The Perfect Enemy | Dow rises 300 points, Nasdaq jumps 1% as investors weigh next Fed rate move - CNBC
February 8, 2023
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An earnings recession is imminent, according to Morgan Stanley

An earnings recession is imminent this year, according to Morgan Stanley equity strategist Michael Wilson. 

“Our view has not changed as we expect the path of earnings in the US to disappoint both consensus expectations and current valuations,” he said in a note to clients Sunday.

Some positive developments have unfolded recent weeks — such as China’s ongoing reopening and falling natural gas prices in Europe — and contributed to some investors viewing market prospects more optimistically. 

However, Wilson advises investors to remain bearish on equities, citing price action as the main influence for this year’s rally. 

“The rally this year has been led by low-quality and heavily shorted stocks,” he said. “It’s also witnessed a strong move in cyclical stocks relative to defensives.”

Wilson has based his forecasts on margin disappointment, and he believes the case for this is growing. Many industries are already facing revenue slowdowns, as well as inventory bloating, less productive headcount. 

“It’s simply a matter of timing and magnitude,” said Wilson. “We advise investors to stay focused on fundamentals and ignore the false signals and misleading reflections in this bear market hall of mirrors.”

— Hakyung Kim

Xylem shares drop on plans to acquire Evoqua

Shares of water technology company Xylem shed more than 9% amid news that its buying peer Evoqua Water Technologies in a deal valued at roughly $7.5 billion.

As part of the deal, investors will receive 0.480 shares of Xylem for each Evoqua share. That represents a value of $52.89 a share, and a 29% premium based on the companies respective Friday closing prices, Xylem said.

Evoqua shares surged about 13%.

Xylem shares fell on news that it’s acquiring rival Evoqua Water Technologies

— Samantha Subin

Tapestry shares down after Barclays cuts to equal weight

There were deeper discounts at Kate Spade and Coach Outlet as Barclays analysts surveyed promotions over the holidays in the handbag category. Seeing the trend as a warning sign for weaker demand ahead, the firm downgraded shares of the brands’ parent, Tapestry, to equal weight from overweight on Monday.

Inflation has persisted so long that even upper income households are feeling the pinch, according to Barclays. Tapestry’s target demo is a household making $125,000 to $150,000 a year. Barclays’ consumer research has shown that this income bracket reduced holiday spending by about 14% at the end of last year.

Rival Capri could feel similiar pressure at its Michael Kors brand, Barclays said. However, the firm reiterated the stock at overweight, saying it could still benefit as global tourism reopens, especially at its Versace and Jimmy Choo brands. Also, promotions during the holidays were flat at Michael Kors.

Deep discounts at Kate Spade could weigh on Tapestry shares

Barclays raised price targets on both stocks, citing the possibility for multiple expansion. Tapestry’s price target was increased $43, which is about in-line with where the stock is currently trading. Capri’s target goes to $72, or nearly 14% above its Friday close.

—Christina Cheddar Berk

Cowen upgrades Skechers, says footwear brand has hidden upside potential

Cowen upgraded Skechers to outperform from market perform, noting Wall Street could be missing areas for potential upsides.

Analyst John Kernan raised the price target to $65 from $48. The new target implies an upside of 39.4% from Friday’s close.

“Skechers’ value proposition continues to resonate based on our checks and is gaining preference in our survey for casual/lifestyle footwear from Nike and Adidas,” he said in a note to clients Monday. “We view Consensus sales and EPS estimates as too conservative with working capital drags ending in 2022 supporting an inflection in Free Cash Flow.”

CNBC Pro subscribers can read the full story here.

— Alex Harring

Leading indicators fall more than expected, signaling recession

The Conference Board’s Leading Economic Index fell more than expected in December, providing another sign that growth could turn negative soon.

The index declined 1% on the month, worse than the Dow Jones estimate for a 0.7% decrease, continuing a string of negative numbers over the past several months. In fact, the index is now down 4.2% over the six-month period from June to December of 2022.

“There was widespread weakness among leading indicators in December, indicating deteriorating conditions for labor markets, manufacturing, housing construction, and financial markets in the months ahead,” said Ataman Ozyildirim the board’s senior director of economics. Ozyildirim noted that the index is “continuing to signal recession … in the near term.”

Long stretches of negative readings frequently have coincided with recessions. Aggravating matters this time around is that the Federal Reserve is raising interest rates, whereas in the past it was usually cutting when the LEI turned negative.

The index tracks data points such as hours worked, jobless claims, building permits, stock market indexes and credit spreads.

— Jeff Cox

Tech stocks rally

Technology stocks rose Monday, pushing the Nasdaq Composite up more than 1% as or 9:55 a.m. EST.

The gains came from semiconductor stocks including Western Digital and Advanced Micro Devices, which surged about 7% each. Other chip stocks such as Qualcomm, Nvidia and Micron Technology gained about 4% each.

Big technology stocks also rallied. Netflix and Apple rose 2% and 1.4%, respectively, while Salesforce added 1.6% amid news of a sizeable stake in the software company from Elliott Management. Tesla jumped 3.9%.

The rise in technology stocks came amid hopes that a China reopening could benefit some business and investors hoped for a shift in Fed policy.

— Samantha Subin

El-Erian says Fed should hike by 50 basis points, calls smaller increase a ‘mistake’

Surging inflation may appear largely in the past, but a shift to a 25 basis point hike at the next Federal Reserve policy meeting is a “mistake,” according to Allianz Chief Economic Adviser Mohamed El-Erian.

“‘I’m in a very, very small camp who thinks that they should not downshift to 25 basis points, they should do 50,” he told CNBC’s “Squawk Box” on Monday. “They should take advantage of this growth window we’re in, they should take advantage of where the market is, and they should try to tighten financial conditions because I do think that we still have an inflation issue.”

Inflation, he said, has shifted from the goods to the services sector, but could very well resurge if energy prices rise as China reopens.

El-Erian expects inflation to plateau around 4%. This, he said, will put the Fed in a difficult position as to whether they should continue crushing the economy to reach 2%, or promise that level in the future and hope investors can tolerate a steady 3% to 4% nearer term.

“That’s probably the best outcome,” he said of the latter.

— Samantha Subin

Stocks open little changed

Stocks were little changed Monday as a busy week kicked off for earnings.

The Dow Jones Industrial Average traded flat, while the S&P 500 added 0.08%. The Nasdaq Composite last rose 0.26%.

— Samantha Subin

Spotify shares rise on layoff news

Spotify shares gained more than 5% before the bell amid news that its cutting 6% of its workforce, contributing to the wave of layoffs that have hit the technology sector as it grapples with dwindling demand and recession fears.

The company also announced the departure of Dawn Ostroff, Spotify’s chief content and advertising business officer. The layoffs equate to about 600 workers.

Spotify shares rose on news that it’s cutting 6% of its workforce

— Samantha Subin

Companies making the biggest premarket moves

These companies are among those making the biggest moves in the premarket:

  • Advanced Micro Devices — The semiconductor maker rallied nearly 3% after being upgraded to overweight from equal weight by Barclays. The firm said it sees potential upside from direct-current and generative artificial intelligence.
  • Shopify — The e-commerce company rose nearly 5% after Deutsche Bank upgraded the stock to buy from hold. Brands are growing increasingly interested in Shopify, the Wall Street firm said..
  • Tapestry — The Coach parent slid 1.85% after being downgraded to equal weight from overweight by Barclays, which cited inflation that was creeping to higher household income brackets, among other reasons.

For more premarket movers, click here.

— Michelle Fox

Fed likely to discuss next week when to halt hikes, Journal report says

Federal Reserve officials next week are almost certain to approve another deceleration in interest rate hikes while also discussing when to stop the increases altogether, according to a Wall Street Journal report.

The rate-setting Federal Open Market Committee is set to convene Jan. 31-Feb. 1, with markets pricing in almost a 100% chance of a quarter-point increase in the central bank’s benchmark rate. Most prominently, Fed Governor Christopher Waller said Friday he sees a 0.25 percentage point increase as the preferred move for the upcoming meeting.

However, Waller said he doesn’t think the Fed is done tightening yet, and several other central bankers in recent days have backed up that notion.

The Journal report, citing public statements from policymakers, said slowing the pace of hikes could provide the chance to assess what impact the increases so far are having on the economy. A series of rate hikes begun in March 2022 has resulted in increases of 4.25 percentage points.

Market pricing is currently indicating quarter-point hikes at the next two meetings, a period of no action, and then up to a half-point reduction by the end of 2023, according to CME Group data.

However, several officials, including Governor Lael Brainard and New York Fed President John Williams, have used the expression “stay the course” to describe the future policy path.

— Jeff Cox

PayPal dips after report about new digital wallet from banks

Shares of PayPal were under pressure on Monday morning following a report from the Wall Street Journal that big banks will be making another entry into the digital payments space.

Bank of America, JPMorgan Chase and other banks are teaming up on a digital wallet, according to the report. The wallet would be operated by Early Warning Services, which also runs Zelle.

Shares of PayPal were down 1% in premarket trading.

— Jesse Pound

Advanced Micro Devices rises following Barclays upgrade

Advanced Micro Devices advanced roughly 3% in premarket trading Monday following an upgrade to overweight from equal weight by Barclays.

Analyst Blayne Curtis set a price target that implies a 21.3% upside from where the stock closed Friday. Despite anticipating another quarterly slide for personal computer demand, he said the company will be helped by continued server leadership and opportunities in artificial intelligence and direct current technology.

CNBC Pro subscribers can read more about the call and his other upgrades and downgrades here.

— Alex Harring

Salesforce gains on activist investor stake

Salesforce gains on activist investor stake

— Samantha Subin

Wayfair jumps after JPMorgan double upgrade

Wayfair shares popped 7% in the premarket after JPMorgan double upgraded the furniture seller to overweight from underweight, citing improving market share trends.

“We are upgrading Wayfair to Overweight from Underweight given a positive shift in market share trends and management’s newfound commitment to controlling expenses/investments, which combined, should cause a significant inflection in earnings revisions from steeply negative over the past two years to positive, on top of still-attractive valuation,” JPMorgan said in a note.

— Alex Harring

Shopify shares rise after Deutsche Bank upgrade

Shares of e-commerce platform Shopify popped more than 3% after a Deutsche Bank upgrade to buy from hold.

“Many leading brands are now actively looking to migrate or are in the process of migrating over from legacy/competing solutions and we note this is in sharp contrast to our conversations over the last twelve months which consistently highlighted the pace of migrations slowing,” Deutsche said in a Sunday note to clients.

— Alex Harring

Stocks are at a key technical juncture, MKM Partners says

MKM Partners chief market technician JC O’Hara noted Sunday that the S&P 500 is dealing with conflicting technical trends, leaving it at a key juncture.

“If the S&P 500 can break and hold above the 200 DMA and the downward sloping trend channel, that would suggest the collective market is forecasting a soft-landing and 4,400 will be the target,” O’Hara said in a note Sunday. “A rejection at the trendline would mean a retest of ~3,600 and a message that the majority of market participants are increasingly anticipating a recession. Follow price is our message.”

The S&P 500 jumped 1.9% on Friday but still notched a losing week.

S&P 500 since October 2021

— Fred Imbert

European markets cautious as investors weigh economic outlook

European markets started the new trading week on an uncertain note Monday with investors reassessing the economic outlook.

The pan-European Stoxx 600 was up 0.15% in early trade, with tech stocks adding 1.1% while chemicals slid 0.7%.

– Elliot Smith

Stock futures open flat on Sunday

Stock futures were little changed to begin trading Sunday night.

Dow Jones Industrial Average futures ticked higher by 3 points, or 0.01%. S&P 500 futures rose 0.01% and Nasdaq 100 futures added 0.02%.

— Tanaya Macheel