Fed sticks to rate cut trajectory

US equities surged to record highs Wednesday as the Federal Reserve maintained its rate cut outlook unchanged. The S&P 500 broke 5,230, the Dow Jones rallied 389 points, and the Nasdaq 100 approached its previous peak. Expectations for 75 basis points in rate cuts this year persisted, despite a dot plot indicating three cuts in 2025. Strong GDP projections and dividend increases fuelled the rally, particularly in mega-cap tech shares like Meta, Alphabet, Apple, and Amazon, alongside JPMorgan’s unexpected dividend hike. In Europe, the STOXX 50 index closed slightly lower at 5,000, with Kering tumbling 13%, Valneva dropping 11%, and Prudential gaining 0.4%, among other notable movements. 

Summary for 20.01.2024 

• Asian equity markets surged, following Wall Street’s rally as the US Federal Reserve reaffirmed expectations for three rate cuts in 2024. Investors digested economic reports including Japanese trade data, Australian employment figures, and regional PMI data. Shares in Australia, South Korea, Hong Kong, and China all gained. Japan’s Nikkei hit new all-time highs, buoyed by expectations of continued accommodative policy from the Bank of Japan. 
• Oil futures rose on Thursday, rebounding from previous losses, as US crude and gasoline inventories fell more than expected, signalling strong demand. The Federal Reserve’s reaffirmed expectations for three rate cuts boosted risk sentiment. Ukrainian drone strikes on Russian refineries continued, shutting down 10% of Russian refining capacity, and tightening global supply along with OPEC+ cuts. 
• European markets are set to open higher, taking cues from gains in the US and Asia post-Fed’s confirmation of three rate cuts this year, while investors await central bank decisions elsewhere and earnings reports. In the US, equity futures rose after Micron’s strong earnings, but Five Below disappointed, leading to mixed sentiments amidst record highs. 
• The Federal Reserve held the fed funds rate steady at 5.25%-5.5% for a fifth consecutive meeting yesterday, as expected while signalling plans for three rate cuts later in the year. They expressed caution, waiting for sustained inflation movement towards 2%. GDP growth forecasts were revised upward for 2024, 2025, and 2026, alongside slight adjustments in PCE inflation and unemployment rate projections. 
• Micron Technology exceeded estimates with a forecast of third-quarter revenue driven by AI demand, leading to a 17% surge in its shares in after-hours trading. The company reported its first adjusted profit in five quarters, highlighting growth in high-bandwidth memory (HBM) chips and optimistic outlook for DRAM and NAND pricing amid supply-demand balance. 
• Five Below shares plummeted over 13% post-market on Wednesday after reporting Q4 earnings and revenue below expectations. Guidance for Q1 2025 and full fiscal year fell short as well. CEO Joel Anderson cited strong holiday sales but acknowledged challenges and implemented initiatives for shrink mitigation. 
• Chewy Inc. shares surged over 6% in after-hours trading as the online pet food retailer reported fiscal Q4 results surpassing expectations. With earnings per share at $0.19 compared to analyst estimates of a $0.03 loss and revenue hitting $2.83 billion, CEO Sumit Singh emphasized the company’s margin expansion and commitment to generating free cash flow. 
• KB Home exceeded analyst expectations in fiscal Q1 2024, reporting an EPS of $1.76 and revenue of $1.47 billion. Strong market conditions drove a 55% increase in net orders and a 58% rise in net order value. Guidance for FY 2024 includes housing revenues of $6.50-6.90 billion and continued capital return to shareholders. 
• Kering‘s shares plummeted nearly 14% following a first-quarter profit warning, attributed to weak performance at its key brand Gucci in Asia. The company anticipates a 10% decline in comparable sales, with Gucci’s sales dropping almost 20%, highlighting challenges in reigniting momentum amidst shifting consumer preferences in China. 
• Social media platform Reddit priced its IPO at $34 per share, raising $748 million and valuing the company at $6.4 billion. The offering, which reserved 8% of shares for retail investors and moderators, aims to rejuvenate the tech IPO market. Reddit, despite loyal user base, has struggled financially and faces regulatory scrutiny. The shares are slated to begin trading on the New York Stock Exchange under the ticker symbol “RDDT” later today. 
• KeyBanc Capital Markets initiated coverage on Microsoft Corporation with an Overweight rating and a price target of $490. They highlighted Microsoft’s dominance in the software industry, particularly with its Azure cloud computing service, diverse revenue streams including Office suite and LinkedIn, and strong position in technology trends like OpenAI. 
• KeyBanc also initiated coverage on SAP AG with an Overweight rating and a price target of $230. They emphasised SAP’s transition to cloud services, expecting rapid revenue growth with 44% of revenue already in the cloud. Forecasted cloud revenue growth and margin improvements contribute to the positive outlook. 
• After the GPU Technology Conference 2024, both Citi and BofA Securities demonstrated confidence in NVIDIA Corporation. Citi upgraded the equity to a Buy rating with a raised price target of $1,030, citing the showcased NVLink Switch technology at GTC, while BofA Securities reaffirmed its Buy rating and $1,100.00 price target, highlighting NVIDIA’s expanding Total Addressable Market (TAM) in AI and the potential of the new Blackwell GPU to maintain stable gross margins. 
• Jefferies reiterated its Buy rating for Dassault Systemes SE, maintaining a steady price target of €33.00. The analysis emphasized Dassault’s stable market position and recent sales performance, with discussions highlighting challenges in transitioning to a subscription-based model but optimism for meeting growth targets despite slow starts. 
• Jefferies maintains its Buy rating on Boeing with a $300.00 price target despite challenges, including a forecasted first-quarter cash outflow of $4.0-4.5 billion and reduced 737 MAX delivery estimates for 2024. The updated outlook reflects lower profitability projections, particularly for the Commercial Airplanes segment, yet the firm remains optimistic about Boeing’s long-term potential. 
• Stifel raises Spirit AeroSystems‘ price target to $34 from $30 but maintains a Hold rating. The adjustment follows hints of slower deliveries from Spirit to Boeing and potential acquisition talks. While a buyout could offer a 20% premium, complexities may impact the transaction, with implications for safety, quality, and finances. 
• KeyBanc Capital Markets upgraded Netflix to Overweight and raised its price target to $705 from $580, citing ongoing momentum in net additions amid content expansion. The firm sees improved content quality driving engagement and expects revenue and EPS growth of ~14% and 10% year-on-year by 2025E and 31% and 22% by 2026E, respectively. 
• UBS maintains a Buy rating and a $411.00 price target for Home Depot after a positive discussion with company leadership. Executives express optimism about structural factors driving the home improvement sector, foreseeing a wider recovery by 2025. Home Depot’s strategic readiness and market dynamics reinforce UBS’s confidence in its outlook. 
• Stifel analysts rate ServiceNow as a ‘buy’ with a $820 target price, citing its underappreciated status and growing interest in its AI offerings. A recent customer survey revealed strong interest in ServiceNow’s products, indicating potential for sustained revenue growth and margin expansion in the coming years. 
• RBC Capital Markets raised Adidas‘s share price target to €230.00, maintaining an Outperform rating. The adjustment reflects optimism about Adidas’s revenue potential in 2024, fuelled by a strong product cycle and management’s effectiveness. The analyst anticipates Adidas outpacing Nike’s growth for the first time in five years. 
• Nike is expected to report its first quarterly revenue decline in nearly two years, attributed to challenges with its direct-to-customer strategy and sluggish demand in North America. Analysts cite stagnant innovation and rising competition as key factors impacting Nike’s performance, leading to lowered price targets and subdued market outlook. 
• BofA Securities raised Spotify‘s price target to $315, maintaining a Buy rating. Confidence stems from anticipated strong Q1 2024 performance, supported by restructuring efforts since 2023. Factors like subscriber growth, ad business scaling, and potential share repurchase program contribute to sustained momentum and shareholder value. 
• Cantor Fitzgerald downgraded SoundHound AI to Underweight from Overweight, citing difficulty justifying its valuation due to factors like the company’s early-stage business, unclear operating model, slowing organic growth, customer loss, and increasing competition from major tech firms. The analysts also lowered the price target to $4.90 from $5.80, expressing more downside risk than upside potential. 
• UBS initiated coverage on several airline shares, rating Southwest Airlines, American Airlines, Alaska Air Group, and Delta Air Lines as Buy. United Airlines and Frontier Group Holdings were rated Neutral, while Allegiant Travel and JetBlue Airways were rated Sell.  
• The European Commission warned Romania about falling behind on required reforms for EU recovery funds, citing concerns over its fiscal deficit amid a busy election year. Romania received €9 billion out of €28.5 billion available, conditional on reforms. Delays in payments and fiscal targets have raised apprehensions in Brussels.