Last week, the Commerce Department announced that its preliminary first-quarter GDP estimate was a snail-paced 1.6% annual rate, well below economists’ consensus estimate of a 2.5% annual pace. One reason is that the core Personal Consumption inflation index rose 0.3% in March and 2.8% in the past year. The Dow initially fell 700 points on this 1-2 punch, but the market clawed back most of that loss by the closing, and Friday recovered to deliver weekly gains of +2.7% in the S&P 500 and +4.2% in Nasdaq.
The market is up because earnings are working. One example was Spotify (SPOT), which announced that its first-quarter sales rose 18.3% to $3.95 billion (vs. $3.34 billion in the same quarter a year ago). During the same period, the company’s operating earnings rose to $1.05 per share, compared to a loss of $1.27 per share last year. The analyst community was expecting sales of $3.87 billion and operating earnings of just 64 cents per share, so Spotify posted a 64% earnings surprise.
Here are the most important market news items and what this news means:
- Eli Lilly (LLY) is the new market leader this week after announcing that its first-quarter revenue rose 26% due to booming sales of its weight loss drugs, Mounjaro and Zepbound. The company raised its full-year revenue guidance to $42.4 billion and $43.6 billion, which is $2 billion higher than its previous guidance. Eli Lilly also beat analysts’ first-quarter consensus earnings estimate and raised its full-year earnings guidance above analyst estimates.
- Super Micro Computer, Inc (SMCI) stock is a great pullback on any dip and remains an outstanding buy. The company is dominating liquid-cooled AI chips in data centers, which are getting faster all the time. On Tuesday, the company announced that its latest quarterly revenue rose 200.8% to $3.85 billion compared to $1.28 billion in the same quarter a year ago. Looking forward, the company raised its fiscal 2024 revenue guidance to a range of $14.7 billion to $15.1 billion and operating earnings guidance of $23.29 to $24.09 per share, which is above analyst consensus estimates.
- There is one interesting conundrum that is expected to help small to mid-capitalization stocks. Specifically, the U.S. dollar is very strong due to high Treasury yields and the fact that the Fed is not inclined to follow Europe and cut key interest rates in June. Since approximately half of the S&P 500’s revenue is outside of the U.S., a strong U.S. dollar is now hindering many multi-international companies. When multi-international companies are struggling, institutional investors typically gravitate to more domestic companies, which boosts their allocations to small and mid-capitalization stocks.
- The Conference Board on Tuesday announced that its consumer confidence index plunged to 97 in April, down from a revised 103.1 in March. This is the third straight monthly decline, and the consumer confidence index is now at its lowest level since July 2022. Dana Peterson, chief economist at the Conference Board, said “Consumers became less positive about the current labor market situation and more concerned about future business conditions, job availability and income.” Furthermore, Peterson said consumer concerns were “dominated” by elevated prices for food and gas. Ouch! Obviously, this is very bad news for President Biden’s reelection chances, which is why he plunged to an all-time low in a CNN poll that also included RFK, Jr.
The wall of worry has grown a bit this earnings season, but we’re only halfway through. The market continues to recover from its recent correction and digesting the increasing likelihood of delayed and fewer Fed cuts. If this week consists of generally positive earnings results and guidance, we should exit earnings season marching back towards the previous highs, barring any heating up of the geopolitical risks.
