Market Recap (S&P +0.32%)

By: Kevin Hanson

For the Week of (4/29-5/3), 2024

Same Story Different Month

This week the markets canceled out as the Fed still needs more information to make decisions on rates and earnings reports were both good and bad. However, as we get closer to the summer many investors are still wondering how long prices will stick and if inflation will ever come down in the current rate environment. In a similar fashion to the previous month market volatility followed investors' sentiments surrounding the current state of rate possibilities. As this relatively boring theme continues to persist month over month it should be interesting to see if economic indicators, consumer behavior, and company performance stay neutral going forward and how much longer the Fed can push off their rate decisions.?

Market Activity

Musk’s China Trip & the ongoing EV War?

This week the CEO of the market's biggest scapegoat went against the US’s trade war efforts on a trip to China to rebound business. Tesla has been one of the worst-performing stocks YTD amidst a steep dip in demand in the EV market forcing the company to lower its prices and cut employees. Given this opportunity for market share numerous companies and startups have tried their luck at carving their share into the growing industry. One notable contender has been China’s EV maker BYD who has soared in sales and market share as Tesla has dwindled.

This week Musk landed in China with the agenda to save his weakening business in the US through a strategy I’d like to call if you can't beat them, join them. During this trip Elon Musk visited Beijing to seek approval for Tesla's self-driving technology amidst struggles with flagging demand, Tesla's shares surged 15.3% following the news. On top of this, Tesla formed a navigation tech partnership with EV start-up Baidu. Finally, in response to demand struggles to cut costs, Tesla announced it was laying off 500 employees from its charger team, sparking uncertainty about its Supercharger network expansion, which led to a 6% drop in Tesla's stock price. Overall, gaining a share in the winning Chinese market will boost Tesla's lackluster year.?

Antitrust & Apples Lofty Buyback Plan

Aside from Tesla the runner-up scapegoat part of the mag 7 that has also experienced strong investor pessimism has been Apple. In general, a majority of the sentiment comes from Apple's lack of dominance in its ecosystem, antitrust concerns, and most importantly its slow rollout of AI capabilities. Because of this many were concerned to hear the earning call this week that was luckily able to take the company out of the dirt temporarily. A majority of this boost following the earnings report was a significant move to authorize $110 billion in stock buybacks, which is considered the largest ever in corporate history. Besides this positive future outlook, the report was weak, reporting a decline in quarterly revenue by 4.3%, accompanied by a decrease in profit attributed to challenges such as ailing iPhone sales and weak demand in China. While this is good for the company's stock until its AI capabilities are unveiled I believe that the stock will continue to tank. Aside from the earnings report, news was also announced regarding the strong strategic alliance between Apple and Google which allowed Google to pay Apple to keep it as the default search engine. In response to these unfair practices, the DOJ continues to investigate the legality of this partnership potentially hurting both companies severely in the near future.?

Samsung & Intel’s AI Futures with the Broader Market?

This week the highly competitive AI industries continued to be disrupted by new market dynamics. Firstly, Samsung continued to display strong growth in the AI segments of its revenue reporting that it quadrupled its net profit, driven by a rebound in its chip business fueled by demand for artificial intelligence technologies. On top of this another growing name in the Ai industry, Intel, announced a substantial investment of $28 billion in a new semiconductor "mega fab" in Ohio, which is set to become the world’s largest chip factory. Supported by a $19.5 billion aid package from the Biden administration, this project aims to bolster U.S. semiconductor production capabilities. Aside from these headlines other companies like Google and Amazon also announced the benefits that AI has brought to their businesses finding new ways to integrate it. Despite this actual chip makers drove the markets down for a moment in time because of increasing costs and competition that come with the AI industry.?

McDonalds Consumers are Laking Demand?

As the higher-for-longer story has persisted the effects of shifting consumer behaviors have continued to bleed into new industries. Overall, this could foreshadow a shift in demand from more and more consumers and social classes hurting business across the board. Representing middle to low-income consumers the fast food giant, McDonald's announced consumers across the globe are tightening their spending after reporting lower-than-expected quarterly sales growth. Overall, as inflation continues to push higher eventually consumers will slow their spending, based on this report from McDonald's it looks like we could see this shift sooner than later.?

S&P’s Headliners Gain More Share of the Index

Following the highly anticipated earnings season for the mag 7 companies it was announced this week that the mag 7’s share of the S&P continued to increase. After this week the S&P's 10 largest stocks have grown to become 33.5% of the index. As this number keeps growing the validity of the index continues to dwindle as market dynamics are perceived to be largely impacted by these 10 holdings.

Peloton CEO Steps Down?

As consumer demand continues to swing closer toward necessities other niche industries and companies have continued to lose demand. This week the CEO of Peloton Barry McCarthy announced he was stepping down as the company prepares to cut about 15% of its workforce. Overall, this showcases the pressures that the higher for-long interest rate stories have put on companies in niches that consumers continue to cut back on.?

Is Boeing’s Spot up for Grabs?

For the first time in a month, Boeing has been able to keep its name out of the headlines as quality control and accidents have smeared the company's brand reliability pushing it further from its duopoly position. As this shift continues to hurt the company and Airbus continues to dominate the market acting as the main distributor new competitors have entered the story. This week, a Brazilian plane maker “Embraer” expressed interest in developing a next-generation narrow-body jet. This new aircraft would directly compete with the successors of Boeing’s 737 MAX and Airbus’s A320. Embraer's move signals increasing competition in the aircraft manufacturing sector, potentially shaking up the market dynamics in the coming years.

Airbnb is launching “Icons” series

The growing housing option for trips announced a new diversification to its product offerings through its “Icon” series. This series features a floating house from Pixar's "Up" located in the New Mexico desert, offering guests a unique experience reminiscent of the beloved film. The second property is a replica of Prince's "Purple Rain" Home where guests can immerse themselves in the ambiance of Prince's world and enjoy a one-of-a-kind stay. The final property is inspired by the mansion featured in the popular "X-Men '97" animated series. Fans of the franchise can stay in this themed property and indulge in their love for the superhero universe. Beyond these properties, this series also features other unique exclusives offered aside from property rentals. Overall, this news displays the company's ability to dynamically diversify its portfolio of offerings to customers in unique ways.?

M&A Report

Paramount’s Road to the End of the Tunnel?

Over the last three months, Paramount has continued to struggle to find a merger or a buyout partner failing to go through with numerous opportunities. However, this week the company received yet another chance to complete their goal. This opportunity would be from Sony Pictures and PE? firm Apollo Global Management who have submitted an all-cash $26 billion offer for Paramount Global, the latest twist in one of the messiest deal dramas in recent memory. Overall, this is a good deal for the company based on the headline and would finally take the company off the market after a long period of finding a bidder.?

Economics/Global

Fed Still Needs More While Price & Wage Pressures Rise

This week investors didn’t get what they wanted but they got what they expected as the Federal Reserve held interest rates steady at their highest level in two decades, acknowledging recent inflation setbacks and extending a wait-and-see posture. In their meeting the Fed mentioned a "lack of further progress" in the fight to reduce inflation, alluding to three straight months of consumer-price data coming in hotter than expected. As for wage pressures, worker compensation in the U.S. rose by 1.2% in Q1, up from a 0.9% increase in the previous quarter. This growth in wages and benefits could contribute to higher inflation rates, adding to the Fed's considerations in its policy decisions.

PMI Index & Job Report

Aside from the Fed’s decisions to wait and see, the PMI and job report also gave us more clues as to when decisions could be made. Firstly, the PMI suggested that growth in the US might be slowing. The manufacturing index fell to 49.9 from 51.9, missing expectations of 52. Additionally, the services PMI also missed expectations, coming in at 50.9 with expectations of 52. On top of that, the job report also diverged indicating a slowdown in job growth and a slight increase in the unemployment rate. U.S. employers added a seasonally adjusted 175,000 jobs in April, according to the Labor Department's report. This figure marks a break from a string of data showing surprising strength in the labor market. Additionally, the unemployment rate ticked up to 3.9%, showing a slight increase compared to previous periods. Overall, these indicators could suggest a slowdown in the economy pushing the Fed's chance to cut in the future if the number continues to follow the same theme.?

Middle Classes Diminishing Savings & Joblessness?

Besides literal indicators, the outlook on the economy continues to shift with the recent market dynamics. At the end of the day what is shaping this outlook is consumer behavior and how factors into that behavior can alter the market. In response to hot spending trends, the Fed has continued to hold rates strong hoping for a slowdown in spending which is yet to occur. However, there is a possibility that excess savings are dwindling and the middle class is weakening as income has shown a lack of growth. On top of this, the job report statements indicate future weakness and potential joblessness, implying increased economic insecurity for middle-class individuals who rely on stable employment for financial security. Overall, excess savings and joblessness will continue to hurt middle-class consumers breaking down the foundation set for the other social class potentially leading to a cut in rates.?

Commodity Futures Trading Commission names first chief artificial intelligence office

So far a major theme of the market YTD has been the exploding growth in AI that continues to find its way into new companies. However, while AI has exploded in growth the legislation to control it has been relatively stagnant. This week that theme could change as the Commodity Futures Trading Commission (CFTC) named its first Chief Artificial Intelligence Officer in response to the Biden administration's efforts to govern AI use across the federal government. While this is a slow step in the right direction it should be interesting to see how the legalities of AI continue to open new roles and loopholes in regulation.

Start-ups & IPO’s

AI Startup CoreWeave Triples Valuation to $19B in Five Months

As the AI boom has continued to skyrocket valuations for startups even higher this week the theme stated the same but was supercharged. Adding to the long list of AI startups, CoreWeave saw a significant increase in valuation, nearly tripling to $19 billion in just five months. Some of this increase for the cloud-computing company has been backed by Nvidia who continues to place its hands on anything AI to remain the dominant force in the industry. Overall, I am interested in when the valuation plan will come down and the AI revolution reaches its peak.?

Outlook

Where Will the Summer Swing?

This week despite Powell's continued theme of higher for long going into the summer I still believe there could be a cut this year. Recently I was considering changing this thesis to no cuts on the year until this week's PMI and job report showcasing a slowdown forming in the economy. If this theme holds, consumer spending could slow down and inflation would fall to an attractive number for the Fed to cut. However, the markets have been highly volatile with numerous disruptions to market dynamics on the horizon following summer. Ultimately, if the theme holds and consumers continue to weaken their spending habits the hope of a cut this year is still alive.?

Works Cited

Stock Analysis: Market Bullets Email Newsletter

Wall Street Journal: Various Email Newsletters

Pictures:?

Horwitz, Josh. “Elon Musk Made a Stealth Visit to China This Week.” Quartz, 20 July 2022, qz.com/970062/elon-musk-made-a-stealth-visit-to-china-this-week.

Spangler, Todd. “Variety.” Variety, 30 Apr. 2024, variety.com/2024/biz/news/paramount-stock-falls-ceo-bakish-dismissal-skydance-deal-1235986923.

Horsley, Scott. “Fed Keeps Interest Rates at 23-year High.” NPR, 1 May 2024, www.npr.org/2024/05/01/1248454950/federal-reserve-inflation-interest-rates.

Novet, Jordan. “Nvidia-backed GPU Cloud Provider CoreWeave Surges to $19 Billion Valuation.” CNBC, 1 May 2024, www.cnbc.com/2024/05/01/nvidia-backed-gpu-cloud-provider-coreweave-is-worth-19-billion.html.

Cfa, Colby Davis. “Does the Stock Market Take a Summer Break?” RHS Financial, 27 Apr. 2020, rhsfinancial.com/2016/06/20/does-the-stock-market-take-a-summer-break.