Morning Wrap: ASX 200 to fall as yields climb, Meta and Amazon power S&P 500 to fresh highs

ASX 200 futures are trading 54 points lower, down -0.71% as of 8:30 am AEDT.

The S&P 500 hit another fresh all-time high thanks to bumper earnings from megacap tech stocks, Meta adds US$200 billion to its market cap after topped earnings expectations and announcing a maiden dividend, the US adds 353,000 jobs in January vs. expectations of just 177,000 jobs and the ASX is set for a weak open as soaring yields weigh on key sectors like Utilities, Real Estate and Materials.

Let's dive in.

S&P 500 SESSION CHART

S&P 500 higher and closed just off best levels (Source: TradingView)

MARKETS

• S&P 500 higher, finished near best levels and building on a Thursday rebound that saw major benchmarks up over ~1%

• Big tech was a major focus with Meta and Amazon rallying after earnings while Apple shares slipped

• US bond yields rallied across the board after blowout US jobs data

• Bullish focus points for the week – Powell pushed back against March easing but Fed pivot narrative remains underpinned by disinflation momentum, major improvement in Q4 earnings season metrics, all five big tech names beat earnings expectations, pushback against regional bank contagion concerns, corporate buyback windows to reopen

• Bearish focus points for the week – Powell said March rate cut is not the base case scenario, hot January US employment report drove a surge in Treasury yields, labour data may be a lagging indicator with more layoff headlines, renewed regional bank contagion concerns, stretched sentiment and positioning indicators, China softness 

• Investors pile $20bn into stocks to round off strong month for equities driven by rallying tech shares (Reuters)

• Stocks face difficult seasonal period, along with concerns about valuation, positioning, sentiment and breadth(Bloomberg)

• Bond traders unwind positions amid fallout from NYCB's results and Powell's press conference (Bloomberg)

• Stock buybacks projected to increase this year after ebbing in 2023, fueled by forecasts of stronger corporate earnings (Reuters)

• Layoffs being mentioned on US earnings call at highest rate since pandemic (Bloomberg)

STOCKS

• Intel delaying $20bn chip facility in Ohio, prompting selloff in shares after hours (Bloomberg)

• Activist shareholders target Samsung to unlock value, emboldened by Japan's corporate governance drive (FT)

• Global major bank losses revive fears over US commercial property market (FT)

EARNINGS

Meta (+20.3%) – Added around US$200 billion to its market cap which is the largest market cap add for any company in history (in a single day). Double beat with quarterly revenues up 25% year-on-year to record US$40 billion and net income up 201% year-on-year to record US$14 billion. Initiated a quarterly dividend of 50 cents per share for the first time and announced a US$50 billion stock buyback. Also raised its Q1 revenue guidance.

• CFO on dividends and capital allocation: "We believe introducing a dividend really just serves as a nice complement to the existing share repurchase program ... we expect that share repurchases will continue to be the primary way that we return capital to shareholders."

• CFO on headcount: "We ended the Q4 with over 67,300 employees, down 22% YoY ..."

• CEO on ad performance: "We certainly believe that we've been continuing to drive ad performance improvements and year-over-year conversion growth remains strong. And we see this reflected in the feedback that we hear from advertisers also."

• Investing in AI: "... State-of-the-art large language models have been trained on roughly 10x the amount of compute each year." (Meta's US$30-37bn full-year capex outlook is mainly driven by investments in AI and overall computing power)

Amazon (+7.9%) – Double beat with quarterly revenues up 14% to a record US$170 billion and net income up 3,722% to US$10.6 billion. AWS sales growth of 13% but still ahead of the 11.8% consensus. Lowered cost-to-serve on a per-unit basis globally for the first time since 2018.

• CEO on quarterly performance: "This Q4 was a record-breaking Holiday shopping season and closed out a robust 2023 for Amazon ... We made meaningful revenue, operating income, and free cash flow progress."

• CEO on rolling out AI: "Every one of our consumer businesses has a significant number of generative AI applications that they either have built and delivered or they're in the process of building."

Apple (-0.5%) – Double beat (iPhone and product beat but iPad, Mac and services revenue missed). It's worth noting that the stock rallied intraday from a -3.8% open.

CENTRAL BANKS

• Fed's Bowman positive on disinflation traction but flags risk from strong labor market and remains cautious on policy changes (Reuters)

• Chicago President Goolsbee wants to see more evidence inflation on track to return to target, but does not rule out March move (Bloomberg)

• IMF Managing Director says central banks face greater risk from cutting rates too early than too late (Bloomberg)

GEOPOLITICS

• Hopes for a Gaza ceasefire as Hamas and Israel edge closer to deal (London Times)

• Saudi Arabia offers concession on Israeli commitment to Palestinian state as it looks to secure US defence pact (Reuters)

CHINA

• China pledges to stick with fiscal expansion to spur economic growth (Reuters)

• China pledges to stabilise markets after recent selloff to 5 year low (Bloomberg)

• China government calls for $1.4tn stock stabilisation fund (Bloomberg)

• New China property financing measures set to be tested (Reuters)

ECONOMY

• US labour market sizzles with blowout jobs report, solid wage gains (Reuters)

• US adds 353,000 jobs vs. 177,000 consensus, highest since Jan-23 (Bloomberg)

• South Korea inflation falls below 3% for first time since last July (Yonhap)

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Sectors to Watch

The ASX is set to fall on Monday as soaring yields tend to place downward pressure on key sectors such as Utilities, Real Estate and Materials (we also don't have any trillion dollar tech companies to lift the benchmark higher).

While major US benchmarks rallied – Most of the resource-related ETFs in the above table finished lower. Notable losers include Gold (selling off due to higher yields and US dollar), Copper (same reason as gold), Lithium (when isn't lithium selling off) and Uranium (pulling back after a powerful rally).

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Things of Interest

US employment data was much stronger than expected – Great for the soft-landing narrative but mixed for markets. Here are some interesting takes on the data:

• Fitch: "... There is simply no way that 350,000 job gains in a month is consistent with a further cooling of the labor market. This elevates the risk that nominal wage growth will not fall back to levels consistent with reaching the inflation target on a sustained basis, particularly as the labor force participation rate refuses to rise any further ... Wages growing at this rate, in a labor market this tight, is a problem for the Fed."

• Goldman: “... ISM was a sincere beat ... ECI was quite friendly ... payrolls was a striking print ... the US macro portrait this week was a very good one, and it speaks to why our US economics team is still so constructive ... we’re now calling for 2.9% GDP growth in 2024."

The market wasn't a huge fan of the jobs report. Yields rallied amid a volatile reshuffle of rate cut expectations. The odds of an rate cut in March dropped as low as 20% (now 38%). But the base case remains six 25 bp rate cuts by year end.

Source: CME Group

Major US benchmarks rallied thanks to bumper earnings from megacap tech stocks. The six members of the 'trillion dollar market cap' club (Apple, Amazon, Alphabet, Microsoft, Meta and Nvidia) are projected to do US$1.78 trillion in revenues in 2024 and more than US$2 trillion in 2025, according to Bespoke . Massive numbers.

What's interesting is that there were more declining than advancing stocks last Friday. This marks one of the very few times the S&P 500 rallied more than 1% when more of its stocks declined and advanced, according to SentimenTrader. Forward returns don't look great after this signal.

Source: SentimenTrader

ASX corporate actions occurring today:

• Trading ex-div: Amcil (AMH) – $0.01, BKI Investment (BKI) – $0.038, Qualitas (QRI) – $0.012 

• Dividends paid: None

• Listing: None

Economic calendar (AEDT):

• 11:30 am: Australia Balance of Trade

• 6:00 pm Germany Balance of Trade

• 2:00 am: US ISM Services PMI