Wall Street Brunch: Did Inflation Bottom For The Year In May?
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Summary:
- Core PCE price index forecasted to rise 0.2% monthly, easing to 2.6% annually, with inflation mainly impacted by rents.
- Nike earnings report to focus on margin improvement and innovation investments, potential for stock rally if worst-case scenario avoided.
- Apple and Meta reportedly held talks about an AI partnership.
JLGutierrez
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The following is an abridged transcript:
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%. That’s up from just below 50% at the end of May. The 2-year Treasury yield (US2Y), 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. The forecast is for a 0.2% rise for the month, with the 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 the UBS economics team. But they see 2.1%, just above the Fed target, by the end of 2025.
Economist Jonathan Pingle says: “The majority of what has stalled and what is keeping inflation from 2.0% 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 percent, just total,” he added.
On the growth side, Goldman chief economist Jan Hatzius says GDP “has slowed meaningfully from 4.1% in 2023H2 to an estimated 1.7% in 2024H1.”
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 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 gain last week and did so without the help of Nvidia (NVDA), which fell 3%. Overall, chips were down more than 1%.
At last week’s Seeking Alpha Investing Summit, our Rena Sherbill discussed NVDA with Michael Kramer, an SA analyst and founder of Mott Capital Management.
Michael Kramer: It comes down to what will NVIDIA do. Will the number, you know, if analyst numbers are right and NVIDIA’s growth rate has peaked in terms of revenue growth, typically what you see is the price to 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.
RS: Do you think that that is a bit priced in with investors at this point?
MK: No, I don’t think it’s priced in because you hear a lot of people talking about breadth broadening out. And the reason why breadth hasn’t broadened out more is because there’s such a concentration in the Mag 7, 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 breadth broaden 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 breadth broaden 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 (NYSE:NKE) on Thursday.
Analysts think the 2025 guidance issued will be more of a focus than the actual earnings numbers, especially if there are 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 Nike’s sales growth rate has “bottomed” and is about to inflect.
SA analysts Kenra Investors says the report could present a compelling entry point, adding “The secret to buying a blue chip like Nike was always taking advantage of negative sentiment during periods of underperformance and letting the compounding power of the business and its dominant position in the market do the rest,” With “margins recovering, inventory issues under control, and a P/E 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 (OTCQX:ADDYY) (OTCQX:ADDDF) was the brand respondents would most likely purchase next.
In other earnings reports, Beyond Air (XAIR) weighs in on Monday.
Tuesday sees results from Baker Hughes (BKR), Carnival (CCL) and FedEx (FDX).
On Wednesday, General Mills (GIS), Paychex (PAYX), Levi Strauss (LEVI), Micron (MU) and AeroVironment (AVAV) are up.
Joining Nike on Thursday’s slate are McCormick (MKC), Walgreens Boots Alliance (WBA) and Acuity Brands (AYI).
In the news this weekend, Apple (AAPL) and Meta Platforms (META) have held discussions about an AI partnership, according to The Wall Street Journal.
In an effort to catch up to companies like Microsoft (MSFT) that have stolen a march in the AI race, the companies have talked about integrating Meta’s generative AI model into Apple Intelligence.
AI startups Anthropic and Perplexity have also held talks with Apple about their gen AI offerings, the Journal said, adding discussions with all companies could still fall through.
Confidential discussions are underway between AMC Entertainment Holdings (AMC) and some of its lenders to reduce the company’s debt load and extend near-term maturities. 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 borrowings stand at roughly $4.5 billion, and as of March 31, the company had more than $2.8 billion in maturities due in 2026, which included a $1.9 billion term loan and ~$1 billion in second-lien notes.
And a new peer-reviewed study suggested 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 mellitus. 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 9.
Getty (GTY) goes ex-dividend on Thursday and Humana (HUM) and Mondelez (MDLZ) to ex-dividend on Friday.
And in the Wall Street Research Corner, Bernstein-Societe Generale screened for stocks that have the highest return on invested capital but not high valuations based on forward price-to-earnings.
Over the last 45 year, 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 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 (GOOG), with ROIC at 26% and a forward P/E of 23.2X, Meta Platforms (META), with ROIC 26.8% and forward P/E of 24.6, Home Depot, (HD), which has an ROIC of 31% and a forward P/E of 23 and Caterpillar (CAT), with ROIC of 22.9% and a forward P/E of 15.3.