Mid-Morning Look

Wednesday, September 18, 2024

With the most anticipated FOMC meeting coming up in recent years, and the S&P 500 rising 7 straight days into the meeting near all-time highs (and Dow hitting record highs this week), major averages are moving sideways to start the day, as investors await with bated breadth the outcome of today’s meeting. So, what is the market outlook? Heading into the FOMC rate decision at 2:00 PM, there is a 61% chance of 50bps cut, a 96% chance of 25bps cut in November (Powell press conference is at 2:30 PM). The base case for the 50-bps cut is the Fed trying to avoid being “behind the curve”, needing to catch up, prevent recession, and provide less stress in a struggling labor market (note there have been several calls this week on Wall Street calling for the aggressive cut). So, what is the base case for going 25bps? Maybe things are not all that bad, stock markets are at all-time highs (for S&P and Dow) as earnings have remained strong. Other economic data points outside of jobs have shown stable improvement along with decelerating inflation – so is such an aggressive cut necessary at this point? Overall, markets are heading into the most divided Fed meeting since 2008, but greater chances/view of an oversized cut so far. A no rate cut is not baked into this market and would come as a major surprise (and likely weigh on markets). The U.S. dollar weakens ahead of the Federal Reserve interest-rate decision where market pricing suggests a near coin flip between a 25- and 50-bp interest-rate cut and bonds are down with the 30y yield to 3.995% from a low of 3.899% yesterday – 20y yield to 4.068% from a low of 3.974% yesterday – 10y yield to 3.683% from a low of 3.599% yesterday.

• US mortgage market index +14.2% in the latest week according to Mortgage Bankers Assoc, as the mortgage purchase index climbs 5.4%, refinance index surges 24.2% as the average 30-year mortgage rate falls 14 bps to 6.15%, lowest in two years, in Sept 13 week.

• In Medical Equipment: EW was downgraded to Hold from Buy at Jefferies based on its view that TAVR growth near-term will continue to be ~MSD, held back by competition, pricing pressure, and workflow challenges in a market that, while not fully penetrated, is showing signs of maturity. RMD was downgraded to Underperform from Peer Perform at Wolfe Research with an $180 price target saying this is a risk/reward call triggered by its physician survey work. Wolfe believes Lilly’s launch of an obstructive sleep apnea indication for its GLP-1 medication tirzepatide “poses significant patient funnel disruption/distortion risks” for ResMed. COR downgraded from Buy to Neutral at Bank America as estimate Cencora could grow EPS at 8% for the next several years, at the low end of its 8-12% long-term targets.
• In Apparel Retail: VFC was upgraded to Overweight from Equal Weight at Barclays, raising tgt to $22 from $19 saying believes VFC will begin to see the positive impact of changes, led by CEO Bracken Darrell (who just completed his one-year anniversary in July 2024), throughout the organization beginning in fall 2024 and accelerating into 2025. VSCO upgraded to Equal Weight at Barclays and raise tgt to $25 from $23 saying the worst is behind the company, and despite losing significant market share over the past several years, VSCO still maintains ~20% of the U.S. intimate’s market.
• In Lodging: Goldman Sahcs initiated HLT, MAR, and WH at Buy in Lodging sector; is sell rated on CHH, HGV and VAC and initiates Hyatt (H) and TNL at neutral noting that the backdrop for Lodging in 2024 remains choppy, with most companies lowering 2H outlooks, drawing late-cycle concerns and debate about whether the stocks are priced for perfection. That said, the firm prefers stocks with less macro-sensitive exposure (IMFs, China, O&L), and higher exposure to ancillary opportunities to drive continued EBITDA growth from here.

• APLT +75%; after the company completed its late-cycle review meeting with the FDA on the ongoing New Drug Application review of govorestat.
• GEHC +1%; was upgraded to Buy from Neutral at BTIG with a $100 price target saying following a tough first half of 2024 where China hurt results, the setup for GE HealthCare has improved.
• LUNR +59%; after announcing NASA awarded the company the Near Space Network contract for communication and navigation services for missions in the near space region, which extends from Earth’s surface to beyond the Moon; contract has a base period of y-years with added 5-yr option and max deal value of $4.8B.
• SIRI +2%; was upgraded to Buy from Neutral at Guggenheim with $30 tgt saying core operating trends and free cash flow remain stable, while subscriber trends are set to improve
• SMCI +2%; initiated at new Buy and $600 tgt at Needham saying as a first mover in the design of GPU-based compute systems and liquid cooled rack level solutions, views Supermicro as a significant beneficiary from growing investment in AI infrastructure and forecast a revenue CAGR more than 55% from FY21 to FY26.
• X +2%; after a report the U.S. national security panel reviewing Nippon Steel’s $14.9B bid for U.S. Steel let the companies refile their application for approval of the deal, but delaying until after the Presidential election in November.

• CWST -6%; after 4.5M share Spot Secondary priced at $100.00.
• GIS Q1 profit fell 14% y/y due to inflation and pressure on margins, btu adj EPS of $1.07 topped the $1.06 estimate while sales fell -1% y/y to $4.85B topping the analyst estimate of $4.79B; noted Q1 gross margin fell 130 basis points to 34.8% of net sales.
• RMD -4%; was downgraded to Underperform from Peer Perform at Wolfe Research with an $180 price target saying this is a risk/reward call triggered by its physician survey work.