| | | Market Snapshot
| Dow | 42326.87 | -1123.03 | (-2.58%) | | Nasdaq | 19431.18 | -716.37 | (-3.56%) | | SP 500 | 5871.86 | -178.75 | (-2.95%) | | 10-yr Note | -8/32 | 4.49 |
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| | NYSE | Adv 218 | Dec 2523 | Vol 1.3 bln | | Nasdaq | Adv 665 | Dec 3699 | Vol 10 bln |
Industry Watch
| Strong: -- |
| | Weak: Consumer Discretionary, Consumer Staples, Utilities, Communication Services |
Moving the Market
-- Reacting to FOMC decision to lower fed funds rate by 25 basis points and digesting Fed Chair Powell's press conference, which combined with the Summary of Economic Projections, led the market to believe rates will be higher for longer
-- Treasury yields moved sharply higher
-- Stocks sliding as yields move up
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Closing Summary
18-Dec-24 16:30 ET
Dow -1123.03 at 42326.87, Nasdaq -716.37 at 19431.18, S&P -178.75 at 5871.86
[BRIEFING.COM] Today's session was disappointing for stocks. The S&P 500 slid 178 points, the Nasdaq Composite was 3.5% lower, and the Dow Jones Industrial Average closed more than 1,100 points lower, logging its tenth consecutive decline.
The major indices traded slightly higher until selling picked up at 2:00 ET as investors grappled with the likelihood that the Fed will be pausing its rate-cut campaign and that rates are going to remain higher for longer. This understanding followed the FOMC's decision to cut rates 25 basis points to 4.25-4.50%, as expected. It was not a unanimous vote. Cleveland Fed President Hammack dissented in favor of leaving the target range for the fed funds rate unchanged at 4.50-4.75%.
The Summary of Economic Projections showed that the median estimate for PCE inflation and core PCE inflation was increased for 2024 and 2025, but the estimate for unemployment was decreased for 2024 and 2025.
Additionally, the median estimate for the 2025 fed funds rate was bumped up to 3.9% from 3.4%, signaling an outlook for only 50-basis points of easing in 2025 versus 100-basis points when the September projection was released.
The bond market also reacted strongly to the notion that rates may remain elevated if inflation remains sticky above the Fed's 2.0% target while the labor market remains strong. The 10-yr yield, which is most sensitive to changes in inflation, jumped 11 basis points to 4.49%. The 2-yr yield, which is most sensitive to changes in the fed funds rate, surged 11 basis points to 4.35%.
Just about everything participated in today's retreat. All 11 S&P 500 sectors registered declines ranging from 1.4% (health care) to 4.7% (consumer discretionary). The equal-weighted S&P 500 fell 3.0%.
- Nasdaq Composite: +29.2% YTD
- S&P 500: +23.1% YTD
- S&P Midcap 400: +11.9% YTD
- Russell 2000: +10.1% YTD
- Dow Jones Industrial Average: +12.3% YTD
Reviewing today's economic data:
- Weekly MBA Mortgage Applications Index -0.7%; Prior 5.4%
- November Housing Starts 1.289 mln (Briefing.com consensus 1.347 mln); Prior was revised to 1.312 mln from 1.311 mln, November Building Permits 1.505 mln (Briefing.com consensus 1.430 mln); Prior was revised to 1.419 mln from 1.416 mln
- The key takeaway from the report is that single-unit starts were up 6.4%, led by a bounce back in the South (+18.3%) following the hurricanes; however, single-unit permits, a leading indicator, were up just 0.1%.
- Q3 Current Account Balance -$310.9 bln (Briefing.com consensus -$283.0 bln); Prior was revised to -$275.0 bln from -$266.8 bln
Thursday's economic data includes:
- 08:30 ET: Weekly Initial Jobless Claims (Briefing.com consensus 237K; prior 242K) and Continuing Jobless Claims (prior 1886K)
- 08:30 ET: Q3 GDP - Third Estimate (Briefing.com consensus 2.8%; prior 2.8%) and GDP Deflator - Third Estimate (Briefing.com consensus 1.9%; prior 1.9%)
- 10:00 ET: November Existing Home Sales (Briefing.com consensus 4.10M; prior 3.96M)
- 10:00 ET: November Leading Indicators (Briefing.com consensus -0.1%; prior -0.4%)
- 10:30 ET: EIA Natural Gas Inventories (prior -190 bcf)
- 16:00 ET: October Net Long-Term TIC Flows (prior $216.B)
Dow sliding nearly 700 points
18-Dec-24 15:35 ET
Dow -670.00 at 42779.90, Nasdaq -632.56 at 19514.99, S&P -139.56 at 5911.05
[BRIEFING.COM] Stocks continue to slide heading into the close. The Dow Jones Industrial Average is nearly 700 points lower, tracking for its tenth consecutive decline. The S&P 500 is down 120 points and the Nasdaq Composite sports a 600 point decline.
Fed Chair Powell reiterated that "We and most other forecasters still feel that we're on track to get down to 2%. It might take another year or two from here. But I'm confident that's the path we're on." Still, the market seemed to be grappling with the likelihood that the Fed will be pausing its rate-cut campaign and that market rates, for all intents and purposes, are going to remain higher for longer.
The 2-yr yield, which is sensitive to changes in the fed funds rate, settled 11 basis points higher at 4.35%.
Stocks slide, yields rise
18-Dec-24 15:10 ET
Dow -505.28 at 42944.62, Nasdaq -381.56 at 19765.99, S&P -83.30 at 5967.31
[BRIEFING.COM] The stock market is sharply lower and yields are sharply higher as Fed Chair Powell gives his press conference. The S&P 500 sports a 1.5% decline, the Nasdaq Composite shows a 2.1% decline, and the Russell 2000 trades 2.0% lower.
The equal-weighted S&P 500 is down 1.5% and all 11 S&P 500 sectors sport declines.
The 10-yr yield, at 4.39% before 2:00 ET, jumped to 4.49%. The 2-yr yield, at 4.22% before 2:00 ET, surged to 4.35%.
Fed lowers rates by 25 basis points; markets react to less dovish outlook
18-Dec-24 14:25 ET
Dow -168.33 at 43281.57, Nasdaq -90.34 at 20057.21, S&P -28.05 at 6022.56
[BRIEFING.COM] The Federal Open Market Committee (FOMC) voted to lower the target range for the fed funds rate by 25 basis points to 4.25-4.50%. It was not a unanimous vote. Cleveland Fed President Hammack dissented in favor of leaving the target range for the fed funds rate unchanged at 4.50-4.75%.
The Summary of Economic Projections, released at the same time as the policy directive that said the "...Committee is attentive to the risks to both sides of its dual mandate," showed an upward revision in the median estimate for the change in 2024 real GDP (to 2.5% from 2.0%) and 2025 real GDP (to 2.1% from 2.0%), the 2024 PCE inflation rate (to 2.4% from 2.3%) and 2025 PCE inflation rate (to 2.5% from 2.1%), the 2024 core PCE inflation rate (to 2.8% from 2.6%) and 2025 core PCE inflation rate (to 2.5% from 2.2%), and a downward revision to the 2024 unemployment rate (to 4.2% from 4.4%) and 2025 unemployment rate (to 4.3% from 4.4%).
Notably, the median estimate for the federal funds rate in 2025 was raised to 3.9% from 3.4%, signaling an estimate for 50-basis points of easing in 2025 versus the prior estimate of 100 basis points. The longer run rate also got bumped up to 3.0% from 2.9%.
The knee-jerk reaction to the Fed news included a sell-off in stocks and bonds, as the balance of today's information reflected a less dovish-minded Fed. The 2-yr note yield, at 4.22% in front of the FOMC decision, shot up to 4.32% in its wake while the 10-yr note yield, at 4.39% in front of the decision, jumped to 4.45%. The U.S. Dollar Index went from 107.00 to 107.58.
Whether there is any notable reversal in these initial moves is apt to hinge on what Fed Chair Powell says at his press conference, which begins at 2:30 p.m. ET, and how he says it. For the time being, the market has been forced to contend with a less friendly development than what it has grown accustomed to seeing in recent weeks and what it had hoped to see in coming weeks and months.
Gold slumps in front of rate decision
18-Dec-24 13:55 ET
Dow +164.66 at 43614.56, Nasdaq +42.45 at 20190.00, S&P +11.82 at 6062.43
[BRIEFING.COM] The Nasdaq Composite (+0.21%) has eked into second place over the last half hour, up about 42 points.
Gold futures settled $8.70 lower (-0.3%) to $2,653.30/oz, this as the dollar strengthens ahead of pivotal Fed decision and 2025 outlook; yields are modestly lower following this morning's housing data.
Meanwhile, the U.S. Dollar Index is narrowly higher to $106.99.
HEICO descends on a Q4 revenue miss; excited about potential U.S. budget cuts (HEI)
HEICO (HEI -8%), an aerospace component and electronics supplier, is descending quickly today after its revenue fell short of analyst estimates in Q4 (Oct). Additionally, HEI reported a slimmer bottom-line beat compared to the previous quarter, potentially adding to today's downbeat sentiment. Similar to the set-up heading into Q3 (Jul), the stock ascended by around +6% over the previous three months, reaching highs of +13% late last month. The upward trend steadily pushed expectations higher, making HEI's top-line miss more disappointing.
However, despite the weaker-than-expected revenue performance in Q4, delivering just 8.2% yr/yr growth to $1.01 bln, a drastic slowdown from +37.3% posted in Q3, HEI delivered several highlights.
- A favorable combination of broad-based demand and acquisition-related impacts pushed sales in HEI's Flight Support Group (FSG) segment 15% higher yr/yr in Q4 to a record $691.8 mln. When backing out M&A, organic sales growth was still a healthy 12%. The FSG segment revolves around manufacturing components for sale at lower prices than OEMs. While a steady uptick in commercial flights remains important to FSG, the U.S. government is a critical customer, with defense and space crucial to HEI's long-term strategy.
- The government is also vital to HEI's Electronic Technologies Group (ETG) segment. Unfortunately for HEI, due to the nature of government contracts, revenue can fluctuate considerably from quarter to quarter. This dynamic clipped Q4 growth, with ETG recording a 1.8% drop in sales yr/yr to $336.2 mln. Furthermore, inventory destocking continues to unfold at some of HEI's customers, capping growth, especially across the non-aerospace and defense markets.
- Regarding HEI's Wencor Group acquisition, which operates as a standalone operation, the company noted that performance continued to exceed expectations in the quarter. HEI added that its decision to operate Wencor as a standalone company contributed to energetic sales, earnings and margins in Q4. Management mentioned that given Wencor's early success, it anticipates further revenue synergies.
- Looking ahead, HEI conveyed a glass-half-full attitude, expressing confidence in returning to growth in its ETG segment during the first half of FY25. Likewise, in FSG, HEI anticipates positive growth, supported by robust demand for most of its products. Additionally, given its business model regarding pricing below OEMs, HEI stands to benefit from potential budget cuts from the incoming administration. Management touched on the DOGE (Department of Government Efficiency) division, noting that it is low-hanging fruit.
HEI's Q4 sales miss and its slimmest earnings beat since 3Q23 were disappointing. However, like last quarter, HEI is bullish about its prospects, anticipating a rebound in ETG and additional growth in FSG in FY25. Furthermore, HEI believes DOGE will be outstanding for the company given the budget deficit and the amount of money the U.S. government must cut, presenting HEI with a significant opportunity. As such, HEI is worth keeping on the radar.
Birkenstock strapped in for some nice gains following solid Q4 earnings report (BIRK)
German sandal and clog maker Birkenstock (BIRK) is strapped in for some big gains after reporting solid Q4 results that exceeded EPS and revenue expectations as the company experienced healthy demand across all geographies, channels, and categories. With revenue growing by 22% on a constant currency basis amid a sluggish consumer spending environment, the resiliency and strength of BIRK's brand is on display. That strong growth, coupled with tight cost controls, fueled a 118% yr/yr surge in adjusted net profit, even as gross margin contracted by 640 bps yr/yr in Q4 to 59.0%.
Looking ahead, though, BIRK expects margins to improve due to increased utilization of its new production facilities. More specifically, the company said that it expects gross margin to move closer to its long-term target of 60% in FY25, while adjusted EBITDA margin expands by as much as 50 bps yr/yr to 30.8-31.3%.
- In FY24, BIRK invested €74 mln to expand its production capacity in order to meet demand and to support its growth initiatives. Considering the macroeconomic headwinds, that was a bold move, but it's also one that is paying off as BIRK continues to benefit from a loyal and growing customer base. The blend of comfort and casual fashion is clearly resonating with consumers as illustrated by the 18% sales growth in the DTC channel and 26% jump on the wholesale side.
- The company is anticipating growth to slow a bit in FY25, forecasting revenue growth of 15-17% on a constant currency basis, compared to growth of 22% in FY24. However, investors are taking the deceleration in stride given that BIRK is also expecting stronger margins in FY25. Furthermore, the company doesn't foresee any weak spots emerging in FY25, forecasting strong contributions across all segments and geographies. On that note, BIRK achieved double-digit revenue growth in each major geography in Q4, including growth of 21% in the Americas, 19% in Europe, and 38% in APMA.
- In Europe, BIRK's second largest market after the Americas, the company is gaining market share across the region. Meanwhile, in the much smaller, but faster growing APMA region, BIRK credited improved brand awareness and the launch of new online stores in Singapore, Malaysia, and the Philippines for the impressive performance. As BIRK expands into the orthopedics, professional, and outdoor categories, it will have another opportunity lined up to gain more share and further expand its footprint.
The main takeaway is that BIRK is bucking a very challenging business climate as its better-than-expected Q4 results showcased the staying power of its brand. Sturdy demand, along with economies of scale resulting from higher production at its new facilities, should set BIRK up for a strong FY25.
General Mills slides after slashing its FY25 EPS outlook as it steps up its investment efforts (GIS)
General Mills (GIS -2%) marches toward 2024 lows today after reducing its FY25 (May) profitability guidance despite delivering its widest earnings beat in over five years in Q2 (Nov). The consumer packaged goods titan expects adjusted EPS to contract by 1-3% yr/yr in FY25 in constant currency, a sharp reduction from its prior guidance of a 1% decline to a 1% improvement.
The underlying cause is two-fold. For one, GIS is stepping up its investments over the next couple of quarters following notable improvements to its market share through the first half of FY25, squeezing its bottom line. CEO Jeff Harmening commented that its investments would position GIS for sustainable growth in FY26. Secondly, GIS noted that Q2 benefited from timing-related items, contributing six points to its EPS, which is expected to reverse in 2H25.
GIS's lowered FY25 earnings guidance notwithstanding, there were several highlights from Q2 underpinning brewing momentum heading into 2025.
- Volumes flipped positive in Q2 for the first time in ten quarters, expanding by 3% yr/yr, led by a roaring comeback in GIS's North America Pet segment, which boasted a 9% jump in volumes compared to a 3% improvement last quarter and a 7% decline in 4Q24. GIS chalked up the exceptional growth in Pet to its brand campaigns and increased product renovation, factors in its decision to step up its investment efforts.
- GIS's largest segment, North America Retail, also showed notable improvements from the previous two quarters, as volumes slipped by just 1% in Q2 compared to a 3% drop in Q1 and a 6% drop in Q4. Again, targeted investments underpinned the sequential advancements. For instance, GIS's cookie line, which comprises around a third of its Retail business, grew by high single digits due to the new capacity the company added and its campaign surrounding returning the Doughboy -- its featured mascot.
- North America Foodservice and International enjoyed similar volume gains at 5% in Q2. In Foodservice, GIS continues to benefit from its commanding presence across K-12 schools, primarily due to its ability to adapt to changing nationwide nutrition standards. Management noted that as these standards change, as they will in 2025, the company expands its market share. Internationally, GIS's categories are returning to pre-pandemic levels, helping it capture market share.
- The continuous volume improvements underscored GIS's return to positive net sales growth yr/yr following four straight quarters of compression, expanding its top line by 2.7% to $5.24 bln in Q2. Organic net sales inched 1% higher, reversing a string of yr/yr declines. GIS also reiterated its FY25 organic net sales growth of flat to up 1%.
There was plenty to like from GIS in Q2, from a long-awaited return to positive volumes to encouraging momentum across each segment. However, investors are disappointed by the slashed FY25 earnings guidance, especially given how well the company performed on its bottom line in Q2. Nevertheless, while GIS's timing may not be perfect, the company is taking advantage of its upward momentum due to past and present investments, ensuring that it does not reverse a promising trend. As such, we think GIS is worth a look at current levels.
Jabil sharply higher following upside results; seeing strong AI-related demand (JBL)
Jabil (JBL +9.5%) is sharply higher today after kicking off FY25 on a positive note. This company, which designs, engineers, and manufactures electronic circuit board assemblies/systems primarily for OEMs, posted a 16.6% yr/yr revenue decline in Q1 (Nov) to $6.99 bln. However, analysts were expecting an even bigger drop. Jabil also reported EPS upside, guided in-line for Q2 (Feb) and raised FY25 EPS and revenue guidance.
- Jabil underwent a substantial transformation in FY24. It sold its Mobility business for $2.2 bln, it saw growth in the AI datacenter sector but faced challenges in multiple other end markets. It also shuffled its reporting segments. Starting with today's Q1 report, it no longer uses its DMS and EMS segments. Instead, it reports using three new segments: Regulated Industries, Intelligent Infrastructure, and Connected Living & Digital Commerce.
- Turning to its Q1 results, its largest segment is Regulated Industries. RI segment revenue fell 7% yr/yr to roughly $3 bln due to continued weakness in Renewable Energy (primarily solar) and EV markets. Jabil expects Q2 segment revs to be down 8% yr/yr to $2.7 bln, reflecting continued softness in the Renewable Energy and EV markets. Throughout the solar downturn, Jabil has been working hard to better position itself as it waits for a recovery.
- Its Intelligent Infrastructure segment was its best performer, with revs up 5% yr/yr to $2.5 bln with growth driven by strong demand in its AI-related cloud data center infrastructure and capital equipment markets. Jabil expects yr/yr segment revenue growth to accelerate in Q2 to +8% to $2.4 bln, reflecting broad-based growth in Capital Equipment (AI is driving demand for semi fabrication and test equipment), Advanced Networking, Cloud and Data Center Infrastructure markets.
- Its Connected Living & Digital Commerce segment saw a big 46% yr/yr decline in revs to $1.5 bln due to its Mobility divestiture. Excluding the divestiture, revenue growth for the segment was approximately 12% yr/yr, reflecting strong growth across its digital commerce and warehouse automation markets. Jabil expects Q2 segment revs to decline 20% yr/yr to $1.2 bln, mainly due to its Mobility divestiture. Connected Living, which largely focuses on consumer oriented devices, remains under pressure. However, Jabil remains bullish on its digital commerce business, which is being driven higher by the automation of the retail and warehouse experience.
- Jabil addressed the potential impact of tariffs. While tariffs may impact customer demand, any changes in tariffs have historically been largely a pass through cost for Jabil. Most of its business in China is predominantly local or regional, with a very small portion being US-bound. Jabil also remains prepared for any shift of operations from Mexico to the US. Also, the US manufacturing footprint has never been bigger than it is today.
Overall, this was an impressive quarter for Jabil. We think investors are pleased not only with its Q1 outperformance, but also with its positive commentary about its Intelligent Infrastructure segment. We also think Jabil's comments on tariffs eased some concerns that investors had. The stock has been in a nice uptrend since early September and it got a boost after Trump's victory last month, presumably because Jabil appears to be better positioned than many EMS names in terms of China/Mexico exposure.
McCormick hugs its flatline following reports of a possible acquisition of Sauer Brands (MKC)
McCormick (MKC) inches higher today following a Bloomberg report that it is in talks to purchase Sauer Brands for as much as $1.0 bln. Sauer Brands is well known for its Duke's Mayonnaise lineup, but it also owns several other brands, including Kernel Season's and The Spice Hunter. While MKC is best known for its seasonings, it also controls a few food-related banners, such as Simply Asia and Thai Kitchen. With a solid lineup of seasonings and food items, MKC and Sauer complement each other nicely, making a possible acquisition of Sauer a decent fit for MKC.
- MKC has been gradually recovering from November bottoms that followed a steady sell-off on Q3 results in early October. The company caters to households and foodservice companies, which has caused some good and bad over the past few quarters. For instance, as at-home food prices eased, food-away-from home prices have struggled to come down as significantly.
- This dichotomy has fueled a rise in at-home consumption, benefitting MKC's Consumer segment while hindering restaurant traffic and hurting MKC's Flavor Solutions segment. With each of these businesses comprising around an equal proportion of MKC's total revenue, its top line has stalled out this year, struggling to break above low-single-digit yr/yr growth.
- However, acquisitions can help provide a decent revenue boost. While it is important not to overpay, if the Sauer Brands acquisition rumor is true, it could benefit MKC's revenue heading into 2025, a year the company expects growth to begin ramping up. MKC outlined its long-term financial expectations in late October. The company anticipates EPS growth of +9-11% and operating income growth of at least +7% over the next three years, with numbers ramping in 2025.
In the absence of acquisitions, MKC tends to return cash to shareholders through repurchases. As such, a relatively expensive purchase of Sauer Brands could temporarily pause stock buybacks as MKC prioritizes paying down debt. However, no representatives for either firm, including Falfurrias Capital Partners, which owns Sauer Brands, have commented on the transaction, making it speculation at this point. Also, despite a possible buyback halt, adding Sauer Brands' lineup to its portfolio would likely be a net benefit for MKC, especially as it heads into its "year of momentum" in 2025.
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