Closing Recap

Tuesday, January 07, 2025

U.S. stocks finish lower after a combination of economic indicators showed a tighter labor market, a more robust services sector and renewed inflationary concerns, which helped dowse any lingering hope that the Fed will be implementing another rate cut any time soon. The tide turned for U.S. stocks around 10:00 AM, tumbling after the ISM Services Index for December showed a “prices paid” component that jumped to 64.4, the highest level since February 2023, prompting another round of selling in bonds/pushing up Treasury yields and sending stock prices lower. Interest rate sensitive sectors were hit with homebuilders LEN, CCS, HOV hitting 52-week lows along with weakness in REITs and other dividend paying sectors. The biggest drag however in the S&P was technology and consumer discretionary with sharp pullbacks In Mag7 stocks (NVDA, AMZN, TSLA) after a strong start to January. With today’s decline the S&P 500 (SPX) moved back under its 50-dma support of 5,950 with market breadth negative as decliners led advancers by more than 2:1 margin (XLK, XLY, XLC biggest losers) and the S&P ended around 5,900 after failing to top 6,000 this morning. Energy (XLE) was a bright spot, with oil prices and stocks getting a boost after President-elect Trump comments (see below). Next up tomorrow is the Fed minutes from the December 18^th FOMC policy meeting, and ADP private payrolls before markets are closed Thursday in observance of former President Jimmy Carter passing. President-elect Donald Trump said today in press conference that interest rates and inflation are too high; he also announced a $20 billion U.S. investment in data centers which helped bounce a few tech and power/nuclear related stocks. Trump also said he would revoke offshore oil, gas drilling ban in vast areas on day one, and said he would open drilling in Alaska arctic wildlife refuge, which lifted energy.

• The U.S. trade deficit widened in November, as the trade gap increased 6.2% to $78.2 billion from a revised $73.6 billion in October (ests were for trade deficit widening to $78.0B from the previously reported $73.8B in October). Imports rose 3.4% to $351.6 billion. Goods imports surged 4.3% to $280.9 billion. They were driven by a $3.7 billion increase in industrial supplies and materials, with crude oil imports rising $1.0 billion.
• ISM report on U.S. non-manufacturing sector PMI rises to 54.1 in December above consensus 53.3 and above 52.1 in November; the prices paid index (inflation) jumped to 64.4 (22-month high) in December vs 58.2 in November; new orders index 54.2 in December vs 53.7 in November and employment index 51.4 in December vs 51.5 in November.

• Bitcoin prices declined all day, falling over 5% late day to $96,500 after topping $102,000 the day prior. The Dollar Index (DXY) dipped initially as investors keep a close eye on trade tensions after US President-elect Trump denied a report that he might moderate plans for across-the-board tariffs (dollar weakness comes after rising 13 of the last 14 weeks prior to 2-year highs). But after a round of economic data (ISM Services, JOLTs), the dollar rebounded along with Treasury yields.
• Treasuries declined as the 10-year yield rose over 6pbs to 4.69% following higher prices paid ISM inflation reading and jobs data that suggested the Fed may hold off on aggressive rate cuts early in 2025. The Japanese yen weakens to near 6-month low against the dollar around 158-handle, weakest since July, even after Finance Minister Kato repeats the familiar intervention warning.

• ULTA provided a trading update and mgmt change as Dave Kimbell to retire as Ulta Beauty CEO and Kecia Steelman appointed President and CEO of Ulta Beauty; for Q4, the company now anticipates comp sales will modestly increase, with operating margin above the prior 11.6%-12.4% range.
• In Consumer Staples: KHC was downgraded from Outperform to In Line at Evercore/ISI citing continued 12-week measured channel sales weakness -4% YoY and limited visibility on when sales will stabilize and said will likely need for increased investment spending resulting in gross margin risk; Evercore also added CPB to its "Tactical Underperform" list largely based on downside to consensus revenue and valuation.
• In Uniform makers: UNF shares jumped after the WSJ reported CTAS and made a $5.1B takeover offer for the provider of workplace uniforms and protective work gear, offering to acquire all UNF outstanding common and Class B shares for $275 per share in cash (a 62% premium to yesterday close). https://tinyurl.com/398y4txa . Unifirst later confirmed and rebuffed again a takeover proposal from Cintas saying that it was confident of its strategy as a standalone company.

• Deutsche Bank said they are cautiously optimistic on the restaurant sector into 2025 with expectations for improving sales trends and moderate cost pressures, while valuations are undemanding.
• UBS said they have a more optimistic view on the restaurant sector sales outlook for ’25 as they anticipate the US macro backdrop and industry environment modestly improve as CMG, DPZ, DRI remain top picks in 2025 while downgraded DIN to Neutral from Buy with a $32 tgt.
• Oppenheimer upgraded CAKE to Outperform and downgraded BJRI to Perform while establish 2025 "top picks" as YUM, DRI, SHAK; saying the overall outlook for underlying restaurant fundamentals is improving into 2025; however, OPCO also flags recent FX rates as EPS headwinds for multi-nationals.

• In Autos: TSLA was downgraded to Neutral from Buy at Bank America while raising its tgt to $490 from $400 saying since their upgrade in April of 2024, news flow and investor sentiment have shifted more positively and catalysts around future growth drivers have been more fully recognized. CVNA was upgraded to Outperform at RBC Capital saying after the company’s remarkable turnaround last year, they see the controversial pullback as an opportunity, raising retail unit estimates above Street and said valuation sis till attractive; UBER and NVIDIA announce collaboration to accelerate autonomous mobility.

• In Utilities: Wells Fargo upgraded CWT to Overweight and AWK to Equal Weight while downgraded AWR to underweight and WTRG to Equal Weight saying the median Water Utility total return in ’24 was -12%, well below the median Regulated Electric Utility & Gas LDC TRs of roughly +16%. Rising interest rates early in ’24 and more recently the fear of higher for longer posed a headwind for the higher P/E water sub-sector.

• In Brokers & Asset Managers: LPLA was upgraded to Overweight from Neutral at JP Morgan, HOOD was upgraded to Neutral from Underweight and RJF was downgraded to Neutral from Overweight as the company said it likes the brokerage stocks as it enters 2025. More resilient short-term rates will support margin lending and other higher-margin businesses and a retail customer base that is making money likely extends a more active trading period for retail investors. Meaningfully higher equity market levels will also help fee-based businesses.
• In Alt Managers: PX was upgraded to Overweight from Neutral at JP Morgan, BRDG was downgraded to Neutral from Overweight and APO was named top pick saying the alternative asset managers continue to see compelling secular tailwinds, with retail / wealth JPMC sees as most compelling. Valuations seem rich and the investment community seems to be moving beyond a sum-of-the-parts to a P/DE, implying a similar multiple on FRE and PRE.
• In Exchanges: CBOE and FRGE were both downgraded to Underweight from Neutral at JP Morgan saying they see exchanges as less compelling in positive markets, which results in slower growth than in more asset sensitive financials such as asset managers and some brokers. The firm sees the potential for Trump policies to favor energy exchange businesses but see less compelling growth in other asset classes. 0DTE options growth has stalled and index option open interest has slowed in recent quarters and is now declining.
• In Insurance: JP Morgan continued named GL as top pick in 2025, upgraded PFG to Overweight from Neutral and downgraded UNM to Neutral from OW saying the favorable macro backdrop (strong equity market, higher interest rates, tight labor market), insurers’ healthy balance sheets and flexibility for share buybacks, and current valuations will enable life insurance stocks to outperform further. JPM was also bullish on MET while conversely, remains Underweight on BHF and LNC.

• Mizuho said for REITs, the easy money has been made in 2024 but stills see pockets of opportunity in 2025 as they continue to prefer NYC to SF/Bay Area and are Neutral on Sunbelt. Among NYC-exposed names, Mizuho upgrades VNO to Outperform (Top Pick), and remains Neutral on SLG; upgrades CUZ to Neutral but says sees better risk-reward in Neutral-rated HIW and downgraded KRC to Neutral and continue to prefer to play West Coast through Outperform-rated BXP.
• UBS upgraded DLR from Neutral to Buy in data center REITs and raised tgt to $205 from $147 noting shares outperformed in ’24 but believes risk is skewed to the upside given an unabated demand pipeline and the potential for further improvement in data center rents.

• DNLI shares slipped after the company announced that the eIF2B program for ALS failed in the HEALEY ALS platform trial; said that the primary and various secondary endpoints at 6-months were not met.
• Vaccine makers MRNA, PFE, NVAX, CVAC shares advanced early amid increasing concerns around bird flu that could be contributing to the vaccine makers’ recent share gains.
• Orna Therapeutics announced a three-year strategic research collaboration with VRTX to utilize Orna’s novel and proprietary LNP delivery solutions to enhance Vertex’s efforts in developing next generation gene editing therapies for patients with SCD and TDT – Orna to receive $65M upfront, eligible for up to $635M
• SLRN shares slid after presented updated Phase 2 results for lonigutamab that competes directly with VRDN-003 in TED as a subcutaneous (SC) therapy.
• STOK CEO said, “alignment around a global Phase 3 study design for zorevunersen puts us one step closer to our goal of delivering the first disease-modifying medicine for the treatment of Dravet syndrome.” The company plans to start the Phase 3 study in mid-2025 which will be a one-year study with the primary endpoint being a reduction in major motor seizure frequency.

• In MedTech: SYK agreed to acquire NARI for ~$4.9 bln in an all-cash for stock transaction (funded by cash on hand and debt), paying $80 per share, confirming a prior report on Monday by Reuters.
• In Lab/Services: CAH was upgraded to Outperform at Evercore ISI with PT $140 and LH was upgraded to Outperform at Evercore ISI with PT $265 and the firm downgraded XRAY to Inline in the dental industry.

• In Shipping: CNBC reported a secret meeting between representatives of the International Longshoremen’s Association and the USMX port ownership group was held on Sunday to make headway on the issue of port automation that needs to be resolved by Jan. 15 to avoid a new East and Gulf Coast ports strike.
• In Airlines: Susquehanna said heading into 2025, they see a favorable supply/demand balance for U.S. airline carriers, with a “new era” of supply discipline and an emerging scenario for demand reacceleration. The firm upgraded ALK to Positive as it sees Alaska Accelerate supporting solid equity earnings, FCF generation, and ROIC expansion into 2026, with DAL, UAL and ALK the top picks within its airline coverage. LUV said it had entered a deal to sell and leaseback 36 of its Boeing (BA) 737-800 aircraft from Babcock & Brown Aircraft Management. MESA said it will sell 18 Embraer aircrafts to UAL for about $229.1 million and use the proceeds to cut debt.
• In Trucking/Transports: Susquehanna downgraded shares of ODFL, SAIA, and XPO to Neutral from Positive in Logistics and Trucking saying LTL volumes should pressure estimates and stretch valuations near term, with mid-term upside limited by 2026 consensus for mid-single-digit % volume growth in an industrial-linked market with half the industry seeking  share gain; firm remains Positive on LTL-adjacent TFII and FDX on recent spin-off news.

• In Metals & Mining: Antofagasta (ANFGF) upgraded to Outperform at Bernstein while downgraded FCX to MP in metals saying commodity prices are the most important factor in stock selection & the firm thinks that copper has good but not amazing risk/reward at the current price, thus its tendency is to be selective vs all-in on copper pure plays. Bernstein sees a potential risks in Freeport’s ability to export copper concentrate from Indonesia in Q125 that aren’t reflected in consensus. Jefferies a note on gold as they upgraded RGLD to Buy from Hold in 2025 outlook for metals and mining as continues to see gold price support from Central bank purchases and the Fed rate cut cycle backstopped by ETF holding volumes that remain at an elevated level.

• In Media: DIS was upgraded from Neutral to Buy at Redburn and raised tgt to $147 from $100 saying after years of cord-cutting pressures, Disney is finally at a point where streaming profit growth will more than offset linear TV declines – signaling the end of a structural headwind that has curtailed Disney share price appreciation. PARA and CMCSA announced the renewal of their comprehensive distribution agreements to continue delivering Paramount’s leading portfolio of broadcast, entertainment, news and sports brands across Xfinity platforms. ROKU was named a top pick for 2025 at Needham saying the two most important upside valuation drivers in 2025 will be connected TV (CTV) ad growth, and industry consolidation which ROKU benefits both from.

• In AI space: the WSJ reported Anthropic is in advanced talks to raise $2 billion dollars in a deal that would value it at $60 billion, making it the latest artificial-intelligence startup to seize upon investor euphoria for the technology. The funding round is being led by the venture firm Lightspeed Venture Partners, people familiar with the matter said. The $60 billion valuation includes the money Anthropic plans to raise in the round. Separately, shares of DELL, VRT, CEG, TLN, VST, MOD, PRIM, ETN, GEV among names that bounced after CNBC reported Donald Trump to announce $20B investment to build new data centers.
• In Software: APP shares fell after Bank America said in gaming industry note that Q4 gaming IAP below Street, bar for Software higher; Truist upgraded TEAM to Buy, downgraded DDOG to Hold, saying they would underscore that it believes both companies have robust businesses with long runways for future growth, but at current valuation levels, it prefers the relative safety that it sees in Atlassian’s setup versus Datadog’s. Increasing optimism in investor expectations drove valuation higher for the software group in the back half of 2024.

• MU shares rose after NVDA CEO said at CES last night that Micron was providing memory for GeForce RTX 50 Blackwell family of gaming chips.
• NXPI said it plans to acquire TTTech Auto, an Austrian company specializing in safety software for autonomous vehicles, in an all-cash transaction valued at $625 million
• AEIS was upgraded from Hold to Buy at Needham with $145 tgt saying while they would like to have more clarity on the WFE outlook for 2025 and timing of the recovery in the Industrial & Medical market, believes there are enough catalysts over next 12 months to warrant the upgrade as numbers for Q4 and 2025 appear reasonable.
• The Semiconductor Industry Association reported yesterday that total semiconductor sales grew 23.3% YoY in November after rising 15.2% in October; Memory sales grew 87.1% YoY; excluding memory, sales were up 8.0% YoY. And total semiconductor sales growth MoM was above typical seasonality, up 10.5% versus the historical November average of up 2.3%.