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Stock indexes continue to lose ground with the S&P 500 chalking up its fourth straight losing session in a row yesterday.
Indexes are still in positive territory for the year, although the Dow is just barely hanging in there with a gain of less than +1% now. Meanwhile the S&P 500 is up +5.3% and the Nasdaq is up +4.5% on the year. Most Wall Street insiders believe that a break was in order after the unrelenting rally that’s lasted since October 2023 and seeing some consolidation is probably overdue.
Most also think it may be tough for bulls to regain their footing with the possibility of a direct conflict between Israel and Iran still on the table. Israeli officials continue to talk retaliation and Iran is reportedly readying its air force and navy for counter strikes, so the situation seems far from settled. The more distance we get from Iran’s strike against Israel last weekend without any retaliation, the more concerns will likely fade but it’s impossible to predict if cooler heads will prevail. It’s also extremely hard to predict how a direct military conflict between the two might play out.
Does it grow into a wider regional conflict that includes other Middle Eastern oil majors as well as Western powers? Or will the two sides keep it contained to a couple of strikes against minor targets? The impact to markets from those two scenarios would be dramatically different.
Stocks are also being weighed down by concerns that Federal Reserve interest rate cuts may not arrive this year as geopolitical tensions drive up energy prices and US economic data continues to come in hotter than expected. Bulls would obviously like to get this black “war” clouds off their shoulders heading into what’s expected to be impressive big tech earnings next week. Wall Street is very keen to learn if big tech profits can justify the steep gain in valuations.
AI business will be a huge focus as companies continue to direct huge amounts of investment into the technology. Many companies so far have been stingy about breaking out AI details but investors are starting to lose patience with the tactic due to concerns that profit potentials have been overhyped. Amazon, for instance, only said that AI-related revenue was "accelerating rapidly" in its Q4 2023 earnings release. A sharp sales decline reported by ASML yesterday has raised worries that companies may be pausing or pulling back their AI ambitions for now.
Today, Netflix and Taiwan Semiconductor may provide somewhat of a preview for what to expect from big tech next week. Both companies release results after markets close. Other earnings of note today include Blackstone, Infosys, Intuitive Surgical, Marsh & McLennan, Nokia, PPG Industries, and SnapOn.
Economic data today includes Existing Home Sales and the Philadelphia Fed Manufacturing Index. Bottom line, the fireworks in the Middle East and more talk that the Fed might not cut rates in 2024 if enough for the bulls to pause and look around for a moment...
U.S. Economy On a Hot Streak Like It Hasn’t Seen in 20 Years: After another burst of growth in early 2024, the economy is on track to expand by at least +2% for the seventh quarter in a row. Just how strong is that? The last time the U.S. pulled off such a feat was in 2003-04. What’s remarkable about the current expansion is that it’s happening after the Federal Reserve rapidly raised interest rates to their highest level in more than two decades. High borrowing costs usually slam the brakes on the economy. Not this time. If anything, the economy has actually grown faster since last summer, when the Fed ended a series of hikes that brought its benchmark short-term interest rate to a 23-year peak of +5.5%. Gross domestic product, the official scorecard of the economy, ramped up to +4.9% in the third quarter of 2023. That marked the fastest increase since 2014, setting aside the stimulus-fueled recovery from the pandemic. One of the two biggest determinants of economic growth in the long run is a rising population. A bigger population means more people working, spending and consuming. A nonpartisan congressional research agency estimates that net immigration to the U.S., much of it illegal, rose by +2.6 million in 2022 and +3.3 million in 2023. By contrast, net immigration rose an average of +900,000 a year from 2010 to 2019. A recent spike in productivity is another possible, though more controversial, reason. Source Marketwatch
Red Lobster Talking Bankruptcy on Higher Wages and Rents: Red Lobster is reportedly weighing a possible Chapter 11 bankruptcy filing in order to restructure its mounting debt. The giant seafood restaurant chain — which has 649 locations nationwide — has sought advice from law firm King & Spalding on how to shed some long-term contracts and renegotiate a chunk of its leases, people with knowledge of the matter told Bloomberg. Red Lobster’s funds have taken a hit in recent months by strenuous leases and rising labor costs, among other issues. Red Lobster is not the only chain that’s been struggling with surging labor costs. California franchisee owners have been especially squeezed since April 1, when a new wage law took effect for fast-food chains — or eateries with at least 60 outposts nationwide where diners pay before eating and there is either no or limited table service. Franchise owners in The Golden State must now pay their workers at least $20 per hour, which is 25% above the state’s general minimum pay. The wage hike has restaurant owners lifting menu prices, delaying renovations and reconsidering operating hours as a means to offset increased labor costs. Source Bloomberg
NEW "Atlas Robot" Unveiled by Boston Dynamics: The robotics company is ushering in a new era with its fully electric humanoid robot "designed for real-world" applications. The company is moving full steam ahead with its new fully electric iteration of Atlas, and retiring its previously hydraulic-powered model. At the core of the transition is Boston Dynamics' partnership with Hyundai, which the company credits for aiding in building the next generation of automotive manufacturing capabilities, according to Boston Dynamics's blog post. The company said that its new electric model breaks new ground as the electric version of Atlas will be stronger, with a broader range of motion than any previous generations. Like many of its previous announcements, the company released a video of its robot in action, which you can watch the short video
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Airlines Preparing for Record Summer Travel: While the aviation industry has been in the spotlight lately for a host of safety issues, airline executives say there is no sign of slowing demand for flights. United Airlines “as an airline and as an industry” will carry record numbers of travelers this summer, the carrier’s Chief Commercial Officer Andrew Nocella said on an earnings call Wednesday. “Demand continues to be strong, and we see a record spring and summer travel season with our 11 highest sales days in our history all occurring this calendar year,” Delta Air Lines CEO Ed Bastian said on his company’s call a week earlier. Demand for international trips and rebounding corporate travel have helped boost global carriers. Both Delta and United’s second-quarter forecasts outpaced Wall Street estimates. Customers appear willing to pay up for first class and other cabins above standard coach, executives said. Delta, United and American have announced upgraded first- and business-class cabins as well as more and larger lounges to accommodate swelling numbers of travelers willing to pay up for higher-priced tickets or elite status or high-fee rewards credit cards. Source CNBC
What Does ASML’s Sales Plunge Reveal About AI Plans? ASML Holding NV posted orders that fell short of analysts’ expectations, as Taiwanese and South Korean chipmakers held off buying the Dutch firm’s most advanced machines. Bookings at Europe’s most valuable technology firm fell 61% in the first quarter from the previous three months to €3.6 billion ($3.8 billion), missing estimates of €4.63 billion. Top chipmakers like Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. are holding off new orders as manufacturer clients work through stockpiles of hardware used in smartphones, computers and cars. That’s hurting ASML, which also forecast sales this quarter below analyst expectations. ASML, the world’s sole producer of equipment needed to make the most advanced chips, saw the biggest slump in demand for its top-end extreme ultraviolet (EUV) machines. The level of EUV orders is “extremely low,” indicating major ASML clients like TSMC, Samsung and Intel Corp. didn’t increase investments in the high-end equipment. Investors had expected TSMC to book significant EUV tools in the first quarter. While the company was hit by weakness in Taiwan, South Korea, and the US, its China business remained relatively resilient. Chipmakers there are still buying less sophisticated machines in a bid to take over the market for mature chips. Source Bloomberg
Did “Cloud Seeding” Cause Dubai’s Record Floods? As the United Arab Emirates grapples with historic floods that have overtaken roads and highways, disrupted flights at Dubai International Airport and killed nearly 20 in neighboring Oman, theories arose as to whether the UAE’s practice of “cloud seeding” may have contributed to the historic rainfall—a theory that has drawn skepticism from many experts. Conflicting reports emerged Wednesday over whether cloud seeding occurred prior to Tuesday’s flooding: Meteorologist Ahmed Habib told Bloomberg cloud seeding planes were out flying on Monday and Tuesday, but the country’s National Center of Meteorology told the outlet seeding occurred Sunday and Monday, and then told CNBC no seeding occurred prior to the flooding at all. Some experts have doubted that cloud seeding could have contributed to the rainfall in any significant way, and have instead blamed climate change, with estimates claiming cloud seeding is only capable of increasing seasonal precipitation by around 10% or 20%, with UAE officials estimating their own program only increases rainfall by around 10-30% per year Source Forbes
Biden Calls for Tripling Tariffs on Chinese Steel, Aluminum Imports: President Joe Biden on Wednesday called for sharply higher U.S. tariffs on Chinese metal products as part of a package of policies aimed at pleasing steelworkers in the swing state of Pennsylvania, at the risk of angering Beijing. As he campaigned for reelection in the "Steel City" of Pittsburgh, Biden aides said the U.S. president was proposing raising to 25% the tariffs imposed by his predecessor Donald Trump on certain Chinese steel and aluminum products. The products now being targeted currently face up to a 7.5% levy under a Trump-era policy under Section 301 of the U.S. trade law, which Biden launched a review of in 2022. The proposed higher tariff rate would apply to more than $1 billion worth of steel and aluminum products, a U.S. official said. The Biden administration is also pressuring neighboring Mexico to prohibit China from selling its metal products to the United States indirectly from there. At the same time, it is launching an investigation into Chinese trade practices across the shipbuilding, maritime and logistics sectors, which could lead to more tariffs. Source Reuters
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