Broadcom earnings top estimates, Lululemon announces C-suite shake-up

Key Concepts

Market Performance: Record highs for Dow Jones Industrial Average (DJIA), S&P 500, Russell 2000 (small caps), and micro caps. NASDAQ and NASDAQ 100 experienced a weaker day, primarily due to underperformance in mega-cap tech stocks.
Sector Rotation: Shift in strength from technology and communication services towards cyclical sectors like materials, financials, and industrials. Defensive sectors (healthcare, staples, utilities) also showed strength.
Economic Outlook (2026): Signs of economic softening in the past month (weakening labor market, skittish consumer, sticky inflation) are potentially bottoming out, with expectations of some growth entering the new year.
Consumer Spending: A "K-shaped" economy is evident, with higher-income consumers driving spending, supported by the stock market and housing. Lower-income consumers (earning $50,000 or less) are spending less.
Earnings Growth: Earnings expectations for 2026 are surprisingly moving higher, with an estimated nearly 15% growth, despite concerns about tariffs and wages.
AI Theme Rethinking: A shift in investor sentiment regarding AI capital expenditures (capex). Initial elation over massive spending has been replaced by concerns about return on investment, balance sheet impact, and potential for circular financing.
Investment Strategy: Investors should be more selective and "pick their spots" carefully, focusing on companies with strong free cash flows and considering the "second round" of AI beneficiaries (those utilizing AI rather than just building infrastructure).
Broadcom: Reported strong Q4 earnings and revenue, beating estimates, with positive Q1 guidance. The stock has seen significant gains (over 70%) year-to-date, making it a bellwether for the AI trade.
Lululemon: Announced CEO succession plan with Calvin McDonald stepping down. The company has experienced slowing sales in North America but strong international growth. Concerns about product development and competition have impacted the stock, though some analysts see it as undervalued.
Federal Reserve: Markets reacted positively to a 25 basis point rate cut, with Fed officials' commentary being closely watched for future monetary policy direction.
Retail Sector: Rent the Runway's Q3 earnings report is expected to provide insights into consumer health, driven by price increases, subscriber growth, and demand for work/going-out wear.

Market Performance and Sector Action

On a record-breaking day on Wall Street, the Dow Jones Industrial Average (DJIA) surged by 1.3%, adding approximately 650 points, and reached new record highs. Similarly, the S&P 500 also hit a new record high, with its equal-weight version also achieving a record. The Russell 2000, representing small-cap stocks, climbed 1.3% to a record high. The S&P 400 (mid-cap sector) also reached its first record high in about a year, and micro-cap stocks similarly saw record highs.

In contrast, the NASDAQ and the NASDAQ 100 were in the red, experiencing a weaker day. This underperformance was largely attributed to mega-cap technology stocks, with Alphabet down over 2%, and Broadcom, Nvidia, and Tesla off more than 1%. However, the NASDAQ 100 did pare back some of its losses.

Sector-wise, energy and technology saw declines of about half a percent, with communication services down by a similar margin. The primary strength was observed in cyclical sectors, with Materials up 2%, Financials up slightly less, and Industrials up 1%. Healthcare, staples, and utilities also performed well, indicating strength in value plays, cyclicals, and defensive stocks. Real estate and discretionary sectors were down but still outperformed the S&P 500.

Within the Dow, strong performers outside of mega-caps included Visa (up 6%), Disney (up 2%), American Express (likely another record high), Walmart, and JPMorgan Chase (both up more than 2%). The transports sector also showed significant strength, having recently come off a 10-day winning streak. This broad market strength, particularly in industrials and transports, is seen as confirming the bullish sentiment heading into year-end, aligning with principles of Dow Theory.

Economic Outlook and Consumer Trends for 2026

Victoria Fernandez, Chief Market Strategist at Crossmark Global Investments, discussed the US economy's trajectory. She noted that over the past month, the economy had been in a softening period, characterized by a weakening labor market, a skittish consumer, high valuations, and sticky inflation. However, she observed that these trends might be bottoming out, suggesting a potential for growth entering the new year.

Key tailwinds for the market heading into 2026 include:

Broadening Market Breadth: The strong performance of the S&P 500 equal weight and Russell 2000 indicates wider participation in the rally.
Fiscal Stimulus: Significant fiscal stimulus is anticipated in early 2026, including potential tax breaks for consumers and corporations.
Potential Financial Deregulation: Easing monetary standards are also a possibility.

Regarding the American consumer, Fernandez highlighted a "K-shaped" economy. While higher-income consumers are spending robustly, supported by the stock market and housing, lower-income consumers (earning $50,000 or less) are spending less than the previous year, driven by slowing wage growth. Despite this, fiscal stimulus is expected to provide some tailwind for the consumer in early 2026.

Earnings Growth and the AI Theme

Surprisingly, earnings expectations for 2026 are moving higher, with an estimated growth of nearly 15%. This is unusual, as typically earnings expectations are lowered at the beginning of a quarter. This positive momentum is attributed to companies' efforts to retain employees, potentially mitigating anticipated layoffs.

The AI theme is undergoing a "rethinking." Initially, the massive capital expenditures (capex) by companies on AI were viewed positively. However, concerns have emerged regarding:

Return on Investment (ROI): Whether companies will see a sufficient return on their AI spending.
Balance Sheet Impact: The potential strain on balance sheets due to significant investment and possible reliance on debt markets.
Circular Financing: Questions about the sustainability of AI investment strategies.

This rethinking has contributed to the recent pullback in some tech stocks. The implication for investors is to be more selective, focusing on companies with strong free cash flows and considering the "second round" of AI beneficiaries – those who will effectively utilize AI rather than solely those building the infrastructure. Companies like Adobe are cited as potential beneficiaries due to their ability to implement AI.

Investment Implications and Sector Opportunities

Investors are advised to "pick their spots more carefully" in 2026, as a broad-based approach to any sector is unlikely to guarantee success. Key considerations include:

Free Cash Flows: Examining the free cash flow generation of companies, particularly within the MAG 7, where some have negative free cash flows, which is a red flag.
Second-Level AI: Shifting focus from AI infrastructure builders to companies that will leverage AI effectively.

Beyond technology, Fernandez identified several sectors showing positive trends and potential opportunities:

Transportation: Exhibiting positive trends and consolidation in uptrends.
Homebuilders: Showing an unexpected uptrend.
Healthcare: A consistently strong area.
Energy: Starting to show signs of growth.

Investors should look for sectors and companies with positive internal trends and relative strength against the broader market.

Broadcom's Strong Performance

Broadcom reported strong fourth-quarter earnings, exceeding estimates for both EPS ($1.95 vs. $1.87) and net revenue ($18.02 billion vs. $17.47 billion). The company also provided better-than-expected Q1 revenue guidance of approximately $19.1 billion (vs. an estimate of $18.48 billion). This performance is particularly impressive given that the stock had already surged over 70% year-to-date. Broadcom's role in supplying chips for wireless networking, storage, and custom AI chips makes it a significant bellwether for the AI trade. The majority of analysts maintain a "buy" rating on the stock, with an average target price of around $432.

Lululemon's CEO Succession and Challenges

Lululemon shares rose following its third-quarter results and the announcement of a CEO succession plan. Calvin McDonald will step down as CEO at the end of January. While McDonald has been a successful CEO since 2018, the company has faced tougher years recently, with slowing sales in North America.

Morningstar Senior Equity Analyst David Schwarz noted that while McDonald's tenure saw significant growth, the new CEO will face the challenge of returning the company to its previous growth trajectory. Key qualifications for the next CEO include:

Strong Apparel Industry Background: Essential due to the competitive and difficult nature of the industry.
International Experience: Crucial given Lululemon's aggressive global expansion, particularly in China and Europe.
Sportswear Experience: As the company increasingly focuses on sportswear, men's business, and footwear.

Despite a significant decline in the stock price (down about 50% year-to-date), many investors remain skeptical, believing not all bad news is priced in. The primary concerns have been:

Slowing North American Growth: Competition has intensified in the US market.
Product Misses: Lululemon has released products that have not resonated with consumers, leading them to seek alternatives.
Loss of Lead Designer: The departure of a key designer has been linked to difficulties in product development.

Schwarz believes Lululemon still has significant growth potential outside the US and in new product categories like footwear and women's athleisure. He sees the stock as potentially undervalued, with new products expected in the spring that could be catalysts for future growth.

Upcoming Economic and Earnings Events

Federal Reserve Commentary: Several Fed officials, including Fed Presidents Anna Pollson, Beth Hammock, and Austin Goulby, are scheduled to speak. This follows the Fed's 25 basis point rate cut, and markets will be listening for clues about the future monetary policy path.
Rent the Runway Earnings: The company is expected to report its third-quarter results, with anticipated sales growth driven by a price increase, subscriber additions, and demand for work and going-out attire. This report will offer insights into the health of the consumer.