| | | Market Snapshot
| Dow | 42583.32 | +597.97 | (1.42%) | | Nasdaq | 18188.60 | +404.54 | (2.27%) | | SP 500 | 5767.57 | +100.01 | (1.76%) | | 10-yr Note | -6/32 | 4.33 |
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| | NYSE | Adv 2003 | Dec 705 | Vol 1.1 bln | | Nasdaq | Adv 2958 | Dec 1426 | Vol 6.8 bln |
Industry Watch
| Strong: Consumer Discretionary, Communication Services, Industrials, Financials, Technology, Energy, Real Estate |
| | Weak: Utilities |
Moving the Market
-- Surge of buying after reports that the April 2 reciprocal tariffs could be narrower than previously thought
-- Buying interest in a short-term oversold market
-- Treasury market action remaining calm
-- Pleasing economic data
-- Technical movement after S&P 500 jumped above 200-day moving average
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Closing Summary
24-Mar-25 16:30 ET
Dow +597.97 at 42583.32, Nasdaq +404.54 at 18188.60, S&P +100.01 at 5767.57
[BRIEFING.COM] The stock market rallied on optimism that the Trump administration may adopt a more targeted approach to impending tariffs, which are set to come into effect on April 2.
The S&P 500 climbed 1.8%, closing at a two-week high above its 200-day moving average (5,752), while the Dow Jones Industrial Average added 1.4%, and the Nasdaq Composite advanced 2.3%.
Technology stocks led the rally, especially names that sold off to start 2025. Tesla (TSLA 278.39, +29.68, +11.9%) and NVIDIA (NVDA 121.41, +3.71, +3.2%) were standouts in that respect. Tesla shares are still 31.1% lower this year, and NVIDIA has shown a 9.6% decline since the start of the year.
Positive economic indicators further bolstered sentiment. The preliminary March S&P Global US Services PMI, which increased to 54.3 from 51.0 in February, overshadowed a contraction in the preliminary March S&P Global US Manufacturing PMI, which fell to 49.8 from 52.7 in February.
The robust rally left ten of the 11 S&P 500 sectors higher and eight of them logged gains greater than 1.0%.
In the bond market, U.S. Treasury yields climbed in a manifestation of increased risk appetite among investors. The 10-yr yield was up eight basis points to 4.33%.
- Dow Jones Industrial Average: +0.1% YTD
- S&P 500: -1.9% YTD
- S&P Midcap 400: -3.3% YTD
- Russell 2000: -5.4% YTD
- Nasdaq Composite: -5.8% YTD
Reviewing today's economic data:
- March S&P Global US Manufacturing PMI - Prelim 49.8; Prior 52.7
- March S&P Global US Services PMI - Prelim 54.3; Prior 51.0
Separately, market participants receive the following data tomorrow:
- 9:00 ET: January FHFA Housing Price Index
- 9:00 ET: January S&P Case-Shiller Home Price Index
- 10:00 ET: March Consumer Confidence
- 10:00 ET: February New Home Sales
KBH, OKLO, CNM, MKC trade up ahead of earnings
24-Mar-25 15:35 ET
Dow +585.56 at 42570.91, Nasdaq +384.83 at 18168.89, S&P +95.40 at 5762.96
[BRIEFING.COM] There was another step higher ahead of the close. The Dow Jones Industrial Average (+1.5%) is nearly 600 points higher.
After the close, KB Home (KBH 61.19, +1.44, +2.4%) and Oklo (OKLO 30.88, +3.72, +13.8%) report earnings. Core & Main (CNM 49.40, +1.13, +2.4%), McCormick (MKC 80.25, +0.08, +0.1%), and other report earnings ahead of the open tomorrow.
The market will be focused on upcoming data this week, especially the Personal Income and Spending report at 8:30 ET, which features the Fed's preferred gauge on inflation.
Stocks, yields at session highs
24-Mar-25 15:10 ET
Dow +529.56 at 42514.91, Nasdaq +396.56 at 18180.62, S&P +95.21 at 5762.77
[BRIEFING.COM] The major equity indices remain at session highs while Treasury yields also remain at intraday highs.
The 10-yr yield is at 4.33% and the 2-yr yield is at 4.04%.
Separately, market participants receive the following data tomorrow:
- 9:00 ET: January FHFA Housing Price Index
- 9:00 ET: January S&P Case-Shiller Home Price Index
- 10:00 ET: March Consumer Confidence
- 10:00 ET: February New Home Sales
S&P 500 up 1.40%: AMD, United Airlines, and Deckers lead gains; Hormel lags amid sector weakness
24-Mar-25 14:30 ET
Dow +400.54 at 42385.89, Nasdaq +350.47 at 18134.53, S&P +79.61 at 5747.17
[BRIEFING.COM] The S&P 500 (+1.40%) is in second place on Monday afternoon, up about 80 points.
Briefly, S&P 500 constituents Advanced Micro Devices (AMD 114.37, +7.93, +7.45%), United Airlines (UAL 79.04, +4.17, +5.57%), and Deckers Outdoor (DECK 123.05, +5.19, +4.40%) pepper the top of the standings. AMD rises on some vague boutique analyst comments, while UAL and DECK enjoy market-mirroring gains after being beaten down over the last month.
Meanwhile, Hormel Foods (HRL 29.12, -0.86, -2.87%) is today's top laggard, pressured as the consumer staples sector (XLP 79.12, +0.20, +0.26%) underperforms the market.
Gold holds steady near $3,015 as markets weigh trade and geopolitical developments
24-Mar-25 14:00 ET
Dow +466.60 at 42451.95, Nasdaq +346.61 at 18130.67, S&P +84.54 at 5752.10
[BRIEFING.COM] With about two hours to go on Monday the tech-heavy Nasdaq Composite (+1.95%) remains the top major average, up just shy of 350 points.
Gold futures settled $5.80 lower (-0.2%) at $3,015.60/oz, keeping losses relatively small as the market watch updates surrounding President Trump's trade policies as well as updates on the situation in Gaza.
Meanwhile, the U.S. Dollar Index is up about +0.3% to $104.41.
Avnet confident in mitigating tariff impacts; possible signs of stabilization outside Asia (AVT)
Avnet (AVT) has crossed both of our Value and Yield Leader Rankings in recent weeks, showcasing its attractive 14x forward earnings valuation and decent 2.8% dividend yield. Avnet is a global electronic component distributor, working with manufacturers in all major electronic component segments. Essentially, if they use a chip, Avnet can supply that business, serving organizations of all sizes, from startups to enterprises and electronic manufacturing services (EMS) providers. Like EMS providers, AVT's margins are slim; in Q2 (Dec), the company posted adjusted operating margins of just 2.8%, down 100 bps yr/yr. However, AVT operates on volume, supporting its steady ~$5.6 bln in revenue over the past four quarters.
There are headwinds present in the semiconductor space as tariff-related uncertainty spurs concerns over how organizations will offset potentially higher costs and lower customer spending. Earlier this month, AVT touched on the subject, noting that during the first round of tariffs in 2017, it handled the higher costs, successfully passing them along to the customer with no impact from a P&L perspective. While this time around the picture has changed, AVT's confidence in managing the matter has not. The company stated that its relationship with suppliers will help mitigate impacts, allowing it to source some products from certain countries without tariffs. Ultimately, AVT believes that its systems in place will lead to virtually no impact on its bottom line.
- Over the past several quarters, AVT has been dealing with a clear downturn. Inventories have piled up as demand softens across most sectors outside of AI. The EMEA region, AVT's most lucrative market from a margin standpoint, has seen outsized weakness compared to the Americas and Asia. However, aerospace and defense end markets displayed moderate sequential growth in Q2. Given the EU's current defense push, these markets may see accelerated growth over the coming months, potentially supporting stabilization in the region and propping up AVT's margins.
- Similarly, aerospace and defense end markets enjoyed sequential growth in the Americas in Q2. Revenue still fell by double-digits yr/yr in the region, largely due to customer hesitation regarding upcoming tariffs. However, only around 8% of AVT's business in the Americas is coming out of China. Also, AVT's customers may need a little time to move their supply chains and gear up for tariff impacts.
- Asia was a highlight in Q2, being the only region to post yr/yr sales growth. However, Asia commands the lowest margins, which weighed on AVT's consolidated margins in the quarter. Still, Q2 marked the second straight quarter of yr/yr growth in Asia, an encouraging sign that the region's economies are holding up relatively well. AVT noted that this tends to be a bullish sign for what is to come in the balance of all its other regions.
Tariffs remain a near-term concern as they cloud businesses' plans. This is leading to an issue surrounding the timing related to demand stabilization in EMEA and the Americas. However, given that Asia has started to show signs of growth, a recovery in the West could occur sooner rather than later. Also, despite tariff concerns, shares of AVT have held up relatively well, slipping by just 11% from January highs. As such, we like AVT at current levels for buy-and-hold investors. As always, a 15-20% stop loss limit should be used.
Kenvue edges modestly higher after landing on another activist investor's radar (KVUE)
Kenvue (KVUE) is once again finding itself in the crosshairs of an activist investment firm after feeling the heat from Starboard Value earlier in the year. According to Bloomberg, TOMS Capital Management has accumulated a stake in KVUE -- the size of which is undisclosed -- and is pushing for the company to separate business units, or to sell itself outright. Since being spun off from Johnson & Johnson (JNJ) in August 2023, KVUE has delivered underwhelming financial results, as reflected in the stock's 9% decline following the separation from JNJ. That subpar performance, including five consecutive quarters of yr/yr revenue declines, has made KVUE a target for activist investors.
- On March 5, KVUE appointed two new independent directors to its Board of Directors and announced that Starboard's Chief Executive Officer and Chief Investment Officer, Jeffrey Smith, will also be joining the Board. The move has placated Starboard, which subsequently withdrew its slate of nominated director candidates. TOMS Capital Management, though, believes that more drastic measures are needed to turn KVUE's fortunes around.
- At this point, it's not clear what specific business unit(s) TOMS Capital Management would like JNJ to spin-off or sell-off. Over the past several years the market has seen some very prominent companies either execute or announce spin-offs, such as General Electric (GE), 3M (MMM), DuPont (DD), and Honeywell (HON). Business separations can create several advantages including valuations that better reflect the individual performances and growth prospects of individual segments, streamlined operations that can reduce complexities and costs, and more strategic flexibility to pursue acquisitions and partnerships.
- In our view, spinning off the struggling skincare and beauty businesses could make strategic sense. The business segment, which owns brands like Neutrogena and Aveeno, experienced a 2.6% increase in organic sales in Q4, but a 4.5% decline for FY24. In comparison, competitor Proctor & Gamble (PG), which owns the Olay, Dove and SK-II brands, delivered organic sales growth of 3% with a low single-digit drop in FY24.
- In addition to tough competition from PG, Unilever (UL), Haleon (HLN), and others, KVUE's Skin Health & Beauty segment is contending with sluggish demand and distributor issues in China. Meanwhile, the company's Self Care business (Tylenol, Benadryl, Visine, etc.) has seen soft demand in the cough and cold category, while a stronger U.S. dollar has hurt both segments. To address these challenges, KVUE has initiated its "Vue Forward" program that's expected to contribute $350 mln in annualized savings by 2026, and it's planning a 20% boost in brand investments, focusing on advertising and social media, particularly targeting Gen Z customers.
- TOMS Capital Management doesn't seem convinced that these actions will be enough to turn the tide for KVUE. It is possible that separating the skin care business from the company could increase shareholder value, but it isn't a guarantee. For example, after disclosing its decision to spin off its freight division on December 19, 2024, shares of FedEx (FDX) are trading lower by about 12% since the announcement.
TOMS Capital Management is advocating for KVUE to further distinguish its operations after being separated from JNJ, which should lead to a more agile and streamlined business should KVUE go the spin-off route. However, a separated KVUE could also lose the sales and cost synergies and efficiencies that it enjoys as a larger company.
James Hardie and AZEK to team up to create a building products one-stop shop (JHX)
There is some big M&A news in the building products space. James Hardie (JHX -19%), an Australian-based supplier of fiber cement and fiber gypsum building products, announced it will acquire The AZEK Company (AZEK +12%), a supplier of decking and railing products. It is a cash-and-stock deal valued at $8.75 bln and should close in 2H25. AZEK shareholders will receive $26.45 in cash plus 1.034 shares of JHX, or $56.88 based on Friday's close. That's a 37% premium for AZEK shareholders.
- The two companies operate in different categories, but the goal is to bring together highly complementary products that span siding, exterior trim, decking, railing and pergolas. JHX makes the argument that consumers are often looking for siding and decking at the same time, so it creates a one-stop shop for contractors.
- JHX sees at least $500 mln in commercial synergies. There should be significant cross-sell opportunities within each company's contractor network and customer base. Also, the combined company will be able to offer a wider selection of complementary products and a national footprint across North America. In fact, JHX believes there could be meaningful upside to its commercial synergies forecast. Another key rationale is that JHX sees the transaction as perhaps spurring a valuation uplift.
- JHX has had anemic top line growth in recent quarters. However, JHX notes that AZEK has averaged more than 15% sales growth in its residential segment over the last seven years. This should help boost James Hardie's top-line growth trajectory. After the combination, JHX expects its annual sales and adjusted EBITDA growth rates will accelerate by more than 250 bps and 300 bps, respectively.
- Also, once run-rate cost synergies are achieved, the combined company is expected to generate annual free cash flow of greater than $1 bln, which James Hardie intends to use to support organic growth, deleverage and fund ongoing share repurchases. James Hardie plans to repurchase $500 mln of its shares in the 12 months after closing. At the same time, James Hardie is targeting a leverage ratio below 2.0x net debt to LTM adjusted EBITDA by the end of the second full fiscal year after closing.
Overall, we see this as a good fit. At first, we did not see a lot of overlap between their product categories, but we are buying into the argument that consumers tend to buy siding and decking at the same time. Also, when an industry is struggling, it makes sense to get bigger to ride out the downturn. The AZEK premium looks attractive for AZEK shareholders although JHX is trading sharply lower on the news as investors are likely recoiling at the premium being paid. On a final note, AZEK peer Trex (TREX +5%) is trading nicely higher on the news.
Meta Platforms heads higher on reports of an alliance with India-based Reliance (META)
Alongside broader market appreciation, Meta Platforms (META +3%) is gapping higher today on a report from The Information regarding the tech titan and OpenAI (MSFT), the company behind ChatGPT, have separately sought an AI alliance with Reliance, a major conglomerate in India, with businesses in telecom, retail, and oil & gas.
It is still unclear at this point whether Meta and OpenAI will partner alongside Reliance or if the two will compete against each other. Given the separate discussions, we surmise the two are competing. No comments from Meta were provided to The Information. As such, the report revolves mostly around OpenAI, noting that the terms of the alliance centered on Reliance Jio, the telecom division, and OpenAI's ChatGPT. However, it was stated that Reliance is open to running AI models from Meta and OpenAI in its planned three-gigawatt data center, topping some of the currently largest data centers built.
- For Meta, the alliance would be significant. Given its expansive consumer base, India has quickly emerged as a critical market for Big Tech. AI has only accelerated tech companies' desire to fortify their presence in the country. The partnership with Reliance Jio, which boasts around half a billion subscribers, would immediately give Meta access to a massive consumer base.
- Meta has already been steadily building its footprint in India. Late last year, the company announced a strategic partnership with IndiaAI to advance open-source AI R&D. CEO Mark Zuckerberg has been a proponent of open-source AI, leveraging the technology to bring in ad dollars and improve the company's social media platforms. This could be what sets Meta apart from OpenAI and helps seal a partnership.
- Furthermore, Meta has worked with Reliance in the past. In 2020, the company invested $5.7 bln in Jio Platforms. Also, Reliance has been open to partnerships with U.S. companies, forming one with NVIDIA (NVDA) in late 2023 to further AI interests in the region.
- Still, OpenAI is not sitting on its hands while Meta tries to gain a leg up. OpenAI is reportedly looking to trim its subscription price from $20 to a few dollars a month, which could be enticing enough to Reliance. Also, the report noted that the possibility being discussed is that Reliance Jio distributes ChatGPT, which might be technologically superior to Meta AI for specific use cases Reliance is searching for.
Meta forming a partnership with Reliance would give it a massive leg up in the race for AI and digital dominance in India. Details are still murky, as it remains unclear who will be the one shaking hands with Reliance. Nevertheless, given that reports indicate Meta and OpenAI could run AI models on a planned data center in India, it is clear that both tech firms are aggressively moving toward extracting untapped potential from India.
Lennar delivers solid Q1 earnings beat, but sluggish Q2 outlook stirs demand concerns (LEN)
Coming off a rare top and bottom-line miss last quarter, Lennar (LEN), one of the country's largest homebuilders, rebounded in 1Q25 to easily beat EPS and revenue expectations. The upside results were driven by better-than-expected deliveries of 17,834 and new orders of 18,355 homes, which were up by 6% and 1%, respectively, as well as LEN's focus on better aligning its production pace with sales. However, the solid Q1 performance is being overshadowed by LEN's disappointing Q2 guidance, including an EPS outlook of $1.80-$2.00 that badly missed analysts' estimates.
- Home affordability continues to act as a major hindrance for LEN and other homebuilders. Even for luxury homebuilder Toll Brothers (TOL), stubbornly high mortgage rates have forced it to ramp up incentives to coax its more affluent customer base to take the leap. This was witnessed when TOL reported downside Q1 results on February 18 and guided for Q2 deliveries of 2,500-2,700, missing analysts' expectations and equating to a yr/yr decline of 1.5% at the midpoint.
- For LEN, the impact of home affordability constraints is seen across its Q1 metrics and guidance. To help spur demand, the company has lowered prices -- ASPs for homes dipped by 1% yr/yr to $408,000 -- while also offering incentives such as mortgage rate buydowns. The cumulative effect of these actions is that adjusted gross margin contracted by 340 bps qtr/qtr to 18.7%, while EPS decreased by 17% yr/yr to $2.14.
- Unfortunately for LEN, there doesn't appear to be any relief on the near-term horizon. While mortgage rates have fluctuated a bit over the past several weeks, they remain elevated in the 6.60-6.80% range. Furthermore, the implementation of tariffs is bound to put some upward pressure on manufacturing costs, although LEN has not experienced any impact just yet.
- In addition to high mortgage rates, slipping consumer confidence levels are also weighing on demand. As such, LEN issued conservative Q2 deliveries guidance of 19,500-20,500 homes, reflecting tepid growth of 1.5% at the midpoint. Adding to the concern, the conservative deliveries guidance comes even as LEN continues to ratchet prices lower. For Q2, the company is targeting ASPs of $390,000-$400,000.
- The company isn't seeing the seasonal pickup that's typically associated with the beginning of the spring selling season. Looking beyond the disappointing spring selling season, the longer-term outlook for LEN and the homebuilding industry remains positive. Positive factors working in LEN's favor include favorable demographics, the chronic undersupply of available homes in the U.S., and the accumulated wealth built up from home price appreciation.
While LEN delivered better-than-expected Q1 results, the homebuilder continues to face challenges related to home affordability due to high interest rates and inflation, leading to a cautious Q2 outlook that is sinking shares lower today.
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