerates to about 1.5% in 2H25 (recently >3% growth) with sticky Core PCE inflation just under 3%, contributing to an S&P 500 correction -10-15% by 2H25. Stifel also expects the Fed to pause at the Jan-29th meeting at 4% (2 more cuts, then done well into 2H25) due to sticky inflation and zero fiscal visibility, with the inflation-leery Fed standing pat too long in 2H25 despite GDP slowing. Meanwhile, Canaccord’s strategist noted the S&P 500 Index (SPX) is heading into the second half of December near all-time highs and with a 27.6% gain for the year, on track for the seventh strongest year on record. This follows a 24% gain in 2023. Back-to-back gains of 20% or more, although rare, have historically led to further upside. The soft-landing environment of 1995 began a period of four consecutive years when the SPX gained over 20% each year.

• Weekly Jobless Claims jumped to 242,000, above 225,000 prior week and vs. consensus 220,000; the 4-week moving average climbed to 224,250 from 218,500 prior and continued claims climbed to 1.886M from 1.871M prior week; the insured unemployment rate unchanged at 1.2% Nov 30 week from 1.2% prior week (prev 1.2%).

• Feb gold prices tumbled -$47.30 or 1.72% to settle at $2,709.40, pulling back from 5-week highs, after having rallied 3.7% the first 3-days of the week as investors booked profits and positioned themselves after PPI data today was “hotter” and ahead of a Federal Reserve meeting next week. U.S. producer prices rose more than expected in November amid a surge in the cost of food.
• Treasury yields rose on weak auction. U.S. Treasury sold $22B in 30-year notes at high yield 4.535% which was higher than the 4.523% when issued prior on a weak bid-to-cover ratio 2.39, as primary dealers take 14.37% of U.S. 29-year 11-month bond sale, direct 19.1% and indirect 66.53%. the 10-yr yield rises 5.2bps to settle at 4.323%; is now up 17.3bps over the last 4 days. The U.S. dollar index (DXY) edged higher, little changed vs. the euro and yen, though the Canadian dollar falls to 1.4210 vs USD, lowest since April 2020.

• OXM missed Q3 revenue, profit estimates saying high inflation, impact of two hurricanes, and election distractions led to tentative consumer spending; lowered FY24 revenue to $1.50B-$1.52B vs. prior $1.51B-$1.54B and EPS seen $6.50-$6.70, vs. prior $7.00-$7.30 forecast.

• In Utilities: WEC was upgraded to Neutral from Underperform at Bank America to reflect the constructive outcome in the recently completed Wisconsin rate case, strong demand growth in Wisconsin, WEC’s robust capital spending plan, strong balance sheet and performance record. CEG was upgraded to Buy from Neutral ($269 tgt) at Bank America citing sustained double-digit growth, an asset mix and business model that provides clean, baseload generation, and a compelling valuation relative to peers. Looking into 2025, JP Morgan upgrades NJR to Overweight from Neutral and EMA to Neutral from Underweight; AEP was downgraded to Neutral at JPM saying the company’s new CEO has introduced several key organizational changes that are encouraging, but the transition likely takes time. XEL was upgraded to Overweight from Neutral at JPM saying while wildfire liabilities have weighed on shares, it has "room to run" following a positive Q3 update.

• Separately, The FDIC said bank profit declined due to absence of one-time gains from prior quarter on equity security transactions, partially offset by strong net interest income. Banks report quarterly net interest income increase of $4.5B, net interest margin climbs to 3.23%. US bank profits dip 8.6% in Q3 2024 to $65.4B – federal deposit insurance Corporation. Domestic bank deposits climbed 1.1% to $194.6B, uninsured deposits up 2.7%.
• In Financial Services: EFX was upgraded to overweight from equal weight at Morgan Stanley, citing an attractive valuation and favorable regulatory environment heading into next year. MSCI was upgraded from Peer Perform to Outperform at Wolfe Research as sees a more constructive demand environment developing next year in financial services/capital markets, which it believes could lead to more consistent sales trends and fewer cancellations in segments such as Analytics.
• In Insurance: MET slides were released ahead of its Investor Day as the company’s new 5yr targets are: 1) 15-17% ROE, 2) double-digit EPS growth, 3) $25b+ of free cash flow, and 4) 100bps direct expense ratio improvement. MMC was upgraded to Outperform from Sector Perform at RBC Capital and raised tgt to $250 from $242 as views as a "high-quality insurance broker" with good visibility into solid sales and earnings growth. The business mix provides diversification and leaves the company less sensitive to changes in P&C pricing.
• In Asset Managers: Wells Fargo upgraded ARES to Outperform while downgraded BX and RJF to Equal Weight from OW (mainly on valuation) saying heading into 2025, the bar has been raised for the asset managers & brokers, and the group needs to "stick the landing" to justify high valuations. Top picks (ARES, TPG, LPLA) can drive EPS upside from secular growth and strategic shifts.
• In Crypto: RIOT shares rose after the WSJ reported activist investor Starboard Value takes stake in the Bitcoin miner, pushing Riot to convert some mining facilities to space for big data-center users.

• JAZZ upgraded to Overweight from Equal Weight at Morgan Stanley with a $175 price target.
• KROS shares tumble after saying it has halted dosing of 3.0 mg and 4.5 mg doses of its high blood pressure treatment in a mid-stage study due to fluid buildup around the heart; said dosing in the 1.5 mg/kg arm will continue after a risk-benefit review by an independent monitoring committee
• WST was upgraded to Buy at UBS on incremental confidence in positive mix shift driven by Annex 1 regulations, wearable injectors, and GLP-1 tailwinds.

• In Managed Care: the sector has been pressured over the last two weeks, led by weakness in UNH after the murder of their CEO while news yesterday (from the WSJ) that a bipartisan group of lawmakers are set to introduce legislation to break up pharmacy-benefit managers weighed on the group (CI, CVS). Today CNC forecasted FY adj. EPS of more than $7.25 for 2025, topping consensus est. of $6.97 and sees FY rev of $166.5-$169.5B topping the $166.63B estimate while projects a health benefits ratio of 88.4%-89% vs est. of 88.23%.

• In Industrials: ROK was upgraded to Buy from Hold at Jefferies and raised tgt to $350 from $290 as sees a recovery in manufacturing sentiment, bolstered by the potential for lower interest rates, reduced corporate taxes, and deregulation. MIDD was downgraded to Hold from Buy at Jefferies as sees "muted" commercial and residential growth and limited visibility into a multiple re-rating.
• In Transports: ALGT shares bounced after raises Q4 adj EPS forecast to $1.75-$2.25, vs prior unchanged-$1.00 and said December capacity expected to be up 17% y/y while booking trends following the election continue to outpace our initial expectations.

• In Defense Government Services: Goldman Sachs said they pivot to a more cautious view of the Government Services sector into 2025. While there are scenarios in which this group is a net beneficiary under the new administration and medium-term budget regime, there are also scenarios in which their customer budgets and therefore revenues shrink considerably, while consensus estimates and valuations do not reflect that possibility. The risk / reward is skewed negatively as they initiate VVX at Sell, and downgrade CACI to Sell; remain Sell-rated on SAIC, downgrade LDOS to Neutral and upgrade PSN to Buy.

• In Steel: UBS downgraded NUE and STLD to Neutral & CMC to Sell (all from Buy) saying despite weak sector-wide Q3 results/Q4 guidance and disappointing steel pricing & demand data, CMC/STLD shares are up >25% from the September lows. Steel was perceived as a relative winner from the President-elect’s protectionist policies. Despite weakening data, the shares traded higher into the election, before rallying 15-20% on the result (then reversing most of those gains). UBS stills expect a recovery in US steel demand & prices into 2025, but after the recent rally in the shares & increase in interest rate expectations, the risk-reward is more balanced.
• In Materials: NDSN shares dropped after Q4 topped views, but guided Q1 and FY below views; guides FY25 sales $2.75-2.87B vs est. $2.933B and adj EPS $9.70-10.50 vs est. $10.41

• In Internet: GOOGL closed at its highest level on record Wednesday after the Google parent announced its Gemini 2.0 model and some of the projects that will come with it. Alphabet said that developers will be the first to have access to Gemini 2.0, with general availability coming in January. Gemini 2.0 is an update to Gemini 1.5, with enhanced performance at similarly fast response times. Separately, GOOGL’s YouTube TV hikes prices by $10 per month above $82 per month.
• In Cable & Telecom: Keybanc upgraded CHTR to Overweight from Equal Weight at Keybanc with $500 PT noting the stock is off its lows but can continue to work higher as broadband subscriber trends improve primarily as a function of lapping Affordable Connectivity Program, continued growth in rural, and underlying subscriber declines being mostly stable. TMUS was downgraded to Sector Weight from Overweight at Keybanc based on valuation, which it thinks has become stretched, and it is unwilling to raise its price target to justify the valuation. CMCSA was upgraded to Buy from Neutral at Seaport with a $46 price target.

• MSFT said it plans to take an $800 million charge after General Motors Co. said it was shutting down its autonomous taxi initiative.
• First notable IPO in a while as ServiceTitan (TTAN) open at $101 after pricing its U.S. initial public offering at $71 per share, above its indicated range of $65 to $67, raising $624.8 million.
• In Optical/Networking: CIEN shares jumped as better guidance offset Q4 miss; reported Q4 adj EPS $0.54, below ests of $0.66 as gross profit falls 5.4% y/y on better revs but guided Q1 revs $1.01-$1.09B above est. $1.0B.
• In Hard disk drives: WDC shares fell after speaking at Barclay’s tech conference saying they are seeing more pricing headwinds than expected in quarter; shares of MU, STX slipped in sympathy.