Stocks Finish Lower on Tariff Uncertainty

The S&P 500 Index ($SPX) (SPY) Monday closed down -0.76%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.28%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.84%.  March E-mini S&P futures (ESH25) fell by -0.72%, and March E-mini Nasdaq futures (NQH25) fell by -0.76%. 

Stock indexes on Monday settled moderately lower, with the S&P 500 posting to a 2-1/2 week low, the Dow Jones Industrials posting a 1-1/2 week low, and the Nasdaq 100 posting a 1-week low.  Global equity markets came under pressure Monday after President Trump on Saturday announced 25% tariffs on Canada and Mexico and 10% on China and warned that European tariffs are coming.  The tariffs were set to take effect on Tuesday and could spark a trade war that threatens economic growth worldwide.  Goldman Sachs warned there's a risk of a 5% slump in US stocks because of the hit on corporate earnings, and RBC Capital Markets estimates stock declines of 5% to 10%. 

However, stocks recovered more than half of their losses after Mexican President Sheinbaum said the US will delay tariffs on Mexico for one month after she spoke with President Trump. Stocks also found some support on Monday's better-than-expected US ISM manufacturing and construction spending reports.

The US Jan ISM manufacturing index rose +1.7 to 50.9, stronger than expectations of 50.0 and the highest level in 2-1/3 years.

US Dec construction spending rose +0.5% m/m, stronger than expectations of +0.2% m/m.

Fed comments on Monday were mixed for stocks.  On the hawkish side, Atlanta Fed President Bostic said he wants to wait "a while" before cutting interest rates again following last year's reductions amid uncertainty over where the US economy is headed in 2025.  Conversely, Boston Fed President Collins said the Fed is unlikely to react to the impact of tariffs on prices so long as policymakers don't see signals of higher, persistent inflation.

Earnings season is in full swing as companies report Q4 earnings results.  Megacap technology companies Alphabet and Advanced Micro Devices are set to report earnings on Tuesday.  Qualcomm will release earnings on Wednesday, and Amazon.com will release its quarterly results on Thursday.  According to Bloomberg Intelligence, analysts estimate S&P 500 earnings grew by +7.5% y/y in Q4, the second-highest pre-season forecast in the past three years.

The markets are discounting the chances at 14% for a -25 bp rate cut at the next FOMC meeting on March 18-19.

Overseas stock markets on Monday settled lower.  The Euro Stoxx 50 fell to a 1-week low and closed down -1.30%.  China's Shanghai Composite Index did not trade today and will be closed through Tuesday for the week-long Lunar New Year holiday.  Japan's Nikkei Stock 225 dropped to a 2-week low and closed down -2.66%.

Interest Rates

March 10-year T-notes (ZNH25) Monday closed up +3.5 ticks.  The 10-year T-note yield fell -0.4 bp to 4.543%.  March T-notes Monday rose on positive carryover from strength in European government bonds.  Also, Monday's selloff in stocks boosted safe-haven demand for T-notes.  T-note prices also found support from concern that President Trump's tariffs will stifle economic growth.

T-note prices were undercut by the inflationary implications of President Trump’s tariff plans, which are hawkish for Fed policy.  Also, Monday’s US ISM manufacturing and construction spending reports were stronger than expected and were hawkish for Fed policy.  Rising inflation expectations also weighed on T-note prices after the 10-year breakeven inflation expectations rate on Monday rose to a 2-1/2 week high of 2.465%.

European government bond yields on Monday moved lower.  The 10-year German bund yield dropped to a 1-month low of 2.358% and finished down -7.4 bp at 2.385%.  The 10-year UK gilt yield fell to a 7-week low of 4.445% and finished down -5.1 bp at 4.487%.

The Eurozone Jan CPI rose +2.5% y/y, stronger than expectations of +2.4% y/y.  Also, the Jan core CPI rose +2.7% y/y, stronger than expectations of +2.6% y/y.

The Eurozone Jan S&P manufacturing PMI was revised upward by +0.5 to an 8-month high of 46.6 from the previously reported 46.1.

ECB Governing Council member Simkus said, "Going forward, we can allow ourselves a looser policy," and the ECB is likely to lower borrowing costs beyond its next meeting in March.

Swaps are discounting the chances at 100% for a -25 bp rate cut by the ECB at the March 6 policy meeting.

US Stock Movers

Companies exposed to manufacturing or imports from China slid on the US tariff announcements, with Apple (AAPL) closing down more than -3% to lead losers in the Dow Jones Industrials.  Dell Technologies (DELL) closed down more than -2%. 

PDD Holdings (PDD) closed down more than -5% to lead losers in the Nasdaq 100 as China-exposed stocks retreated after President Trump imposed an additional 10% tariff on Chinese goods. 

Automobile makers fell after President Trump announced tariffs on US imports from Canada, Mexico, and China.  Tesla (TSLA) closed down more than -5% as Elon Musk could draw more retaliatory tariffs than other automakers given his close political relationship with President Trump.  General Motors (GM) closed down more than -2%, and Ford Motor (F) closed down more than -1%.  Auto parts makers also fell, with Aptiv Plc (APTV) and Autoliv (ALV) closing down more than -2%.

Moderna (MRNA) closed down more than -7% to lead losers in the S&P 500 as vaccine makers tumbled on expectations that vaccine-skeptic Robert Kennedy Jr will be appointed as head of the US Department of Health and Human Services. 

FedEx (FDX) closed down more than -6% after Loop Capital Markets downgraded the stock to hold from buy.

Asset managers retreated Monday after Vanguard Group cut fees for dozens of its mutual funds and ETFs.  As a result, Blackrock (BLK) closed down more than -5%, Invesco Ltd (IVZ) closed down more than -4%, and State Street (STT) closed down more than -3%.     

Homebuilding stocks were under pressure Monday on concern tariffs will negatively impact them due to declining consumer confidence and rising building costs.  PulteGroup (PHM) and Lennar (LEN) closed down more than -3%.  Also, DR Horton (DHI) and Toll Brothers (TOL) closed down more than -1%.

Constellation Brands (STZ) closed down more than -3% after Piper Sandler downgraded the stock to neutral from overweight.

Union Pacific Corp (UNP) closed down more than -1% after Loop Capital Markets downgraded the stock to sell from hold with a price target of $200.

Triumph Group (TGI) closed up more than +35% after Warburg Pincus and Berkshire Hathaway partnered to acquire the company for $26 a share or about $3 billion, including debt.

IDEXX Laboratories (IDXX) closed up more than +11% to lead gainers in the S&P 500 and Nasdaq 100 after reporting Q4 RPS of $2.62, better than the consensus of $2.41 and forecast 2025 EPS of $11.74-$12.24, the midpoint above the consensus of $11.94. 

Defensive healthcare stocks rallied Monday with the rout in the broader market.  As a result, Molina Healthcare (MOH) closed up more than +4%, and Elevance Health (ELV) closed up more than +2%.  Also, HCA Healthcare (HCA), Cardinal Health (CAH), Universal Health Services (UHS), Centene (CNC), and UnitedHealth Group (UNH) closed up more than +1%.

AbbVie (ABBV) closed up more than +3% after Morgan Stanley raised its price target on the stock to $239 from $224.   

Tyson Foods (TSN) closed up more than +2% after reporting Q1 adjusted EPS of $1.14, stronger than the consensus of 91 cents. 

Baker Hughes (BKR) closed up more than +2% after Argus Research raised its price target on the stock to $55 from $43.

Tempur Sealy International (TPX) closed up more than +5% after Wedbush upgraded the stock to outperform from neutral with a price target of $80.

Meta Platforms (META) closed up more than +1% after the Insider reported the company plans to release six AI-powered wearable devices this year. 

Earnings Reports (2/4/2025)

Advanced Micro Devices Inc (AMD), Alphabet Inc (GOOGL), Amcor PLC (AMCR), AMETEK Inc (AME), Amgen Inc (AMGN), Apollo Global Management Inc (APO), Archer-Daniels-Midland Co (ADM), Atmos Energy Corp (ATO), Ball Corp (BALL), Centene Corp (CNC), Chipotle Mexican Grill Inc (CMG), Cummins Inc (CMI), Electronic Arts Inc (EA), Enphase Energy Inc (ENPH), Essex Property Trust Inc (ESS), Estee Lauder Cos Inc/The (EL), Fair Isaac Corp (FICO), FMC Corp (FMC), Fox Corp (FOXA), Gartner Inc (IT), Hubbell Inc (HUBB), IDEX Corp (IEX), Jack Henry & Associates Inc (JKHY), Jacobs Solutions Inc (J), Juniper Networks Inc (JNPR), KKR & Co Inc (KKR), Marathon Petroleum Corp (MPC), Match Group Inc (MTCH), Merck & Co Inc (MRK), Mondelez International Inc (MDLZ), Omnicom Group Inc (OMC), PayPal Holdings Inc (PYPL), Pentair PLC (PNR), PepsiCo Inc (PEP), Pfizer Inc (PFE), Prudential Financial Inc (PRU), Regeneron Pharmaceuticals Inc (REGN), Simon Property Group Inc (SPG), TransDigm Group Inc (TDG), Veralto Corp (VLTO), WEC Energy Group Inc (WEC), Willis Towers Watson PLC (WTW), Xylem Inc/NY (XYL).