Stock bulls are feeling nervous after Microsoft delivered disappointing earnings results, raising concerns on Wall Street about upcoming results from other big tech giants. Microsoft's AI-powered cloud business, Azure, grew +29%, a slowdown from +31% last quarter and below Wall Street’s estimates. Microsoft did beat Wall Street’s overall estimates for profit and revenue growth but only by small margins.
At the same time, the company’s capital expenditures ballooned nearly +80% from a year ago. Remember, Google-parent Alphabet last week delivered results that moderately topped expectations and which also failed to impress investors. It’s worth noting that semiconductor maker Advanced Micro Devices reported better than expected results that it credited to a shift into new artificial intelligence processors. AMD’s data center revenue more than doubled during the quarter as companies continue the race to adopt generative AI technology. Many AI skeptics point out that while profits continue to grow for chipmakers and other key hardware makers, the companies spending hundreds of billions of dollars to buy up that hardware are still struggling to figure out how to make money with the technology.
Tech bulls argue that companies are in the build-out phase, which tends to be the most expensive part of new technology adoption, and that profits may take longer to play out than anticipated. Bears continue to warn that AI’s impacts may be less direct - and less profitable - than the initial hype and that companies are massively over-investing.
Wall Street insiders are concerned that without some truly dazzling Q2 earnings results, the upside for big tech stocks may be limited from here, especially considering the double-digit and even triple-digit gains most have already made.
Facebook-parent Meta reports after the market close today, followed by Amazon and Apple tomorrow (Thursday).
Other earnings of note today include ADP, Aflac, Allstate, Boeing, Ingersoll Rand, Johnson Controls, Marriott, Mastercard, TMobile, and Trane. Today also brings the latest policy decision from the Federal Reserve. While the central bank is expected to leave interest rates on hold, investors hope that Fed Chair Jerome Powell will indicate when rate cuts will begin.
Wall Street overwhelmingly thinks September is the likely start date. On the data front, investors are anxious to see ADP’s private payroll report as they try to gauge what the official July jobs report will deliver on Friday. ADP is expected to report private payroll growth of +154,000, up slightly from last month and versus an official gain of +180,000 for Friday’s report. Pending Home Sales is also out today.
The Big Hiring Pullback: The U.S. job market looks to have frozen up. Companies aren't doing large-scale layoffs, but they have slowed down hiring, and fewer workers are quitting their jobs voluntarily. Employers are showing the least appetite for bringing on new workers in years. That's a byproduct of the economy cooling, though not so much that employers feel they need to let go of the staff they have. There were 5.3 million hires in June, 314,000 fewer than in May, according to the latest Job Openings and Labor Turnover survey released Tuesday morning. The rate of hiring, at 3.4% of total employment, is the lowest since March 2020 and a half-point below its levels before the pandemic. On the other side of things, the freeze-up on the part of employers is benefiting workers who are already employed. The layoff and discharge rate was 0.9%, the lowest level on records that date back to 2000. The Fed began a two-day meeting Tuesday morning at which its leaders will debate whether the labor market is deteriorating in ways that add urgency to interest rate cuts. The hiring numbers add to that evidence. Source Axios
Intel to Cut Thousands of Jobs: Intel Corp. plans to eliminate thousands of jobs to reduce costs and fund an ambitious effort to rebound from an earnings slump and market share losses. The workforce reduction may be announced as early as this week, according to people familiar with the company’s plans, who asked not to be identified because the information isn’t public. Intel, which is scheduled to report second-quarter earnings Thursday, has about 110,000 employees, excluding workers at units that are being spun out. Intel reduced its workforce about 5% in 2023 to 124,800 by year’s end after announcing job cuts beginning in October 2022. It also has slowed spending in other areas. The company expected those cost reductions would save as much as $10 billion by 2025. Source Bloomberg
Popularity of Smaller, aka Cheaper, Cars is Soaring: Americans have had a long love affair with big cars and the fantasy of hulking pickup trucks on wide open roads, but now many are finding new flings with smaller cars simply because they’re cheaper. Sales of sub-size SUVs in the U.S. shot up +20% in the first half of this year, far outpacing overall vehicle sales growth of +2%, according to data from Cox Automotive. Moreover, compact car sales increased +18%, and compact SUV sales rose +12%, while full-size pickup truck sales slumped -4% in the same time period. Amid a +19.6% price increase of automobiles from January 2021 to 2024, most of these compact SUVs are under $30,000, with many under $25,000—versus the $60,000 price tag of a pickup truck Often with lower interest rates than even gently used cars and similar features to their larger counterparts, smaller vehicles have become a formidable alternative. However, the uptick in small car sales “doesn’t mean that many people aren’t still buying large pickups,” Brian Moody, executive editor of Kelley Blue Book, told Fortune. The top-three best-selling cars in the U.S. last year—the Ford F-Series, the Chevy Silverado, and the Ram Pickup—were all large flat-bed pickups. Source Fortune
The Biggest Threats to the $1 Trillion AI Boom: The risk of under-investing is dramatically greater than the risk of over-investing,” said Sundar Pichai, the boss of Alphabet, on an earnings call last week. He, like lots of executives nowadays, was talking about artificial intelligence (AI). More specifically, he was talking about building more AI data centers to serve the customers of the tech giant’s cloud-computing arm. The sums involved are eye-popping. Alphabet’s capital spending is expected to grow by about half this year, to $48 billion. Much of that will be spent on ai-related gear.Pichai is not alone. New Street Research, a firm of analysts, estimates that Alphabet, Amazon, Meta, and Microsoft will together splurge $104 billion on building AI data centers this year. Add in spending by smaller tech firms and other industries and the total AI data-center binge between 2024 and 2027 could reach $1.4 trillion. For now, the tech giants show little inclination to pare back their investments, as Pichai’s remarks show. That is good news for the myriad suppliers that are benefiting from the boom. Just as the spending ramps up, though, the threats to the AI supply chain are building. One problem is its heavy reliance on Nvidia. Another threat stems from supply bottlenecks, most notably in the availability of power. However, the biggest threat to the AI supply chain would come from waning demand. If AI profits remain elusive, the tech giants could cut capital spending, leaving the supply chain exposed. Source The Economist
Sellers are Losing Their Grip on the Housing Market: Sellers are losing their advantage in the US housing market. That's because higher levels of inventory are starting to weigh on home prices, the research firm Capital Economics said. It's starting to reverse a trend that's persisted for the past few years, with tight inventory pushing home prices to record highs. US home prices notched another record in May, but the pace of growth cooled. Prices were up 5.9% on a yearly basis, down from the 6.4% recorded the prior month, according to the S&P CoreLogic Case-Shiller price index. This is happening as housing inventory rises. Active house listings rose past 800,000 in the US in June, Realtor.com data shows. Meanwhile, nearly 65% of homes on the market are going at least 30 days without being contracted, a Redfin analysis found. But Capital Economics predicted home prices would continue climbing, forecasting a further +5% increase through year-end as a decline in mortgage rates boosts demand. Source Business Insider
OpenAI Releases ChatGPT’s Hyper-Realistic Voice: OpenAI began rolling out ChatGPT’s Advanced Voice Mode on Tuesday, giving users their first access to GPT-4o’s hyper-realistic audio responses. The alpha version will be available to a small group of ChatGPT Plus users to begin with, and OpenAI says the feature will gradually roll out to all Plus users in the fall of 2024. You may have already tried out the Voice Mode currently available in ChatGPT, but OpenAI says Advanced Voice Mode is different. The company says Advanced Voice Mode will be limited to ChatGPT’s four preset voices – Juniper, Breeze, Cove and Ember – made in collaboration with paid voice actors as the company seeks to avoid deepfake controversies. OpenAI also says it introduced new filters to block certain requests to generate music or other copyrighted audio. Source TechCrunch
Most US Households Can Cover $400 Shock Expense: Cash may be king but it isn’t the only indicator of financial resilience, according to research drawing on the bank records from 5.9 million American households. Expanded access to short-term credit may provide low-income households with a crucial lifeline when faced with unexpected expenses, according to a report by JPMorganChase Institute released Tuesday. The research looked at households’ cash balances, income, spending, and credit access in December 2023. It showed 92% were able to cover a $400 surprise bill with some combination of cash on hand, disposable income, and short-term credit. Among low-income families, more than three quarters could cover the unexpected expense, but many had to cover it with disposable income or with credit, the study found. The report cautioned that focusing on cash as the main measure of a household’s ability to manage a surprise expense can lead to an overly pessimistic view of Americans’ financial resilience. Source Bloomberg
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