Market Snapshot
| Dow | 44545.72 | -337.47 | (-0.75%) | | Nasdaq | 19709.35 | -54.31 | (-0.27%) | | SP 500 | 6040.53 | -30.64 | (-0.50%) | | 10-yr Note | -4/32 | 4.57 |
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| | NYSE | Adv 733 | Dec 2000 | Vol 420 mln | | Nasdaq | Adv 1524 | Dec 2795 | Vol 6.1 bln |
Industry Watch
| Strong: Communication Services, Consumer Discretionary |
| | Weak: Energy, Materials, Utilities, Consumer Staples, Financials, Industrials, Real Estate |
Moving the Market
-- Reacting to news that President Trump plans to go ahead with tariffs on Canada and Mexico starting tomorrow
-- Treasury yields higher in response to the tariff news
-- Some mega caps giving back early gains weighing down market
-- Reacting to this morning's economic data, which featured the Fed's preferred gauge on inflation in the form of the core-PCE Price Index and was in-line with expectations
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Closing Summary
31-Jan-25 16:25 ET
Dow -337.47 at 44545.72, Nasdaq -54.31 at 19709.35, S&P -30.64 at 6040.53
[BRIEFING.COM] The stock market was trading in good form for most of the morning, but stocks took a sharp turn lower in the early afternoon. The deterioration coincided with the White House confirming that 25% tariffs for Canada and Mexico, and a 10% tariff for China, will begin tomorrow (February 1). The basis for the tariff actions were tied to immigration, trade deficit, and fentanyl issues.
It wasn't exactly breaking news as there were similar reports out yesterday, but the added uncertainty heading into the weekend was enough to drive selling interest and quell any buy-the-dip action. There were subsequent reports hinting at behind-the-scenes negotiations that may lead to the tariff actions being called off or at least watered down, but the major indices still closed near their worst levels of the session.
The Dow Jones Industrial Average fell 0.8%, the S&P 500 registered a 0.5% decline, and the Nasdaq Composite was 0.3% lower than yesterday.
Even Apple (AAPL 236.00, -1.59, -0.7%), which was up as much as 4.0% after reporting earnings, ultimately closed lower on the day. Many other stocks participated in the afternoon retreat. 26 of the 30 Dow components were in the red, nine of the 11 S&P 500 sectors closed lower, and market breadth favored decliners by a 5-to-2 margin at the NYSE and by a 2-to-1 margin at the Nasdaq.
Treasury yields jumped in response to the tariff talk, which put added pressure on equities. The 10-yr yield settled six basis points higher than yesterday at 4.57% after hitting 4.50% earlier and the 2-yr yield rose four basis points to 4.24%.
The initial positive bias in equities was fueled by this morning's relatively pleasing inflation data. The core-PCE Price Index (the Fed's preferred inflation gauge) was up 2.8% year-over-year for the third month in a row following a 0.2% month-over-month increase.
In corporate news, responses to earnings results were mixed. AbbVie (ABBV 183.90, +8.25, +4.7%) and Atlassian (TEAM 306.78, +39.83, +14.9%) were among the earnings-related winners while Exxon Mobil (XOM 106.83, -2.74, -2.5%) and Chevron (CVX 149.19, -7.13, -4.6%), and Colgate-Palmolive (CL 86.70, -4.19, -4.6%) registered declines.
- Dow Jones Industrial Average: +4.7.% YTD
- S&P Midcap 400: +3.8% YTD
- Russell 2000: +2.6% YTD
- S&P 500: +2.7% YTD
- Nasdaq Composite: +1.6% YTD
Reviewing today's economic data:
- December Personal Income 0.4% (Briefing.com consensus 0.4%); Prior 0.3%, December Personal Spending 0.7% (Briefing.com consensus 0.5%); Prior was revised to 0.6% from 0.4%, December PCE Prices 0.3% (Briefing.com consensus 0.3%); Prior 0.1%, December PCE Prices - Core 0.2% (Briefing.com consensus 0.2%); Prior 0.1%
- The key takeaway from the report is that consumer spending is strong (which we knew from the Adv. Q4 GDP report) and that inflation is sticky above the Fed's 2% target, making it clear why the Fed said it isn't in a hurry to adjust its policy stance.
- Q4 Employment Cost Index 0.9% (Briefing.com consensus 0.9%); Prior 0.8%
- The key takeaway from the report is that compensation costs moderated to 3.8% for the 12-month period ending in December 2024 from 4.2% for the 12-month period ending in December 2023.
- January Chicago PMI 39.5 (Briefing.com consensus 41.5); Prior 36.9
Looking ahead to Monday, market participants receive the following economic data: Final January S&P Global U.S. Manufacturing PMI (prior 50.1) at 9:45 ET; December Construction Spending (prior 0.0%) and January ISM Manufacturing Index (prior 49.3%) at 10:00 ET.
Stocks slide ahead of the close
31-Jan-25 15:30 ET
Dow -358.56 at 44524.63, Nasdaq -87.97 at 19675.69, S&P -34.89 at 6036.28
[BRIEFING.COM] The major indices sit at session lows heading into the close. The Dow Jones Industrial Average has shed more than 350 points so far.
The average is still 0.3% higher for the week, the S&P 500 (-0.6%) is 1.1% lower this week, and the Nasdaq Composite (-0.4%) trades 1.8% lower for the week.
Looking ahead to Monday, market participants receive the following economic data: Final January S&P Global U.S. Manufacturing PMI (prior 50.1) at 9:45 ET; December Construction Spending (prior 0.0%) and January ISM Manufacturing Index (prior 49.3%) at 10:00 ET.
Nine S&P 500 sectors lower after 10-yr yield hit 4.57%
31-Jan-25 15:00 ET
Dow -239.04 at 44644.15, Nasdaq +6.41 at 19770.07, S&P -14.48 at 6056.69
[BRIEFING.COM] The Nasdaq Composite remains slightly higher than its prior close, showing a 0.1% gain. The S&P 500 (-0.2%) and Nasdaq Composite (-0.5%) remain in negative territory.
Nine of the 11 S&P 500 sectors are lower with the tech sector showing a 0.6% decline, consumer staples down 0.7%, materials reflecting a 0.9% decline, and energy sporting a 2.9% decline.
The 10-yr yield hit 4.57% over the last half hour while the 2-yr yield moved to 4.24%.
Negative vibe takes root
31-Jan-25 14:30 ET
Dow -206.19 at 44677.00, Nasdaq +66.45 at 19830.11, S&P -1.86 at 6069.31
[BRIEFING.COM] The S&P 500 dropped below its prior close over the last half hour, trading 0.1% lower.
Market breadth had been positive through most of the session, but quickly shifted to a negative skew after the tariff news emerged. Decliners lead advancers by a 2-to-1 margin at the NYSE and by a 3-to-2 margin at the Nasdaq.
Treasury yields remain elevated, keeping pressure on equities. The 10-yr yield is at 4.54% and the 2-yr yield is at 4.21%.
Mega cap support market
31-Jan-25 14:00 ET
Dow -199.45 at 44683.74, Nasdaq +110.95 at 19874.61, S&P +6.49 at 6077.66
[BRIEFING.COM] The S&P 500 trades near its low of the session, just two points above its prior close. For now, the flat line has held as support for the index.
The equal-weighted S&P 500 is down 0.5%, though, reflecting more selling under the surface. Even Apple (AAPL 235.21, -2.41, -1.0%), which was up as much as 4.0% after reporting earnings, has turned lower.
Other mega caps remain in positive territory, providing some support to index performance. Alphabet (GOOG 206.85, +4.22, +2.1%), Tesla (TSLA 412.46, +12.18, +3.1%), and Amazon.com (AMZN 238.79, +4.19, +1.8%) are standouts in that respect.
Deckers Outdoor sells off on mild FY25 revenue guidance triggered by inventory issues (DECK)
Deckers Outdoor (DECK -17%) is getting trampled today despite delivering a decent beat-and-raise in Q3 (Dec). The shoemaker, known for its brands UGG, HOKA, and Teva, had been on a monster run leading into Q3 results last night. Since gapping higher on a beat-and-raise Q2 (Sep) report in late October, the stock tacked on an additional +30%, reaching all-time highs yesterday. This level of appreciation put Q3 numbers under a microscope.
What is disappointing investors today? Guidance is at the forefront of today's selling pressure. While DECK hiked its FY25 (Mar) outlook, it was slightly milder than analysts anticipated, mainly on the top line. DECK projected FY25 revs of $4.9 bln, equivalent to increasing its prior forecast by the size of its top-line beat in Q3, meaning that the raise does not incorporate additional upside in Q4.
DECK has a history of issuing conservative guidance. However, this time, investors are not quickly shrugging it off. The problem stems from inventory, primarily with the UGG banner. The brand experienced a robust December selling period yr/yr, aided by DECK's increased and earlier inventory position -- its strategy to avoid the pitfalls of last year when it sold out of key styles that were later fulfilled in Q4. However, unlike last year, when this acted as a tailwind to Q4, it is having the reverse impact this year, benefiting Q3 at the expense of Q4. While this issue does not paint a deteriorating demand picture, it is enough to trigger selling pressure today, given DECK's valuation and subsequent lofty expectations.
That said, there were still plenty of highlights from Q3 showcasing a steady appetite for DECK's brands, especially when stacked against rivals like NIKE (NKE), whose recent Q3 (Feb) guidance, which included another quarter of yr/yr revenue compression, illuminated the challenges associated with mounting a comeback.
- In Q3, DECK posted EPS of $3.00, delivering gross margin expansion of 160 bps yr/yr to 60.3%. However, DECK cautioned that this level of margin expansion is not the norm. The company noted that high levels of full-price selling combined with low levels of wholesale closeouts are abnormal and should not be counted on going forward.
- Revenue grew 17.1% yr/yr to $1.83 bln, lifted by solid gains in UGG and HOKA, which increased net sales by 16.1% and 23.7%, respectively. Geographically, international net sales growth continued to outpace domestic growth, climbing by 28.5% yr/yr to $657.9 mln versus an 11.5% improvement to $1.169 bln. DTC and wholesale sales growth were similar, rising by 17.9% and 16.2%, respectively.
- Looking ahead to FY26, DECK provided a few color comments, noting that it has an exciting pipeline of upcoming products. Part of its strategies for next year involves expanding its DTC business through consumer acquisition and retention and bolstering its international presence by implementing its domestic playbook.
Bottom line, while DECK's Q3 report underscored sustained demand, its inventory-related headwinds eroded Q4 revenue prospects, spurring substantial selling pressure today following a massive rally leading into Q3 results.
Intel beats muted Q4 expectations, but underlying story remains the same (INTC)
In its first earnings report since beleaguered chip maker Intel (INTC) ousted its former CEO Pat Gelsinger, the company surpassed analysts' low 4Q24 expectations, but one doesn't need to look too far under the surface to see that its struggles remain. With the exception of its smaller Network & Edge unit, which generated yr/yr growth of 10%, each of INTC's segments experienced revenue declines, indicating that the company's competitive position hasn't improved as it looks to close the technology gap against rivals like Advanced Micro Devices (AMD) and NVIDIA (NVDA).
- Even INTC's revenue beat comes with a major caveat. During the earnings call, co-CEO David Zinsner acknowledged that a portion of Q4 revenue in Client Computing Group (CCG) was driven by customers buying ahead of the likely implementation of tariffs. Due to this pull forward in demand, along with the ongoing rebalancing of PC inventory and competitive pressures, INTC issued downside EPS and revenue guidance for Q1.
- Michelle Johnston Holthaus, the other co-CEO, didn't sugar coat the situation during the earnings call, stating that "there are no quick fixes" and admitting that she is not pleased with where INTC is today in regard to the AI data center market. The remarks did come as a breath of fresh air as she painted a realistic picture of where INTC currently stands and detailed what it needs to do to get out of this rut.
- Strengthening the product roadmap and winning back customers is easier said than done, but that is the key for INTC's turnaround. While the company's processors in the PC and laptop markets (i7, Core i9) are at least generally on par with products from AMD and Qualcomm (QCOM), the same can't be said on the data center side. In Q4, Data Center and AI (DCAI) revenue fell by 3% yr/yr to $3.4 bln, after the unit achieved growth of 9% last quarter. Ms. Holthaus stated that 2025 is all about improving the competitive position of Xeon, which is sold into the traditional data center market.
- Furthermore, in 1H25, the company plans to launch Clearwater Forest, its first 18A server product. As a reminder, 18A is INTC's new process technology that will help launch new CPUs for both PCs and data centers. The news isn't as encouraging on the AI data center side at this point with Ms. Holthaus commenting that INTC isn't participating in the cloud-based AI data center market in a meaningful way yet.
- Turning to CCG, revenue fell by 9% yr/yr to $8.0 bln following last quarter's 7% dip. On the positive side, the company's PC customers digested inventory at a much slower rate in Q4 compared to Q3. Looking ahead, INTC is poised to launch Panther Lake in 2H25, its next generation desktop processor that will utilize the 18A process node. In 2026, the company expects Panther Lake to achieve meaningful volumes, providing a significant boost to CCG.
- For the upstart Foundry segment, the story remains mostly unchanged as the unit continues to bleed red ink to the tune of $13 bln in losses in 2024. INTC is still the largest customer of the Foundry segment and that will likely remain the case for the foreseeable future. Still, INTC believes Foundry will eventually transform into a huge opportunity, bolstered by the rapid growth of AI and the need for another manufacturing source outside of Taiwan Semiconductor (TSM).
The main takeaway is that Q4 was another rough quarter for INTC, and the next few quarters may not show much improvement either given the magnitude of the challenges facing the company. If there is a silver lining, it's that INTC does have some key products set to launch this year, and a new CEO may help to refocus and reenergize the company.
Apple heads higher despite slight iPhone shortfall and weak China; guidance was reassuring (AAPL)
Apple (AAPL +1%) is trading higher after reporting Q1 (Dec) results last night. The headline numbers were roughly as expected with a nice EPS beat. Revenues rose 4.0% yr/yr to a new DecQ record of $124.3 bln, which was in-line with analyst expectations. On the call Apple said it expects Q2 (Mar) yr/yr revenue growth in the low-to-mid single digits (FactSet consensus +5.3%).
- iPhone sales were below street estimates but investors do not seem overly concerned. Revenue declined 0.8% yr/yr to $69.14 bln vs $71 bln street ests. The iPhone active installed base grew to an all-time high in every geography. Apple also set an all-time record for upgraders. Apple said that its iPhone 16 lineup takes the smartphone experience to the next level and Apple Intelligence is one of many reasons why customers are upgraded.
- Mac sales for the holiday quarter rose 15.5% yr/yr to $8.99 bln, driven by significant excitement around the world. Apple saw strength across its lineup, from the new Mac mini to the latest MacBook Air and MacBook Pro models. Apple saw double-digit growth in every geographic segment. The Mac installed base reached an all-time high and Apple saw double-digit growth for both upgraders and customers new to the Mac.
- iPad revenue jumped 15.2% yr/yr to $8.09 bln, driven by strong interest for its latest products, including the new iPad mini and latest iPad Air. The iPad installed base reached another all-time high and over half of customers who purchased an iPad during DecQ were new to the product.
- Wearables revenue was down 1.7% yr/yr at $11.75 bln, a bit light of street estimates. Customers are excited about the new AirPods 4, however, its Apple Watch was lapping a difficult compare against the Watch Ultra 2 launched last year. Nevertheless, the Apple Watch installed base reached a new all-time high, with over half of customers purchasing an Apple Watch during DecQ being new to the product.
- Services revenue rose a healthy 13.9% yr/yr to an all-time record of $26.34 bln, a bit above street estimates. Both transacting and paid accounts reached new all-time highs. Paid subscriptions also grew double-digits. Apple now has well over 1 bln paid subscriptions across the Services on its platform.
- A notable weak spot in DecQ was Greater China as it was the only geography with a yr/yr sales decline (-11% yr/yr to $18.5 bln). Apple noted that over half the decline was driven by change in channel inventory from the beginning to the end of the quarter. Also, Apple has not rolled out Apple Intelligence in China, which likely softened iPhone 16 sales. China is also a competitive market and the macro picture there is not great.
Overall, investors are pleased with Apple's start to FY25. iPhone sales missed the mark a bit, but it sounds like China is a big reason for that and investors likely already priced in a weak China. They seem relieved it was not worse. Also, we think investors are pleased with the low-to-mid single digit sales growth guidance for MarQ. Apple noted on the call that the dollar has strengthened significantly and it expects a FX headwind of 2.5 percentage points in MarQ, so this guidance is quite good given the FX headwind.
KLA Corporation jumps on upbeat Q2 results; sees DeepSeek's breakthrough as a net positive (KLAC)
KLA Corporation (KLAC +3%) crushes earnings and sales estimates in Q2 (Dec), reflecting another quarter of accelerating AI-related demand. The energetic pace of AI is not expected to slow in 2025 either, supporting KLAC's upbeat Q3 (Mar) guidance, projecting EPS and revenue above consensus for the first time in two years.
- KLAC posted adjusted EPS of $8.20 in Q2, a healthy 33% jump yr/yr. Gross margins ended 2024 at 61%, over 10 pts higher than some of the company's closest peers, such as ASML (ASML) and Lam Research (LRCX), reflecting sustained demand for KLAC's Services business. Revenue growth accelerated to 23.7% yr/yr to $3.08 bln from +18.5% in Q1 (Sep), illuminating the several growth drivers taking center stage in 2024, including increased investments in AI, high-performance computing, and advanced packaging.
- Part of Q2 took a hit from the most recent U.S. government-imposed export controls released in December. The restrictions targeted China, which KLAC estimated will have a roughly $400-600 mln impact on 2025 revenue. As KLAC looks at 2025, it anticipates sales contribution from China to move from 41% of overall revenue to around 27-31%.
- However, global AI demand offset this headwind, remaining a critical catalyst for KLAC. Management touched on the recent revelations of the China-based AI company DeepSeek, which touted performance on par with the best U.S.-based models despite training at a fraction of the cost. KLAC noted that its experience supports the theory that higher compute efficiency enables greater adoption of AI. As such, it sees no reason to believe that increased efficiency will adversely impact the demand environment for the foreseeable future.
- Investments in AI and high bandwidth memory, alongside a strengthening supply/demand backdrop, is positioning the wafer fab equipment (WFE) industry for growth in 2025. KLAC aligned its WFE spending forecast with LRCX, expecting modest growth from the mid-$90 bln reached in 2024. For reference, LRCX projected over $100 bln in WFE spending this year. As such, KLAC issued a bullish view of the first quarter in 2025, anticipating Q3 adjusted EPS of $7.45-8.65 and revs of $2.85-3.15 bln, a 27% improvement yr/yr at the midpoint.
KLAC's Q2 performance mirrored the DecQ numbers of its peers ASML and LRCX this week. As such, a lot of what KLAC reported was priced as shares moved around +5% higher over the past two days, keeping today's reaction less enthusiastic than the responses ASML and LRCX enjoyed. Also, KLAC has greater exposure to China than its semiconductor equipment counterparts. While normalizing revenue in the region was expected, as KLAC touched on this repeatedly over the past several quarters, investors may be hesitant to ignite a more aggressive rally in KLAC, given the lingering uncertainty surrounding possibly further trade restrictions.
Still, with AI prospects remaining white hot, KLAC is nicely positioned to continue extracting outsized benefits from numerous drivers tied to AI, including more complex designs, accelerating product cycles, and expanding advanced packaging demand.
IBM surges to new all-time high on strong Software results an robust FY25 guidance (IBM)
IBM (IBM +13%) traded sharply higher today to a new all-time high after reporting strong Q4 results last night. It reported nice EPS upside, only its second double-digit EPS beat in the past six quarters. Revenue rose 1% yr/yr to $17.55 bln, which was in-line. We think the guidance is playing a key role in the big move today.
- Quickly on the guidance, IBM's FY25 guidance of +5% CC (constant currency) sales growth may not sound like a lot but it is a notable improvement from FY24's +3% CC result. Also, IBM's FY25 free cash flow guidance of $13.5 bln is a nice improvement from FY24's $12.7 bln number.
- As has been the case in recent quarters, its Software segment was the star of the show with revenue up +10.4% (+11.5% CC) to $7.9 bln with strength across key categories of Red Hat (+17% CC), Automation (+16% CC), Data & AI (+5% CC) and Transaction Processing (+11% CC). Software is now about 45% of IBM's business, with more than $15 bln of ARR growing at double digits.
- IBM continues to see momentum in Red Hat, fueled by six consecutive quarters of double-digit bookings growth. This is reflective of continued demand for its hybrid cloud platform as clients are prioritizing application modernization on OpenShift containers and Ansible automation to optimize their IT spend. OpenShift is now $1.4 bln ARR business, growing about 25%.
- Consulting segment revenue was down -2% (-1.1% CC) to $5.2 bln. IBM continues to see clients reprioritizing their IT spending towards digital transformation and AI initiatives for cost optimization and operational efficiency. Infrastructure segment revenue was down -7.6% (-6% CC) to $4.3 bln, reflecting product cycle dynamics. This is the 11th quarter of z16 availability. Nearly three years in, IBM noted this product cycle has outpaced prior cycles.
- Breaking down the +5% CC FY25 revenue guidance by segment, IBM sees Software approaching double digit growth, led by Red Hat in the mid-teens. In Consulting, IBM sees growth in the low single digits. And with a new mainframe launch in mid-2025, IBM expects Infrastructure to be about a point contribution to IBM's overall revenue growth.
Overall, this was an impressive way to wrap up FY24. What really stood out is its robust Software segment, that keeps growing strongly and is now 45% of sales. The FY25 guidance was quite positive as well. That +5% CC revenue growth may not sound like much but IBM has not had a 5% sales growth in any quarter since 3Q22. So to forecast that for a full year this early in the year is a sign that management is bullish on its prospects. Its Software segment is really booming right now.
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