For those of you who would prefer to listen:
Heightened volatility remains within the Market. It’s been that way all April. This week brought upside movement as the S&P put an end to its weekly losing streak. Choppy price action is to be expected. It’s a volatile world in which we live.
There were a number of important developments this week. They were all Market moving. I attempt to make some sense of them in another rapid rundown.
The Economy is slowing. Q1 GDP (Gross Domestic Product) recorded just 1.6% annualized growth in Q1. That was the slowest in 2 years. It was expected to rise 2.5%. It grew 3.4% in Q4 last year. The strong Economy has been a major driver to the Stock Market. America’s Economy has been beyond resilient and surprisingly strong. Consumers keep spending. But businesses are tightening their wallets. Americans keep throwing money aggressively on services and experiences. They’re buying less big stuff, like appliances and cars. It’s having an impact.
The Job Market is still strong. We will find out more next week with the April Job Report. But inflation has been really sticky. Q1 Core PCE (Personal Consumption Expenditures) rose 3.7%. It measures the prices we pay. It was hotter than expected. Core PCE is the Fed’s preferred measure for inflation. So, what we’re facing now is slowing growth and rising prices. It’s not a good combo. Stagflation signs are showing up again. That hit the Market earlier in the week. Yields went up. Stock prices went down.
April brings both Baseball and Earnings. Scoreboards get lit up. Earnings Season is the coveted time when investors can focus on facts rather than emotions. Corporate America reports its quarterly results. So far, so good. Q1 earnings have been tracking above expectations. This week was a biggie. Over 40% of the S&P 500 companies have now reported. This week was the Titans’ turn at the plate for Earnings Season with Microsoft, Alphabet and Meta, the company formerly called Facebook, delivering results. It provided updates around the AI secular growth theme.
The Tech Titans have been under fire in April. These mega cap stocks entered the week weak, falling 6 straight sessions and suffered a 7.5%+ weekly decline. That had not happened since the 2022 lows in November. The Top 7 stocks erased nearly $1 Trillion in value last week. The sell-off burned off much of what seemed like lofty expectations for Q1.
The Tech Titans were expected to grow earnings 40% in Q1. Nvidia is expected to grow earnings 400%. Amazon 170%. Apple is actually expected to see a contraction of 1%. The rest of the 493 S&P companies are estimated to see an earnings shrink of 3%. In addition, the Street is still looking for 10% earnings growth for the whole year in 2024. It’s crystal clear where the growth is coming from.
Meta was first. The company reported a double-beat. But the outlook for the rest of the year was a bit murky. Meta said it plans to keep aggressively investing in Artificial Intelligence (AI), which has made it a leader in the innovative race. But CEO Mark Zuckerberg said what so many have feared: It’s going to take longer to realize the big revenues from these aggressive investments. That triggered worries about the rapid pace of AI spending. Meta’s stock sold off. The rest of Tech followed suit. It felt like the euphoric AI investment theme had more unwinding to do. Then came Google to the rescue.
Alphabet, Google’s parent company, reported a strong double-beat. Revenue increased 15% from a year earlier. That was the fastest rate of growth since early 2022. Much of it fell to the bottom line. Net income jumped a whopping 57%. Google’s core advertising business is reaccelerating after a difficult 2022 and 2023. The growth was widespread. The company has turned a corner after pouring money into the business in order to keep up with Amazon Web Services and Microsoft Azure. Google has been investing heavily in artificial intelligence after getting caught off guard by ChatGPT’s emergence. The company has added generative AI features to search and other services to ensure that consumers stick with Google as the way people seek information evolves. Google proved that it still has no rival for real-time search, for now. It aims to stay that way.
Other highlights for the quarter include a report that YouTube TV now has 8 Million subscribers. It was roughly 5 Million last year. Alphabet also announced its first-ever dividend and a $70 Billion stock buyback plan. That’s a new theme in Silicon Valley. Alphabet’s dividend follows Meta, which announced its first dividend in February. To put that $70 Billion purchase plan in perspective, Alphabet could basically buy the retailer Target with that cash. These are really big numbers from big companies. The Market rejoiced with the Google company’s return to growth. The sell-off reversed and stocks rallied into the weekend.
Microsoft keeps delivering. The company also reported a double-beat amidst some pretty lofty expectations. Strength continues to be found in AI adoption across its cloud services. Azure revenue growth accelerating to 31% compared to last year. It grew 28% in the December Qtr. It was faster than expected. This from CEO Satya Nadella: “Microsoft Copilot and Copilot stack are orchestrating a new era of AI transformation, driving better business outcomes across every role and industry.” The company’s AI-driven spending in the quarter was about $1 Billion more than what the Street expected. That didn’t spook the Market as it appears warranted given the huge customer demand. Nadella said AI is democratizing expertise around the globe and Microsoft is leading the charge.
Both Alphabet and Microsoft said they plan to continue spending an eye-popping amount of money on artificial intelligence. $40 Billion and $50 Billion respectively in investments is cementing their dominance in AI and it seems to be convincing investors that these huge AI bets are generating returns, both today and tomorrow.
On deck next week for earnings is Amazon and Apple. Nvidia reports later in May. What these companies report and what they say will go a long way for the next stage of this Market move. As mentioned earlier, Apple’s growth has stalled. In fact, Q1 iPhone sales in China fell 19%, while Chinese rival Huawei’s phone recorded a 70% gain. China is a major market for the iPhone. Expectations are low. The Market would like to see Apple grow. It’s no longer the largest company in America. That crown was handed to Microsoft last year. But make no mistake, Apple still matters. Next week we’ll learn a lot.
America’s fiercest economic activity continues to be found at hotels, restaurants and the friendly skies. The travel bug bit many, and the impact is still being felt. Daily TSA traffic is consistently higher than last year, and it’s expected to be that way through Summer. A recent survey by Nationwide Insurance showed 91% of respondents have trips planned this year and 40% said they plan to travel more than they did last year. Half of those surveyed are planning to travel overseas. Cruises are amongst the most popular trips on the calendar. Both American Airlines and Southwest are experiencing strong demand for their flights. Delta Airlines is seeing record traffic this Spring. Travel and experiences are what people want.
Visa is a good barometer for the American Consumer. The company processes a lot of what people pay. Management said they don’t see much change in spending behavior yet. They called it stable. Revenues were up 10% in the quarter compared to last year. Payment volumes were up 8%. International payment volume was up 11%. Cross-border transactions were up 16%. That measures transactions between merchants and customers based in different countries. Travel overseas has certainly been a big theme since Covid. Visa’s results come after American Express delivered upbeat earnings last week showing healthy spending growth. Americans are still out and about and spending. This bodes well for a busy Summer ahead.
The Pepsi company reported a double-beat of its own, clearing expectations for both revenues and profits. People have maintained their hunger and thirst for sweet beverages and salty snacks. In fact, demand was stronger overseas than at home for Pepsi products. 40% of company revenue comes from overseas. The company identified inflation as a key factor in customer spending. A recall at a Quaker cereal plant hurt too. Overall product prices were up 5% in the quarter, while volume was down 2%. The Coca-Cola Company reports earnings next week which is always an important indicator of consumer health. The majority of its sales come from outside the home, so activity at restaurants, concerts, and ballparks tends to bring a Coke and a smile.
This week’s sticky inflationary data continues with the FED on hold which has put pressure on yields and interest rates. They’re both near the highs of the year. These higher yields have also strengthened the US Dollar against most major currencies. In fact the Japanese Yen, has weakened at a ferocious pace down to levels not seen 3 decades. An intervention by the Bank of Japan is increasingly expected. They continue to hold a very accommodative monetary policy despite this inflationary environment.
Lots of things going on. There’s clearly other issues too, like foreign wars, a number of court cases and multiple college campus protests. The Market isn’t ignoring them. They’re just not the primary drivers. Earnings and economic activity are the ones behind the wheel. They’ve both been volatile. But they’re both still growing. The Market certainly likes that.
Things got pretty oversold, and fast. April has definitely been a grind. But the Stock Market remains in an uptrend. Tests are expected. In fact, they’re necessary. They’re just not much fun. Expect more to come.
That’s my rapid rundown for this last full week in April, 2024. I hope you found it informative and valuable.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
