Mid-Morning Look

Friday, January 10, 2025

U.S. stocks are on track to close out the week with hefty losses, pulling back sharply as a combination of “hotter” monthly jobs data for December, coming in well above expectations and a surge in inflation expectations as per the University of Michigan sentiment data (highest since 2008) has reduced expectations for aggressive rate cuts by the Fed this year. Following the data, traders bet the Federal Reserve will wait until at least June to reduce its policy rate. Prior to the monthly jobs report, they had seen the Fed cutting as early as May and saw about a 50% chance of another cut by the end of year. Following the recent string of continued solid economic reports, and signs of inflation increasing, many must wonder why the Fed cut rates by such an aggressive 50-bps ahead of the Presidential election last September. The data has not only sunk stocks but boosted the dollar index (DXY +0.2% to 109.40) and Treasury yields (10-yr highs of 4.79% today, highest since Oct 2023) on “higher-for-longer” views on interest rates. The CBOE Volatility index (VIX) rises to 2025 highs above 20.30 while NYSE breadth more than 5:1 decliners leading advancers, with biggest drops in Technology, Financials, Communications, and REITs. Transports got a boost after better earnings from airline Delta (DAL). P&C insurance stocks hit hard (MCY, ALL, TRV, CB) following the devastation from the Los Angeles wildfires.

• 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%

• 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 Footwear & Sports Apparel: NKE upgraded from Neutral to Overweight at Piper and raised tgt to $90 from $72 saying while they may be early with this call, CEO Elliott Hill’s intensified urgency to clean up the marketplace should translate to a more visible recovery story entering FY26, while buy-side sentiment remains negative. LULU upgraded from Hold to Buy at Needham with $475 PT, noting shares lagged in 2024, with shares -25% (vs. SPX +23%), but says checks suggest a strong recovery of demand in December. BOOT upgraded to Buy from Neutral at UBS and raised tgt to $210 from $155 calling it the dominant retailer in two niche and underserved categories, namely western wear and workwear and believes Boot Barn is an underappreciated growth story.
• 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.
• 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).

• CEG +21%; said it would buy privately held Calpine Corp, a geothermal and nat gas energy company, in a cash-and-stock deal valued at $26.6 billion including debt.
• CTRA +3%; along with gains in other natural gas producers AR, EQT, CRK, RRC amid cold weather forecasts.
• DAL +10%; rises on quarterly results as Q4 adj EPS $1.85 vs. est. $1.76 and revs rose 5.7% y/y to $14.44B vs. est. $14.16B; guides Q1 adj EPS $0.70-$1.00 vs. est. $0.76 and FY EPS guidance above $7.35 vs. est. $7.45.
• FUBO +5%; after DIS along with partners FOXA and WBD said their planned sports streaming joint venture, Venu Sports, will be discontinued.
• GMED +2%; 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.
• WBA +24%; posted another quarterly loss but topped estimates on an adjusted basis with adj EPS $0.51, ahead of the $0.38 consensus as sales rose 7.5% y/y to $39.5B vs. est. $37.4B.

• DYN -21%; after announced new clinical data from its ongoing Phase 1/2 ACHIEVE trial of DYNE-101 in patients with myotonic dystrophy type 1.
• IGMS -69%; shares tumbled after halting development of Imvotamab and IGM-2644 for autoimmune diseases; is also reducing staff by 73% and is exploring internal options and strategic alternatives.
• MCY -18%; among Property & Casualty insurers getting crushed as estimates of industry losses from the worst wildfires in Los Angeles history move higher (ALL, TRV, AIG also decline).
• PCG -10%; as utilities in California also pressured given the wildfires, EIX down a 5^th straight day.
• ROKU -3%; was downgraded to Sell from Neutral at MoffettNathanson with a $55 PT saying the incoming administration will likely be more constructive on industry consolidation, but the list of potential credible buyers for Roku seems to be devoid of any real names.
• STZ -11%; reported Q3 profit and sales below consensus with EPS $3.25 on sales $2.46B below consensus of $3.31 and $2.53B; forecasts FY beer net sales growth 4% to 7% below prior forecast 6% to 8% and lowered year EPS view to $13.40-$13.80 from $13.60-$13.80 prior noting beer sales strong/spirits sales weaker.