Stocks trickled lower today as yesterday’s tech rally stalled, influenced by a profit warning from Samsung that hit broader tech optimism. The Dow dropped by 0.4%, underperforming, while the S&P saw a modest decline of 0.2%. The tech-heavy Nasdaq Composite traded flat through noon. All three indexes opened significantly lower before staging strong morning rallies.
The bearish open can be blamed on Samsung’s dour morning announcement, which cast a shadow over the tech sector. The company expects a significant 35% drop in its fourth-quarter operating income, falling well below estimates, as demand remains weak. This decrease in demand also led to a decline in revenue to 67 trillion won, contributing to Samsung’s leanest operating profit in 15 years.
This development is a stark reminder of the sluggish demand for smartphones and memory chips, casting doubt on the market recovery anticipated in 2024. Despite a more optimistic revenue forecast from Micron Technology Inc. in December, the overall market outlook remains uncertain.
Tom Kang from Counterpoint Technology Market Research commented, “This shows that the rebound is slower than we all thought. Prices are not rising that fast and the demand from certain sectors is not that strong.”
Samsung had previously projected a gradual recovery in the $160 billion memory market in 2024, driven by AI development. However, its recent performance and a 2.4% drop in its shares in Seoul today reflect the challenges it faces, including low utilization rates in its foundry chipmaking business and competitive pressures in consumer electronics.
Despite these setbacks, there are signs of recovery. South Korea’s semiconductor industry saw significant gains in production and shipments in November, and there’s optimism that Samsung’s chip business will return to profitability in the first half of 2024.
Investors are keenly awaiting further details about Samsung’s long-term investment strategies, especially in AI, which will be discussed during the full results announcement on Jan. 31. Samsung’s plans to ramp up its high-density memory chips production, competing with SK Hynix in the AI chips market, are particularly noteworthy.
On the consumer electronics front, Samsung is betting on new devices and foldables to drive growth in 2024, with a major unveiling planned in the U.S. later this month. This comes at a time when Apple Inc.’s iPhone 15 might be losing momentum.
Big Tech was instrumental in lifting stocks higher on Monday, despite Boeing’s shares dropping after a 737 Max 9 jet incident with a fuselage door being ripped off mid-flight. Today, Boeing’s shares slightly declined, while Alaska and United Airlines reported finding loose parts in their jets during inspections. Airlines looked resilient, though, given the circumstances.
Investors’ focus now shifts to the upcoming December Consumer Price Index (CPI) and its implications for potential interest rate cuts. The CPI comes out Thursday morning, and, as usual, it’s going to be a very important report. The market got its hopes up following December’s FOMC meeting in which the Fed’s updated dot plot for 2024 showed far more rate cuts than expected.
However, recent comments from Federal Reserve officials suggest that a rate cut in the near future is becoming increasingly unlikely. According to the CME Group’s FedWatch Tool, Treasurys are pricing in a 60% chance that the Fed will cut rates at its March meeting. That’s down from 80% in late December, immediately following the FOMC meeting.
The notion that inflation is easing is central to the belief that the U.S. economy will avoid a recession. This theory will be tested on Friday when major banks begin reporting their fourth-quarter earnings.
In short, traders could see some fireworks on Thursday and Friday as both days will feature data that has major implications for the rest of the year. Bulls would like to see low inflation and strong (but not too strong) bank earnings. Bears want the opposite.
But even if bulls get what they’re hoping for, stocks look overstretched following the November/December rally, which should limit how high stocks go in the event of a “perfect” combo of a soft CPI and robust bank earnings.
