Wall Street Lunch: Consumers To The Rescue Again

Summary:

• Retail sales exceeded expectations, driving Treasury yields higher and suggesting a resilient U.S. consumer despite labor market concerns.
• Taiwan Semiconductor surged on strong AI chip demand and positive guidance, while Blackstone reported robust Q3 earnings with significant asset growth.
• Meta Platforms announced targeted layoffs and cost-cutting measures, continuing its trend of workforce reductions to enhance efficiency.

Listen below or on the go on Apple Podcasts and Spotify.

The consumer keeps spending, giving the Fed more leeway on the pace of cuts. (0:16) Taiwan Semi restores faith in AI chip demand. (1:58) Meta lays down the law on meal vouchers. (3:41)

This is an abridged transcript of the podcast.

Our top story so far. A trifecta of macro reports that were soft-landing friendly—headlined by retail sales—are pushing Treasury yields higher.

September retail sales rose 0.4% from August, topping the +0.3% consensus and accelerating from +0.1% prior. On a Y/Y basis, retail sales climbed 1.7%. Core retail sales, which exclude motor vehicles and parts, increased 0.5% M/M, topping the +0.1% consensus.

The control group, which excluded autos and gas and feeds into GDP, jumped 0.7% M/M vs. +0.3% consensus. That’s the biggest rise in three months and the third-largest monthly gain of 2024.

Control group sales, which tends to line up with personal consumption spending in the GDP report, also came in much stronger than expected with a 0.7% gain. That is the biggest gain in three months and the third largest monthly gain of 2024.

Wells Fargo economists say that “even though retail sales have been choppy this year, there is an underlying theme that shows the composition of spending tending to favor those categories that feed into the Commerce Department’s GDP calculations.”

“The upshot is that despite hand-wringing over the state of the labor market, U.S. consumers just keep . spending.”

Speaking of the labor market, weekly initial jobless claims fell as expected to 241,000, although claims are still seeing some impact from Hurricane Helene and the Boeing strike.

And the Philly Fed manufacturing index for October rose more than anticipated to 10.3.

Overall, the data reinforced the belief that the Fed doesn’t have to cut too rapidly. While two quarter-point rate cuts are still priced in, the odds of a December cut fell below 80%, and the odds of a cut in March moved to a toss-up.

Also on the central bank front, the ECB cut rates by another 25 basis points to 3.25% as inflation dipped below 2%.

Among active stocks, Taiwan Semiconductor (NYSE:TSM) jumped after the global foundry reported third-quarter results and guidance that topped estimates amid surging demand for AI chips. That took some of the sting out of ASML’s (ASML) disappointing bookings earlier this week.

CEO C.C. Wei says AI “demand is real, and I believe it’s just the beginning,” adding that overall semiconductor demand has stabilized and has started to improve.

Wei also said Taiwan Semiconductor has no interest in buying Intel’s (INTC) foundry business.

Looking ahead, revenue contribution from server AI processors is expected to more than triple this year and account for a mid-teens percentage of total revenue in 2024. Full-year revenue is forecast to rise 30% from the year ago.

Blackstone (BX) turned in better-than-expected Q3 earnings as investment activity picked up. Fund appreciation was its strongest in three years. Among its strategies, corporate private equity and infrastructure realized the best performances.

Total assets under management were $1.11 trillion, topping the Visible Alpha consensus of $1.09 trillion. Fee-earning assets under management rose to $820.5 billion from $808.7 billion at the end of Q2.

And Red Robin Gourmet Burgers (RRGB) is higher as JCP Investment Partnership increased its active stake to 11.3% from 8.7% through a series of transactions across several related buying parties. The firm sees the restaurant stock as undervalued and representing an attractive investment opportunity.

Shares of Red Robin have perked up over the last week, gaining more than 13%. Short interest on RRGB stands at 14.2% of the total float, which could add some volatility to the mix.

In other news of note, Meta Platforms (META) has initiated layoffs across various divisions, specifically targeting teams within WhatsApp, Instagram, and Reality Labs. That’s according to The Verge.

Although the exact number of job cuts has not been disclosed, reports indicate that they are relatively small in scale.

These layoffs follow a broader trend of workforce reductions at Meta, which has seen about 21,000 jobs cut since late 2022. That’s part of broader cost-cutting initiatives, with CEO Mark Zuckerberg labeling 2023 as the “year of efficiency.” (It was also the year of the Rabbit.)

Also, the FT says Meta fired about two dozen staffers in its Los Angeles office for using their $25 meal credits to buy household items. Some employees used their $25 meal credit for items including acne pads, wine glasses, and laundry detergent.

Those who violated the company rules only on occasion were reprimanded but not terminated, but those who were fired were apparently abusing the food credit system over a long period of time, with some pooling their money together.

And in the Wall Street Research Corner, BMO strategist Brian Belski says the valuation backdrop for small-caps and mid-caps continues to look compelling.

Small caps are still trading at a discount relative to their 20-year average, while mid-caps trade only at a slight premium. The S&P 500 (SP500) trades at a significant premium relative to their 20-year average.

And the S&P 600 (SP600) and S&P 400 (SP400) have averaged double-digit gains in the one year following initial rate cuts by the Fed since 1995, at 12.8% and 10.7%, respectively.

“We believe peak pessimism is in place, making a rebound even more likely and recent trends have begun to show some improvement,” Belski said, adding “it is only a matter of time before the fortunes of this group take a turn for the better.”

Among the Outperform-rated stocks that fit a highly selected buying approach are Constellation Energy (CEG), Digital Realty Trust (DLR), Ross Stores (ROST), Snap (SNAP) and Take-Two Interactive (TTWO).

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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