Podcast Summary
Recession fears, stock market selloff: The latest jobs report and concerns about a potential recession led to a selloff in the stock market, with uncertainty surrounding the Federal Reserve's decision not to cut interest rates adding to the concerns.
The latest jobs report and the potential triggering of the Psalm rule have raised concerns about a possible recession, leading to a selloff in the stock market. The Federal Reserve's decision not to cut interest rates this week has added to the uncertainty, with some market analysts questioning if the Fed is now behind the curve. The labor market's strength had previously kept the Fed from lowering rates, but with unemployment at 4.3% and potential weakness in the economy, the question is whether we'll get a soft landing or a recession. Despite the concerns, some analysts remain optimistic, believing that inflation is moderating, employment is still good, and lower interest rates are on the way, which could set the economy up for a few years of growth.
Fed's rate cut decision: The Fed's decision to cut interest rates might not be necessary due to decreased rates from the bond market and stock market performance, but potential risks remain with company actions, such as Intel's job cuts and dividend suspension
The Fed's decision to cut interest rates in September might not be necessary, as interest rates have already decreased significantly due to the bond market signaling an economic downturn. Additionally, the stock market, including the S&P 500, NASDAQ, and Dow, is still up for the year despite recent declines. However, Intel's announcement of job cuts and suspension of its dividend serves as a reminder of the potential risks for investors, particularly when a company's leadership lacks credibility. Historically, companies that cut or abandon their dividends have faced negative consequences, including decreased investor confidence and potential further stock price declines.
Dividend Cuts: Companies that cut their dividends have historically underperformed in the S&P 500, except for companies like Apple that have strong growth prospects and cautious approaches to innovation.
According to a 50-year data analysis by Motley Fool Money, companies that cut their dividends have historically underperformed in the S&P 500. This trend holds true for most instances when a company cuts its dividend for reasons within its control. Conversely, Apple, a tech industry giant, defied this trend with impressive growth in its services sector, which now accounts for nearly 30% of its revenue. Despite a slight dip in iPhone sales and revenue, investors are optimistic about upcoming upgrades and new AI-driven offerings, which could potentially bring in paid subscriptions. Apple's cautious approach to innovation, as indicated by its modest CapEx spending, is being rewarded by the market.
Apple and Meta's Capital Expenditures: Apple's capital expenditures are being covered by customers through high product prices and buybacks, while Meta is investing heavily in future growth through increased CapEx, leading to losses in certain divisions.
Apple and Meta, two tech giants, reported stronger-than-expected earnings, with Apple focusing on capital deployment and Meta on higher CapEx for future growth. Apple's CapEx is being covered by some customers, and the company's massive buyback program has kept the dividend yield low. There's a call for Apple to increase its dividend payout. Meta reported a significant increase in sales, daily active people, and average price per add, but a large loss in the Reality Labs division. Both companies are investing heavily in infrastructure and technology to compete in the AI race, leading to increased CapEx. Apple spent $32 billion on dividends and repurchases in the last quarter, while Meta raised its full-year CapEx projection to $37-$40 billion. Despite the focus on CapEx, both reports were generally positive, with strong earnings and revenue growth.
Meta's investment in AI and metaverse: Despite cutting costs, Meta invests heavily in AI and metaverse, positioning themselves well in the scale game with a large user base of 3.27 billion DAUs and attractive valuation
Meta, formerly known as Facebook, is investing heavily in AI and the metaverse despite cutting costs last year. This strategic move comes as the company has seen consistent high growth with a 22% increase in topline growth in the most recent quarter, making it an attractive investment with a forward earnings multiple of 21 times and a 0.4% dividend yield. Meta's large user base of 3.27 billion daily active users (DAUs) is a significant advantage, similar to Apple's focus on active devices. The race for AI dominance in the tech industry is heating up, and Meta's investment in this area positions them well in the scale game, where the number of connected devices and users is a crucial metric. However, Microsoft's recent earnings report disappointed investors due to slower cloud growth, causing a rotation out of big tech stocks and into small caps. The cloud remains a significant area of spending for AI efforts in the tech industry.
Azure growth slowdown, AI investment: Microsoft's Azure growth slowed in Q1, but the company remains optimistic about growth in H2 with investments in data centers and servers. CEO Satya Nadella is heavily investing in AI with partnerships and increased CAPEX.
Microsoft's Azure cloud business grew at a slower pace than expected in the recent quarter, with growth coming in at the low end of their guidance due to soft demand in European markets for non-AI services and some limits in AI-related hardware. However, Microsoft remains optimistic about growth in the second half of fiscal 2025 with investments in data centers and servers. The company's overall revenue in the quarter was up 15 percent, with cloud revenue increasing 21 percent and the Xbox video gaming unit up 61 percent. Microsoft's CEO Satya Nadella is heavily investing in AI, with a huge partnership with OpenAI and a significant increase in CAPEX last quarter. Microsoft was also impacted by the global IT outage that affected Windows machines, but the impact was minimal. Amazon had a rough day with shares down 12 percent following their earnings release, despite revenue coming in slightly below expectations and Amazon Web Services (AWS) revenue up 19 percent. However, the market may have been disappointed with lower-than-expected guidance for the third quarter. Despite these disappointing numbers, Amazon remains a profitable business with significant growth in AWS and strong operating income and cash flow.
Cloud Business Impact on Stock Prices: Amazon, Microsoft, and Alphabet's cloud businesses are driving financial growth and stock price increases due to rapid expansion, impressive financial results, and heavy investments in AI and CapEx.
The performance of the cloud segments in Amazon, Microsoft, and Alphabet is significantly impacting their stock prices. The cloud businesses of these tech giants are experiencing rapid growth, and the financial results from these sectors have been impressive. Amazon Web Services (AWS) reported increasing engagement and excitement from customers, while Microsoft's cloud segment continues to drive the stock price. Alphabet's cloud business, which was previously losing money, has now turned a profit, generating $1 billion in operating profits. These companies are investing heavily in AI and CapEx, with Amazon, Microsoft, and Alphabet collectively spending $45 billion in capital expenditures this quarter. Despite some concerns about the competition in the search market, the overall financial performance of these companies in their cloud segments remains strong. Investors looking for opportunities may find value in taking advantage of the weakness in the stock prices of these tech giants.
CEO investment decisions: CEOs, including those from tech companies, are optimistic about future investment but face risk of under/overinvesting during paradigm shifts. Real estate sector, specifically REITs, have performed well but are still in bear market. Capital allocation and investment decisions are crucial during change.
Learning from the discussion on Motley Fool Money is that while many CEOs, including those from tech companies, are optimistic about the future and planning to invest heavily, there is a risk of underinvesting or overinvesting during a revolutionary paradigm shift. This is a difficult decision for leaders, and history shows that getting it right is crucial. The real estate sector, specifically REITs, has been a standout performer during this earnings season, with the Vanguard Real Estate Index ETF up 10% compared to the S&P 500 and QQQs being down. Despite the strong performance, the real estate sector is still in bear market territory, indicating there may be more upside to go. Capital allocation and investment decisions are crucial for companies during times of significant change, and only time will tell who gets it right.
Consumer health, economic climate: Companies catering to middle and upper-middle income consumers are faring better in the current economic climate, while those serving lower-income demographics may face challenges. Mercado Libre, the 'Amazon of Latin America,' is a notable example of a successful company in a growing market with significant potential for further expansion.
The health of the consumer is a crucial factor to consider in the current economic climate, as even companies serving lower-income demographics may experience challenges. Meanwhile, companies catering to middle and upper-middle income consumers are faring better. A notable example is Mercado Libre, the "Amazon of Latin America," which reported impressive QT results and continues to see significant growth in e-commerce and digital payments in regions with lower penetration. With a market cap under $90 billion and an annual revenue run rate of over $20 billion, Mercado Libre's potential for growth is significant.
DSW shoe brands: DSW owns several shoe brands and has significant purchasing power, allowing them to buy merchandise at discounted prices and pass the savings onto consumers, with 25% of sales coming from larger retailers.
DSW Inc. is a solid business with a long history of consistent free cash flow generation, similar to retailers like TJ Maxx or Ross, but with room for improvement. They own several shoe brands and have significant purchasing power, allowing them to buy merchandise at discounted prices and pass the savings onto consumers. Additionally, they have been acquiring smaller shoe brands to boost revenue. Approximately 25% of their sales come from selling to larger retailers like Nordstrom's, Dillard's, and Amazon. The stock has seen some artificial selling due to a small cap ETF fund, potentially creating an opportunity for investment. The company also sells sneakers, but it's unclear if they are included in the 25% of sales coming from larger retailers. Therefore, I plan to add Mercado Libre to my watch list instead.