Bogleheads

By?Matthew Gutierrez,?Shawn O'Malley , and?Weronika Pycek ?· July 17, 2023

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???Earning season is fully underway: 30 companies, capturing about 11% of the S&P 500's earnings, have already reported??

There’s reason for cautious optimism — about half have beaten Wall Street expectations for both revenue and earnings. Still, the trend in earnings over the last year is troubling (see Chart of the Day.)

?Earnings calls are a great opportunity to hear firsthand what companies think about the economy. Tomorrow, we’ll get reports from Bank of America and Morgan Stanley, with Tesla, Netflix, and IBM on Wednesday, American Airlines on Thursday, and American Express on Friday.

—?Shawn

Here’s the rundown:

Today, we'll discuss the?three biggest stories in markets:

• What to watch as earnings season begins in earnest
• The vast demographic shifts that will reshape our world
• Why Vanguard has struggled to win over the world

All this, and more, in just?5 minutes to read.

POP QUIZ

What are the world’s happiest countries for 2023? (Scroll below to see the answer!)?

CHART OF THE DAY

IN THE NEWS

????A $10 Trillion Stock Market Rally Faces Earnings Test (Bloomberg )

The momentum of second-quarter earnings is picking up, putting global stocks’?$10 trillion?rally this year on the line.

• S&P 500 firms are expected to report a?9%?decline?in profits for the second quarter, making it the?weakest season?since 2020. In Europe, the slump is projected to be even steeper at?12%.
• “I’m skeptical companies will be able to demonstrate the same degree of?earnings resilience?this quarter,” one analyst said.

This time around, investors are keeping a close watch on several trending areas — here’s an?Earnings season?key:

Artificial intelligence (AI) buzz

The?Nasdaq 100, driven by excitement about AI, achieved its best-ever first-half performance. Investors will search for indications of how this emerging technology impacts earnings.

• Projections indicate that the largest?technology giants, including Apple, Microsoft, Amazon, Nvidia, and Google’s parent company, Alphabet, will demonstrate the most substantial earnings growth this quarter.
• If AI enthusiasm fails to “adequately materialize” in better-than-projected earnings for tech companies, these firms will likely see at least a “temporary correction” (pullback), says WisdomTree’s director of macroeconomic research.

Consumer Squeeze

Many investors are focused on the sentiment surrounding?consumer demand?and?spending, closely monitoring indicators that can assess the health of Corporate America and the spending that powers it.

• Said one investment analyst, “Consumers have propped up the U.S. economy for months…so any evidence of belt-tightening, trading down, or fading spend(ing) on services will be key.”

U.S. consumer spending has experienced a?slowdown ?following a surge at the beginning of the year, with borrowing for things like vehicle purchases hitting a two-year low.

• And revolving credit balances, including credit cards, rose recently but at a slower pace than in prior months.

Inflation Effect

The prospect of?easing inflation ?has sparked optimism that the Federal Reserve might soon?halt its rate hikes. However, the situation isn't as favorable as you might think for companies since they continue to face labor shortages empowering workers to demand higher wages.

• Inflation has slowed faster than wages, meaning real (inflation-adjusted) incomes for many folks have actually increased in the past year.

Investors will want to see which effect comes through stronger: Greater consumer spending thanks to higher real incomes (good for business profits) or greater labor costs to pay workers those higher incomes (bad for business profits.)

Weak Rebound of China

As the world’s second-largest economy, upturns and downturns in China ripple globally, especially for companies like Nike and Starbucks that rely heavily on Chinese sales. Recent?economic data ?out of the country, though, signal a slowdown magnified by geopolitical challenges.

But that may not be as bad as it sounds for American companies in aggregate.

• Exports to China are only?six-tenths of the U.S. economy, reports?Axios .
• And an economic slowdown in China may contribute to lower oil and materials prices, which could benefit many American corporations, particularly ones with less business in China.

Investors will want to see how much a slowdown in China hurts or benefits American companies.

??

MEET THE TEAM

The writers behind this newsletter will be in New York City the weekend of Oct. 7-8, and we’d be thrilled to meet you.

Want to talk markets, careers, investing, and more with us over drinks in the Big Apple? Let us know by filling out?this form .?Details to come.

This should be an excellent opportunity to network and meet other like-minded individuals. We hope you’ll join us.

??? ?? ??? The Demographic Shape Reshaping the World?(NYT )

The world’s demographics are changing pretty drastically. We can almost hear David Bowie in the background: “Ch-ch-ch-ch-changes…”

Getting older:?For years, large working-age populations have driven economic growth.?Japan?marked a major shift in 2013, when a quarter of the population was 65 or older, making it the?oldest country?ever.

• And soon, much of Western Europe will follow, with record old-age populations. Then comes South Korea, Britain, Eastern Europe, and China.
• While the traditional, bigger powers grow older, many lower-income countries today will have larger prime-age labor forces for the first time.

That’s just the beginning.

By?2050, people 65 and older will make up nearly?40%?of the population in parts of East Asia and Europe, almost twice the share of older adults in Florida, America’s retirement capital. Many retirees will depend on fewer working-age people in those countries.

• Economists believe today’s wealthier countries will inevitably make up a smaller share of?global GDP. It’s a “sea change” for Europe, the U.S., China, and other top economies, which have benefited from having some of the most working-age people in the world adjusted for their populations.

Soon, well-balanced workforces might come in Southeast Asia, Africa, and the Middle East, according to?United Nations?projections. That shift could reshape economic growth, markets, and geopolitical power balances.

Why it matters:

With people living longer and (generally) having fewer children, countries reap a so-called “demographic dividend” when a growing share of workers with few dependents fuels economic growth. Adults with smaller families usually have more free time for education and work. More women tend to enter the workforce, too.

Longevity:?While longer lifespans present their challenges, many doctors and economists see it as an achievement and an opportunity for greater economic growth.

• “We’ve managed to?increase the length of life,” one doctor noted. “We have reduced premature mortality. We have reached a state in which having children is a choice that people make instead of somehow being coerced, forced by societal structures into having whatever number of children.”

MORE HEADLINES

???Weak China GDP?data ?weighs on global markets.

???U.S. lawmakers?extend ?social media investigation to Meta’s threads.

?? Some colleges now?cost ?nearly $100,000 per year.

?? Elon Musk?says ?Twitter’s ad revenue is down 50%, and cash flow is negative.

???Bogleheads Struggle to Win Over the World?(Bloomberg )

Bogleheads?— if you’re not familiar with them, one might compare them to the diehard “Swifties” (Taylor Swift fans) of the financial world. They’re passionate, loyal and have been increasingly vindicated over the past few decades by the merits of low-cost, passive investing.

• Their icon,?John Bogle, set out in 1975 to challenge the status quo on Wall Street, suggesting that society needed fewer stock-pickers and more cheap, accessible and broadly diversified “index” funds.
• His vision flipped the investment world upside down as his firm, Vanguard, eventually became one of the world’s largest, with?$7.7?trillion?in assets, forcing others to adopt its approach.

The business model is simple: Offer investment products, like S&P 500 mutual funds for 401Ks, and collect small fees based on client portfolios’ value. Vanguard itself doesn’t have $7.7 trillion in assets per se, but it manages funds on clients’ behalf and gets paid for doing so.

With?30 million customers, your retirement investment funds likely have at least one Vanguard fund in them or have taken inspiration from Vanguard, offering access to thousands of stocks for a few hundredths of a percentage point in fees — something unimaginable just two to three decades ago.

• Given Bogle’s pioneering success, Vanguard is a true ‘American story,’ but in a more literal way. The firm’s breakthrough popularity is largely confined to the U.S., lacking the same adoption with investors worldwide.

What gives??As Bloomberg reports, Vanguard has already?retreated from Asia, closing offices in Tokyo, Hong Kong, and Singapore. And its European offices face a similar prospect.

• Former employees blame the company’s efforts to?impose a U.S. business model internationally, failing to adjust to different regulations, business practices, and cultures.

After launching in the UK in 2009 and expanding to Berlin, Frankfurt, Milan, and Zurich, Vanguard has accumulated?$300 billion worth of assets?from Europe — just?3.9%?of its $7.7 trillion pie.

Why it matters

Despite its cult following in the U.S., a survey in 2019 revealed that most people in Europe were completely unfamiliar with Vanguard. For marketing, the firm relies on?word of mouth, which has worked great at home but not so well abroad.

While the U.S. financial system has begrudgingly embraced Bogle’s vision over several decades for index funds with?paper-thin fees that only profit at a huge scale, other countries continue to resist that vision.

• In Germany, for example, financial advisors aren’t keen to abandon working on commissions in favor of a U.S.-style fee model.

For Hagerty, a 20-year Vanguard veteran based in the U.K., and many others, growing Vanguard worldwide isn’t just business. It’s personal.

• “The mission runs deep,” he says, and with $300 billion in European assets under management, that should be enough for Vanguard to justify continued efforts to scale in the region.

TRIVIA ANSWER

The happiest countries in 2023: Finland, Denmark, Switzerland, Iceland, and the Netherlands. The U.S. is?19th .

SEE YOU NEXT TIME!

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