Wall Street Breakfast
Inflation data and NIke earnings on the way
A cool core PCE would put the Fed on the spot to cut in September. (0:18) The Mag 7, the Terrible 3 and the Magnificent 1. (2:14) Nike guidance in focus with Adidas snapping at its heels. (3:58)
Show Notes
Stocks with the highest ROIC but not the highest valuation
Apple and Meta have held talks about AI partnership
GLP-1 drugs linked to reduced dementia risk: study
Earnings Calendar
Episode transcripts seekingalpha.com/wsb
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- Duration:
- 8m
- Broadcast on:
- 23 Jun 2024
- Audio Format:
- mp3
[music] Welcome to Seeking Alpha's Wall Street brunch, our Sunday look-ahead to this week's market moving events, along with the weekends, top news and analysis. Hello, today is Sunday June 23rd and I'm your host, Kim Kong. The Fed's favorite inflation gauge headlines this week, just as traders are warming up to the idea that slower growth will allow the FOMC to cut rates in September. A cool number on the May core PCE could boost odds of a quarter-point cut then. They now stand just above 60%, and that's up from just below 50% in the end of May. The two-year treasury yield, most closely tied to the Fed funds rate, is around two month lows. The core PCE price index hits Friday, along with the income and spending data as usual. The forecast is for a 0.2% rise for the month, with an annual rate easing to 2.6% from 2.8%. That's as low as it will get this year, according to the latest report from UBS's economics team. But they see 2.1% just above the Fed target by the end of 2025. Economist Jonathan Pingel says, "The majority of what is stall and what is keeping inflation from 2% is rents. Measures of inflation expectations remain well anchored, supply chains have been slackening, and apartment rent growth has slowed substantially, despite rising costs of owner-occupied housing." Between 1995 and mid-2008, core PCE inflation averaged 1.9%. Core services inflation around 3% was needed to offset falling goods prices. Not all buckets of the inflation basket should be at 2%, just total, he added. On the growth side, Goldman chief economist Jan Hotzius says GDP has slowed meaningfully from 4.1% in the second half of 2023 to an estimated 1.7% in the second half of 2024. His baseline is for a moderate pickup in the second half, as the impulse from financial conditions is turning more positive at a time when we expect the drag from inventories and net trade to end. But most of the slowdown is probably here to stay. As real income growth has softened, consumer sentiment has fallen anew, and there are early signs of an increase in election-related uncertainty that could weigh on business investment in the coming months. On the equities front, bulls will be aiming for another winning week in June, the S&P eked out a third straight weekly gained last week and did so without the help of NVIDIA, which fell 3%. Overall, chips were down more than 1%. At last week, seeking off the investing summit, our arena Sherbol discussed NVIDIA with Michael Kramer, an essay analyst and founder of Mott Capital Management. It comes down to what will NVIDIA do? If analysts' numbers are right and NVIDIA's growth rate has peaked in terms of revenue growth, typically what you see is the price the sales multiple begin to contract once revenue growth peaks. And if revenue growth rates have peaked and they have started to come down, then that multiple will start to contract. And that could weigh on the stock going forward, even if revenue continues to grow. Do you think that that is a bit priced in with investors at this point? No, I don't think it's priced in because you hear a lot of people talking about breath broadening out. And the reason why breath hasn't broadened out more is because there's such a concentration in the MAG7, the Terrible 3, or the Magnificent 1, right? And I think the market has given people this false sense of security because they see it's up, but if you're not really paying attention to what's happening with the rotation beneath the surface, you're not really capturing the struggles that are really happening beneath. And if we do actually start to see breath broadening out, where is that money going to come from? It's probably going to come from the ones that led the market higher, which means you could actually see breath broadening out and the equity market go down. You can catch the full interview this week on the investing experts podcast. Moving to earnings, while the calendar is still light, there are some important names set to report. The most notable is Nike on Thursday. Analysts think the 2025 guidance issue will be more of a focus than the actual earnings numbers, especially if they're a hints of margin improvement and benefits from the recent innovation investments. Investors are also prepared for some near-term headwinds, which opens up the possibility that Nike could rally if it avoids a worst-case update. UBS said the big event question is if the report will signal to the market that a Nike sales growth rate is bottom and is about to inflect. SA analyst Kenra Investors says the report should present a compelling entry point. Adding the secret to borrowing a blue chip like Nike was always taking advantage of negative sentiment during periods of under performance and letting the compounding power of the business and the cost of the market. With margins recovering, inventory issues under control, and a PE ratio near historical buy zones, Nike appears poised for a rebound. A survey conducted by Citigroup shows Nike remains a global leader in athletic gear among North American and European consumers. In China, however, Adidas was the brand response that most likely purchased next. In other earnings reports, Beyond Air weighs in on Monday. Tuesday sees results from Baker to use, Carnival, and FedEx. On Wednesday, General Mills, Patreks, Levi Strauss, Micron, and Aeroviroment are up. Joining Nike on Thursday, Slade are McCormick, Walgreens, Boots Alliance, and Acuity Brands. In the news this weekend, Apple and meta-platforms have held discussions about an anti-partnership according to the Wall Street Journal. In an effort to catch up to companies like Microsoft that have stolen a march to the AI race, the companies have talked about integrating that is generated of AI model into Apple intelligence. AI startups Anthropik and Perplexity have also held talks with Apple about their Gen AI offerings. The Journal said discussions with all companies could still fall through. Meanwhile, confidential discussions are underway between AMC Entertainment and some of its lenders to reduce the company's debt load and extend near-termaturities. That's according to Bloomberg. The discussions come at a time when the world's largest movie theater chain is grappling with billions of dollars of debt. Its long-term borrowing stand at roughly 4.5 billion, and as of March 31st, the company had more than 2.8 billion in maturities due in 2026. That includes $1.9 billion in a term loan and about a billion dollars in second-line notes. And a new peer-reviewed study suggests that GLP-1 drugs, popularly used for weight loss, are associated with a lower risk of dementia in older people with diabetes. The trial considered real-world data from Sweden using more than 88,000 patients aged 65 or older with type 2 diabetes malitis. Researchers at the Swedish University Karolinska Institute led the study. For income investors, FedEx goes ex-dividend on Monday with a payout date of July 9th, Geddy goes ex-dividend on Thursday, and Humana and Mondalees go ex-dividend on Friday. And in the Wall Street research corner, Bernstein Society General's screen for stocks that have the highest return on invested capital, but not high valuations based on forward price to earnings. Over the last 45 years, high ROIC companies have outperformed low ROIC companies by 2.3% a year, and outperformed in risk-off or risk-averse regimes by 3.7% annually on average since 1978. Top decile companies by growth in ROIC outperformed by 5.2% annually on average over the same time period. Analyst Ann Larson says, "These stocks also shine brightest during the slowdown and contraction phases of the economic cycle." Among the stocks are Alphabet with ROIC at 26% and Ford PE of 23.2 times, Meta with ROIC of 26.8% and Ford PE of 24.6, Home Depot, which has an ROIC of 31% and a Ford PE of 23, and Caterpillar with ROIC of 22.9% and a Ford PE of 15.3. Check out the full list of names in our story, we'll look for that link in show notes. That's all for today's Wall Street brunch. Look for links to stories in the show notes section. Don't forget, these episodes will be up with transcriptions at SeekingAlpha.com/WSB and join the elite community of real investors to an Earth-great investing ideas. Just head to SeekingAlpha.com/subscriptions. (upbeat music) [BLANK_AUDIO]