🔬The Wall Street Paradox: Slowing Growth, High Multiples
Plus: The Tech sell-out takes a personal day; and much more!
"There are no shortcuts to any place worth going."
- Beverly Sills
"The best way to teach your kids about taxes is by eating 30% of their ice cream."
- Bill Murray
Bounce back day for the big US markets with the S&P 500 +1.1% and Nasdaq +1.6%. Small-Cap kept working though, with the Russell 2000 +1.7%.
9 of 11 sectors closed higher (obviously) led by Tech (+2.0%) and techy Comm. Services (+1.2%). Defensive Staples (-0.7%) finished worst.
Notable companies:
CrowdStrike (CRWD) [-13.5%]: Continued fallout from Friday's major global outage; downgraded to neutral from buy at both Guggenheim and BTIG; BTIG theorized customers may seek bigger discounts on renewals.
Reddit (RDDT) [+5.3%]: Reportedly struck content deals with NFL and NBA for videos on its platform.
Ryanair Holdings (RYAAY) [-15.4%]: Fiscal Q1 results were light; noted strong Q2 demand, but pricing softer than expected and fares expected to be materially lower than last summer.
Street Stories
The Wall Street Paradox: Slowing Growth, High Multiples
If you exclude the ‘Everything Bubble’ that took place during the pandemic, the S&P 500 is trading at its highest valuation this millennium.
A high valuation must, to some degree, be supported by a strong outlook for growth. Otherwise, the market can be looked at as something of a timebomb.
Thankfully we have such an outlook: The aggregate of Wall Street estimates for the S&P 500 clocks in at +5.0% in 2024 followed by +5.8% and +5.3% in 2025 and 2026 respectively.
Maybe not enough to warrant record valuations, but definitely solid.
Having said that, there is a little bit of a kink to this narrative. See over the last 12 months the S&P 500 is up +20.6%. Estimates for 2024 revenue? Up +0.9%. 2025? Up +1.4%.
See the rub?
If we want to slice things up even more, over the course of the year a majority of companies have actually seen revenue estimates for their current fiscal year decreased by Wall Street.
Record stock market valuation but analysts are net more bearish than they were in January?
WTF?
Anyway, it is what it is. There are still plenty of stocks out there that continue to ratchet up estimates and build inertia.
For example, Super Micro has seen revenue estimates increase by +40% this year on increased demand for data centers. The Street’s forecasts for Nvidia are up +31%. And diabetes turned weight-loss player Eli Lilly has seen theirs jump by +11% on strong clinical data and growing demand.
However, there are plenty of companies on the opposite end of the spectrum. Tesla is probably the most notable of the big 2024 losers but after announcing strong Q2 deliveries things could be bottoming out (they report after close today so we won’t have to wait long to find out).
Other big losers this year include Hasbro which has been crushed by slowing demand. And videogame maker Take-Two - pretty much just off of Grand Theft Auto 6 being delayed until 2025 (15 year old me would be pissed).
Picking stocks is never easy but this is definitely one of the weirder times I’ve experienced following the market. That said, there are still plenty of amazing companies out there ready to keep piling on the growth and having their quality come to light. Just might take a bit of digging!
Rotation Takes a Chill Pill
The sell-off in Tech and 2024 momentum trades took a day off yesterday, as many of the recently beaten up names had some relief. Big Tech earnings on deck this week added to some of the sentiment reversals (Tesla, Alphabet and Spotify report today).
Joke Of The Day
Time may be a great healer but it's also a lousy beautician.
When my wife found out I replaced our bed with a trampoline; she hit the roof.
Hot Headlines
Reuters / Delta has canceled +4k flights due to CrowdStrike related outages. The company still sees disruptions lasting a few more days. Remember last week when I talked about why airlines are terrible investments? This, also.
CNBC / China surprises with cuts to key rates to support weak economy. The move comes after the nation reported weaker than expected economic data last week. Amongst other cuts, the People’s Bank of China dropped the 5-year loan prime rate to 3.85% from 3.95%.
Reuters / Nvidia is working to build new flagship AI chip for the Chinese market that would technically comply with US export restrictions. The firm is working with one of its major distributor partners in China on the launch and distribution of the chip, tentatively named the ‘B20’.
WSJ / Tesla’s stock jumped +5.1% ahead of earnings today, in part due to the Elon Musk interview claiming the company will use humanoid robots next year.
Quartz / Sam Altman gave people $1,000 a month for 3 years in research study to see impact on their living situation. Biggest take-away was that individuals were able to be more selective about employment offers instead of being forced into any work for a paycheck. Pretty neat.
Yahoo / McDonald's to extend $5 meal deal until August after strong traffic growth. Lovin’ it.
Reuters / Private Equity firm L Catteron has approached Mattel with buyout offer. PE owning Barbie and Hot Wheels just feels icky.
Trivia
Today’s trivia is on the President of the United States.
At 78, Joe Biden was the oldest person to be inaugurated. Who was the youngest person to become president?
A) Theodore Roosevelt
B) John F. Kennedy
C) Bill Clinton
D) Barack Obama
Who was the only president to serve more than two terms?
A) Theodore Roosevelt
B) Franklin D. Roosevelt
C) Woodrow Wilson
D) Harry S. Truman
Who was the first president to visit China while in office?
A) John F. Kennedy
B) Lyndon B. Johnson
C) Richard Nixon
D) Jimmy Carter
(answers at bottom)
Market Movers
Winners!
Mattel (MAT) [+15.1%]: Reuters reported L Catterton approached with a takeover proposal; HAS may be considering its own bid; Yahoo Finance source said no approach has been made.
Clearwater Paper (CLW) [+13.1%]: Selling its tissue business to Sofidel America for $1.06B; expected to close in late 2024.
Terex (TEX) [+11.0%]: Acquiring Environmental Solutions Group (ESG) from DOV for $2.0B; strengthens portfolio, creates path for growth (sees 130bps margin accretion); move reduces cyclicality.
IQVIA Holdings (IQV) [+9.2%]: Q2 earnings and revenue beat; strong performance in Technology & Analytics Solutions; raised FY EPS guidance and tightened revenue outlook.
ON Semiconductor (ON) [+6.6%]: Selected to power Volkswagen Group's next-gen electric vehicles.
Reddit (RDDT) [+5.3%]: Reportedly struck content deals with NFL and NBA for videos on its platform.
NVIDIA (NVDA) [+4.8%]: Planning new Blackwell AI chips for China market, compatible with US export controls; multiple price target increases.
Vista Outdoor (VSTO) [+2.6%]: Reaffirmed FY25 revenue and EBITDA outlook; weaker Q1 revenue due to shipment delays; raised purchase price for The Kinetic Group to $2.15B.
Losers!
Ryanair Holdings (RYAAY) [-15.4%]: Fiscal Q1 results were light; noted strong Q2 demand, but pricing softer than expected and fares expected to be materially lower than last summer.
CrowdStrike (CRWD) [-13.5%]: Aftermath of Friday's major global outage; downgraded to neutral from buy at both Guggenheim and BTIG; notes cite possible impacts on deal signings, though lesser impact on renewals; BTIG theorized customers may seek bigger discounts on renewals.
Verizon Communications (VZ) [-6.1%]: Q2 EPS in line, revenue slightly below consensus; FY24 EPS and FCF guidance reaffirmed; total wireless services revenue up 3.5% y/y; postpaid phone net adds better than expected; analysts noted disappointing guidance as the Street expected a raise.
Krispy Kreme (DNUT) [-4.3%]: Sold majority ownership stake of Insomnia Cookies to Verlinvest and Mistral Equity Partners; transaction EV of ~$350M.
Market Update
Trivia Answers
A) Theodore Roosevelt was the youngest to become President at 42. While serving as Vice President, he acceded to the role following the assassination of President William McKinley. (JFK was the youngest elected at 43)
B) Franklin D. Roosevelt served three full terms and died 3 months into his forth term.
C) Richard Nixon was the first to visit China while in office (1972).
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Such valuable content! Will definitely share and recommend!