Closing Recap

Friday, January 10, 2025

US equity futures slumped a bit in the overnight session coming off yesterday’s Federal holiday to honor Jimmy Carter, but the real excitement came with a much better Nonfarm Payrolls report. It looked like a, “good news is bad news” kind of day as the market didn’t appreciate the read-through to the Fed likely being on hold with better jobs data. S&P futures quickly dipped to -1% and Nasdaq futures slid to -1.3%. Traders immediately shifted Fed cut expectations to an implied single cut in 2025, no earlier than June. Hotter University of Michigan inflation expectations (highest 5-10 year reading since 2008) created a second early hurdle in equities. Today’s sentiment on the Fear and Greed Index was 32/100 (Fear) versus 26 (Fear) last week, 48 (Neutral) last month and 75 (Extreme Greed) at this time last year. Separately, the AAII bull-bear spread survey dipped to -2.7 versus 1.2 last week as bull fell to 34.7% from 35.4% and bears rose to 37.4% from 34.2% last week. Early breadth favored decliners by almost 4:1 and small caps underperformed with IWM (-1.69%) versus SPY (-1.23%) and QQQ (-1.45%). Energy (+0.73%), Health Care (-0.01%) and Utilities (-0.09%) were the early outperformers among S&P sector ETFs, while Real Estate (-1.79%), Technology (-1.91%) and Financials (-1.94%) paced the underperformers with only Energy sector gaining versus the other ten in the red.

On the data front today, Brent crude rose to a 3-month high while gold priced in Euros hit all-time highs. Per @bespokeinvest, small caps (IWM) have dipped -11.1% from the late-November high and are now in correction territory, while today would mark the 4th 1%+ fall in the S&P 500 in the ten trading days since Christmas if performance holds. On inflation expectations, @M_McDonough notes the entire swing higher in 1-yr inflation expectations can be explained away by political party affiliation with Democrats jumping higher while Republicans drop. That said, @charliebilello notes market-based inflation expectations are now at their highest since April. Lastly, if you were considering a rotation to low-multiple stocks, @SethCL warns since 1991, if you bought the lowest year-end median P/E sector, you would have underperformed the highest median P/E sector over the following twelve months. 

Heading into the final hour of trading, breadth remained at almost 4:1 favoring decliners and small caps continued to underperform. Energy (XLE, +0.1%) remained the only S&P sector ETF in the green as both oil and natural gas gained. Financials (XLF, -2.4%), Real Estate (XLRE, -2.3%) and Technology (XLK, -2.1%) were the largest laggards on the day. Both growth and value slipped with little difference in performance as the Russell 1000 Growth was -1.30% versus its Value counterpart -1.28%. With expectations around Fed cuts now curtailed, even more focus will fall on corporate guidance and commentary as earnings get rolling next week. For the week, the S&P 500 fell 1.94%, the Nasdaq declined 2.34%, and the Dow fell 1.86%.

• University of Michigan surveys of consumers sentiment prelim Jan 73.2 (consensus 73.8) vs final Dec 74.0; current conditions index prelim Jan 77.9 vs final Dec 75.1 and expectations index prelim Jan 70.2 vs final Dec 73.3.
• University of Michigan surveys of consumers 1-year inflation outlook prelim Jan 3.3% vs final Dec 2.8%; University of Michigan surveys of consumers 5-year inflation outlook prelim Jan 3.3% (highest levels since 2008) vs final Dec 3.0%

• WTI February crude futures gained overnight and held solid performance to settled +$2.65/bbl, or +3.58%, to $76.57 following the better US payrolls data. Expected new sanctions against Russia provided incremental support as Brent crude topped $80 for the first time since October (later settling +$2.84/bbl, or +3.69%, at $79.76). The strong finish to the week helped extend the longest stretch of weekly gains since July. Nymex front month settles up 7.8% at $3.989/mmBtu for a 19% weekly gain.
• The U.S. 10-year yield rose 9.2 bps today to 4.772% and ended the week up 17.5bps and now up four of the past five weeks to a new 52-week high and at the highest yield since Wednesday, Nov. 1, 2023, and up 115 bps from its 52-week low of 3.622% hit Monday, Sept. 16, 2024. The 2-yr yield rose 11.5bps this week to 4.394% and the 30-yr yield gained 14.7bps this week to 4.962%, up 5-straight weeks to highest since Nov 2023.

• In Restaurants: Citigroup upgraded MCD to Buy from Neutral with $334 PT saying after a year-plus transitioning through cumulative pricing pushback by consumers, expects 2025 will be a year where MCD fully leans back into its scale advantages, drives share gains in key markets and fuels a recovery in margins/EBIT growth. Citigroup downgraded YUM to Neutral, lower PT to $141 as expects a difficult international operating environment to persist into 2025, with lingering risks of global unit closures, ongoing macro challenges in China. Lastly, Citi upgraded SG to Buy, raise PT to $49 saying its model/waterfall of Infinite Kitchen unit growth/remodels suggests room for substantial financial upside (mid-teens store profit upside by 2029E and almost 50% upside in a DCF).

• In Department Store/Off price retail: COST December U.S. comp sales ex-gas, FX +9.8%, vs. est. +5.2% and December total comp sales +7.4%, above est. +3.7%; December E-commerce comparable sales up 34.4%; said total and comparable sales were positively impacted by approximately 1.5% because of the shift in e-commerce sales; BURL upgraded to Buy from Neutral at UBS and raised tgt to $360 from $280 citing a solid consumer spending environment, major market share gains from department stores, and Burlington’s self-help initiatives. ROST downgraded to EW from OW at Wells Fargo as it sees a more balanced outlook from here.
• UBS with broad positive retail sector call as they upgraded BURL, BOOT, GIL, ANF to Buy; and upgraded GAP, JWN to Neutral saying conversations with investors suggest the market has started to price in US tax cuts, reduced government spending, and deregulation. However, we think the market still underestimates how these actions could supercharge apparel and footwear spending as well as sentiment. Also said they believe the global health & wellness trend continues in 2025, particularly benefiting running footwear brands. We prefer Buy-rated stocks with "Up & Coming" brands like ONON, DECK, SKX, UAA over Neutral-rated stocks like NKE, LULU, VFC
• In Luxury Retail: CPRI was upgraded to Buy on favorable risk/reward at Citigroup noting there have been a tough couple of years, but the market seems to be valuing the company as if its portfolio of brands are on a path to extinction. Citi does not believe they are, which creates a very favorable risk/reward if anything were to go right.

• Home Furnishings: ARHS shares rose after raises FY24 revenue view to $1.27B-$1.28B from $1.23B-$1.25B late Wednesday night and said sees comparable growth is expected to decline between 9% to 8%. Wayfair Inc (W) said to exit German market immediately, as restructuring to impact approximately 730 employees and expects charges of $102M to $111M.
• In Homebuilders: RBC Capital upgraded both KBH and LEN to Sector Perform from Underperform on a valuation-based ratings change following the stock’s significant recent decline and reset to investor expectations, though said they expect continued affordability challenges to reverberate across the homebuilders’ group amid the higher-for-longer rates backdrop.

• In Energy Equipment: HP was upgraded to Buy at Citigroup as its run-rate FCF yield with KCA is ~13%, which it believes normalizes at ~11% post close (target price at $40) and downgrade OII to Neutral as there’s now limited upside to its $30 target price (yield at 6%), while EBITDA growth should slow given the drop in active floater rigs. From a macro perspective, the firm believes investors will exit the Q4 earnings season with a view that the downside within U.S. operations is better dimensioned, while the outlook for International bears some uncertainty.
• In Solar and Alt Energy: RUN was upgraded to Buy from Neutral at UBS and raised tgt to $17 from $14 saying shares look attractive trading near all-time low multiples despite emerging positive trends like its California market share has nearly doubled to 22% over the past year. Susquehanna downgraded both ARRY and NOVA to Neutral from Positive with a $7 and $4.50 price target respectively.
• In Pipelines/MLPs: Wolfe Research upgraded PAA, PAGP to Outperform from Peer Perform saying sees better value in master limited partnerships than the c-corps in 2025 and downgraded EPD to Peer Perform from Outperform as does not see a catalyst to drive greater investor inflows or a reason for the stock to regain a sizable valuation premium over peers.
• Natural Gas producers (AR, CTRA ) rallied early as natural gas futures climb to a one-week high at $3.87 per mln British thermal units (mmBtu), on forecasts for colder weather and higher heating demand over the next two weeks than previously expected and record flows of gas to liquefied natural gas export plants.

• In FinTech/Payments: Goldman Sachs provides 2025 outlook for industry, saying they believe a robust consumer and leverage to the digitization of payments globally should be positive for payment stocks into 2025. They upgraded BILL to Buy citing potential inflection in fundamentals from a solid economy and downgraded GPN to Neutral as business is repositioning towards areas with weaker tailwinds. Top picks: Buy-rated V, MA, SQ, and AFRM. Additionally, heading into 4Q24 earnings, they expect a relatively strong end to 2024, aided by better holiday spending, and particularly stronger e-commerce spending.
• In Life Insurance: Deutsche Bank said several key themes will shape the insurance sector in 2025, arising from both broad economic trends and issues specific to the insurance industry. While some big macroeconomic themes will influence the sector via their impact on equities and rates, others, such as tariffs and immigration, are expected to have little impact on insurance stocks despite their broader consequences. The firm upgraded CRBG and EQH.
• In REITs: Self-storage REITs CUBE, NSA all upgraded to Hold from Sell at Deutsche Bank saying with the stocks off 15% – 20% in the past three months due to concerns about the impact of rising rates on their bottom line, the group as a whole feels relatively de-risked barring a recession. After a year of bearishness on the self-storage sector, the firm is shifting to a neutral outlook.

• AKYA shares jump after QTRX acquires the company in an all-stock transaction; Akoya shareholders will receive 0.318 shares of Quanterix common stock for each share of Akoya common stock owned.
• AVDL pre-announced flat Q424 Lumryz sales (inclusive of a ~$6M inventory headwind), and provided 2025 sales guidance for the product ($240M-$260M, implying growth of 50% versus 2024 at the midpoint) that was well below consensus of ~$286M.
• DYN announced new clinical data from its ongoing Phase 1/2 ACHIEVE trial of DYNE-101 in patients with myotonic dystrophy type 1.
• GILD upgraded to Overweight (from EW) and raise tgt to $113 from $87 at Morgan Stanley as sees the potential for upward estimate revisions (LEN launch) and further multiple expansion (progress with NextGen HIV treatment)
• IGMS shares tumbled after halting the development of its Imvotamab and IGM-2644 treatments for autoimmune diseases, with multiple analysts downgrading the stock.
• NTLA announced a strategic reorganization focused on key value drivers. Over the course of 2025, the strategic reorganization will result in a net workforce reduction of approximately 27%. The company expects to incur charges of approximately $8M associated with the reorganization.
• VIR was upgraded to overweight from Equal Weight and raise tgt to $20 from $10 at Morgan Stanley citing promising early Phase 1 activity for VIR-5500 in mCRPC and VIR-5818 in a subset of CRC.

• In Life Sciences: TMO was upgraded from Market Perform to Outperform w/ $630 PT at Bernstein saying although they do have preclinical exposure it believes it is lower than peers in its coverage, and their later-stage research and / or production-focused revenue could outperform in ’25. The firm also upgraded WAT to Outperform ($430 PT, 15% upside) as believes that tactically the replacement cycle is not yet fully priced in, and fundamentally the company’s long-term prospects have improved since pre-pandemic.
• In Medtech: BSX was upgraded to Buy from Hold at Deutsche Bank saying the story has become simpler, and as one of the best-in-class MedTech names, believes BSX is poised again to outperform in 2025. GMED forecasts 2025 net sales $2.66B-$2.69B vs. est. $2.66B and 2025 adj EPS $3.40-$3.50 vs. est. $3.43; and guides prelim Q4 net sales about $657.0M vs. est. $635.5M.

• In Railroads: CSX and CNI both upgraded to Buy from Hold at Jefferies saying as the current freight recession approaches its third year, they are increasingly positive on the freight backdrop for 2025. Consistent with the view that the cycle turns and a pro-business administration spurs demand for transportation and logistics services, the firm upgraded both to Buys as it is positive on the earnings acceleration over the next two years.
• In Aerospace: JOBY and ACHR both downgraded by JP Morgan saying eVTOL stocks have been vastly outperforming the broader market and as they see downside in the coming quarters, and it would similarly look for a better entry point. Gov’t IT service names LDOS, BAH, CACI, etc seeing a bounce early after Bloomberg reported Billionaire Elon Musk expressed doubt that his government efficiency panel in President-elect Donald Trump’s incoming administration will actually be able to achieve $2 trillion in cuts to the US federal budget, backtracking from a lofty target that he had floated prior.

• BMO Capital upgraded TEAM to Outperform from Market Perform and raised its target price to $292 from $255 saying while they are not raising its estimates, its confidence has increased that Atlassian can sustain ~20% y/y growth through a combination of factors, after passing the very difficult March compares.

• Goldman Sachs upgraded NXPI to Buy and downgraded AMD to Neutral in 2025 semis outlook. The firm recommended to Focus on industry-leaders in AI, as well as cyclical names as we expect the magnitude of earnings beats in AI-related names to moderate, while earnings revisions in broad-based semiconductors to turn positive in the latter half of the year. Best positioned: NVDA (on CL), AVGO, LRCX, MU, TER (on CL), and ENTG. Separately, AI infrastructure companies at CES 2025 shared an optimistic outlook, while others struck a cautious tone given demand uncertainty and/or persistent inventory headwind.
• Truist with some semi changes as they downgrade ON to Hold from Buy and cut tgt to $60 from $85 and raise ADI PT to $230 from $216 saying NVDA sounds best and ON sounds worst after Truist attended CES 2025 this past week and hosted several meetings with high-profile companies in its sector. The over-arching theme is straightforward: spending on AI infrastructure is strong, which benefits NVDA most… just while NVDA is making a clear and highly credible push into the $35B client compute market, challenging INTC .