Slower Growth
Summary: Comments from Capital One and Bank of America suggest that consumer spending growth may finally be materially slowing. Bank of America said that credit and debit spend was up just 0.7% y/y in May. Despite this slowdown, the Fed is sticking with its plan to maintain interest rates at a restrictive level and capital markets are losing confidence that inflation will ever come back down to 2%.
Editor’s Note: This week, we’ve held back the Industrial and Real Estate sections for premium subscribers only. There’s a long discussion on EVs in the industrial section including some comments on Chinese EV manufacturers which are important to consider for any investor in the auto industry (including $TSLA shareholders). In Real Estate, there are some surprising comments about a potential shortage of retail space. The big private equity firms seem to be increasingly bullish on CRE.
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Macro
Consumer spending growth has slowed down
“...our spending trends have…slowed down. We're down to sort of 6% net spending growth in Q1, and that was essentially entirely driven by new account origination. So if you look at it on a spend per customer basis, that's more flattish." - Capital One (COF 0.00%↑) SVP of Finance Jeff Norris
"Bank of America aggregated credit and debit card spending per household rose 0.7% YoY in May, following the 1.0% YoY rise in April.” - Bank of America (BAC 0.00%↑) Institute
"I do think there has been some slowing in the overall consumer environment in restaurants. We do see some amount of pressure on the lower income consumer." - Restaurants Brands (QSR 0.00%↑) CEO Josh Kobza
The consumer remains under pressure
"The benefit payments they got during COVID are gone. Savings have been depleted. Credit card debt is going up…it's clearly a change with the consumer in the U.S." - Mondelez International (MDLZ 0.00%↑) Chairman Dirk Van de Put
"The consumer in North America, without question, still remains under some pressure…consumers are having to choose. And to a degree, they're putting off or delaying some of these projects -- these DIY projects because they have to decide why I want to do other things with my money and looking at various macro indicators, credit card debt at all-time highs." - Sherwin-Williams (SHW 0.00%↑) Director of IR Eric Swanson
"I think you've heard other companies, you read it in the media, there's a consumer segment in the United States that is under more pressure." - Coca-Cola (KO 0.00%↑) CFO John Murphy
"Mean consumer is still very healthy. As I see it, they still have balances left over. I'm not going to tell you anything you haven't heard. In their checking accounts, they've got 23% more funds in their checking account as a unit than they had pre-pandemic and then more savings on top of that." - Bank of America (BAC 0.00%↑) President of Regional Banking Dean Athanasia
More than 50% of Americans believe that we’re in a recession right now
"But, I mean, I was just looking at an article this weekend. More than 50% of American consumers believe that we're in a recession. At some point, it doesn't really matter what the data says at the highest level. It is a question of how secure does the consumer feel. There's less credit. There's much lower savings than even the pre-COVID savings rates we were seeing. And you're starting to see people teeter more into some of that default. So I think you're just continuing to see a consumer that slowly, way more slowly than any of us expected, continues to pull back and make very explicit decisions based on value and perceived value of whatever the items are that they're looking for." - Best Buy (BBY 0.00%↑) CEO Corie Barry
But the Fed is sticking with it
"We've made good -- and we've made good progress and we're in the phase now of just, you know, sticking with it until we get it done…We'll need to see more good data to bolster our confidence that inflation is moving sustainably toward 2%. We know that reducing policy restraint too soon or too much could result in a reversal of the progress we've seen on inflation." - US Federal Reserve Chair Jerome Powell
Capital markets don’t think inflation is ever getting back to 2%
"I've been saying that I do not believe that inflation is going to ever come back down to 2% I do believe that on the short run, it could come down a bit, but I think that it's going to be back pretty soon" - Interactive Brokers (IBKR 0.00%↑) Chairman Thomas Peterffy
"People have been gradually writing it up because I just think people are coming it the view that rates aren't going to -- are less likely to go down to their pre-pandemic levels, which were very low by recent history measures." - US Federal Reserve Chair Jerome Powell
The consumer has been resilient
"...that resilient word, I know it can sound a bit cliche and overused, but I really do think that it's appropriate in the environment we're in." - Hormel Foods (HRL 0.00%↑) CEO James Snee Chairman
"It's been really consistent the last few quarters. And, as we look at trends across, we've talked about unit sales and growth by Income Group consistently, it's been pretty consistent. And that's the best way to describe it as the consumer has been choiceful and resilient." - Walmart (WMT 0.00%↑) CEO of Walmart US John Furner
"The consumer is still doing pretty well. As stock markets go up, people tend to spend a percentage of their net worth, not of their income. So as people are mutually getting a little more prosperous, they're spending some of that, which is a little bit unexpected." - Blackstone (BX 0.00%↑) CEO Stephen Schwarzman
But inflation may be lower than people recognize
"Inflation, we find to be lower than what the Fed is reporting. In particular, we think that the real estate numbers are significantly higher than what we're seeing in the real world. And so as a result of that, we have more optimism that rates will go lower at some point this year" - Blackstone (BX 0.00%↑) CEO Stephen Schwarzman
"There was some deflation in general merchandise, which is helping and making things a bit more affordable" - Walmart (WMT 0.00%↑) CEO of Walmart US John Furner
Labor markets are gradually cooling
"We watch the labor market of course and the economy as a whole, but the labor market very carefully, and that's what we see. We see gradual cooling, gradual moving toward better balance. We're monitoring it carefully for signs of something more than that, but we really don't see that" - US Federal Reserve Chair Jerome Powell
International
China is recovering slowly
"We're seeing that recovery in China, retail is a little slower." - Hormel Foods (HRL 0.00%↑) CEO James Snee Chairman
Canada’s consumer environment has slowed
“There has been some amount of slowdown in Canadian retail sales overall. Just a couple of stats around that. Overall CPI is now down to around 2.7%. So you have seen a slowdown in inflation. That's similar to your point about what we've seen elsewhere in the world and in the U. S. So you've seen a little bit less pricing in the market as a result, which is a natural adjustment. Another thing, Patrick loves to talk about this a lot is employment is one of the biggest drivers of our business. So you have seen a tick-up in unemployment. It's up about a point year on year. So that's something that we definitely keep an eye on. And that changes a little bit more pronounced in Ontario. So there are some macro stats that point to a little bit of softening" - Restaurants Brands (QSR 0.00%↑) CEO Josh Kobza
Japan looks interesting to KKR
"The other area that we're quite constructive on in Asia is Japan. 25-ish years of a deflationary environment, and we're starting to come out of that. We think that poses really interesting investment opportunities for us." - KKR (KKR 0.00%↑) CFO Robert Lewin
Blackstone is spotting opportunities in European real estate thanks to refinancing risk
"We have more money. And we're not shy to use it when prices get beat down, and the world asks the same question like, "Oh, my goodness. You're in real estate. Must be terrible." And we look at it now and say, "Well, geez, this is like bottom land." And we've been buying pretty aggressively now, particularly, oddly, in Europe. And what happened in Europe, this is why finance is so much fun, that if you built a real estate empire and use debt in Europe when interest rates were negative, you were basically paying nothing to borrow. And so now you're paying roughly 6%. So when you get to refinancing time, people look at your coverages and say, you've got to pay down debt for me to refinance you" - Blackstone (BX 0.00%↑) CEO Stephen Schwarzman
Financials
Loan demand is still pretty muted
"Loan demand has been pretty muted…We just haven't seen that demand. I think people are still being very cautious about inventory builds, they're being cautious about big capital investments, and you're seeing less utilization of revolvers because of that. Price obviously matters too, right, in terms of where rates are. And so that demand has been pretty muted and that's what you see on the commercial side I think across the industry." - Wells Fargo (WFC 0.00%↑) CFO Michael Santomassimo
Banks are under regulatory pressure to reduce CRE exposure
"Banks continue to look to reduce their exposure that many of them are under regulatory pressure to reduce commercial real estate exposures. They're being choosy about who they're doing business with. So you're seeing them exit some relationships that aren't as profitable for them and keeping relationships that they feel confident in both from a credit perspective and from a relationship profitability perspective." - Boston Properties (BXP 0.00%↑) CFO Michael LaBelle
Credit looks good but maybe some preliminary signs of marginal pressure
“There are some very preliminary signs on the margin that are consistent with what you've talked about as some early signs of potential pressure. For example, we have seen a modest increase in the percentage of customers who are making the minimum payment instead of sort of something larger to pay down their balances. But that's not in and of itself kind of a reason to change our view. I think it's just a very early and a fairly modest sign that the intuition that I think anybody would have, a prolonged period of high prices and high interest rates is bound to put some pressure on consumers" - Capital One (COF 0.00%↑) SVP of Finance Jeff Norris
The IPO market is better but not fully open
“...look, I'd say the debt markets are open. The IPO market is not as open as investment bankers tell you it's open, but it's getting better…if the markets kind of continue on their current trajectory, I think you'll see a lot of realization activity…So I'm optimistic, but we need these markets to continue to improve." - Carlyle Group (CG 0.00%↑) CFO John Redett
The merger environment is getting better but still not perfect
"We have a number of factors that are better than they were, but we certainly don't have the perfect set of factors to drive a big time revenue -- a big time merger market. You obviously -- CEO confidence is solid. There is access to capital. The markets are relatively stable and sponsors are getting a little more lively” - Evercore (EVR 0.00%↑) Chairman John Weinberg
High interest rates are driving an increased need for restructuring and liability management
"...a lot of the really near-term maturities are -- have been taken out in terms -- because, as I mentioned before, the financing markets have opened up. And so companies have rightly taken advantage of that to try to address the maturity walls. But there still is a lot of leverage out there that will need to get refinanced in a potentially higher rate environment, and that means a lot of work for our liability management folks." - Lazard (LAZ 0.00%↑) CEO of Financial Advisory Peter Orszag
Small businesses are healthy, but cash reserves are declining
"...small businesses are doing well. Their profitability is up over the last six months. But what is giving us pause is that the cash reserves are down than where they were about a year ago. So that's something that we are watching carefully as we help them navigate." - Intuit (INTU 0.00%↑) CFO Sandeep Aujla
Consumer
CPG companies have had a nice tailwind from price-inelastic consumers
"And for 2 years, we've been able to price without really having any volume effect on what we were doing. So you've got some great growth with an excellent bottom line to go with it. And if you look, for instance, I use chocolate as an example. Chocolate, our chocolate business, we increased prices by 30% over the last 2 years. Volume kept on growing at 2%. So it has been a bit of a surprise, to be honest. But it didn't hit" - Mondelez International MDLZ 0.00%↑) Chairman Dirk Van de Put
Energy drink category growth has slowed down
"I mean the category has been slowing. Robert, you're absolutely right. I mean it's -- we're watching it very closely over the last several weeks. There's a lot of forecasts as well that still anticipating good growth in the category. So we're kind of waiting for that to turn around here. We're heading into summer right now. It's the busiest beverage season that when you look at July, August, it’s usually the best months of the year. So those are things that we're waiting on. I think the little -- we have been disappointed with the category, not seeing that category growth as we anticipated." - Celsius (CELH 0.00%↑) CEO John Fieldly
Walmart ad revenues currently low single digit of GMV, seeking to match Amazon's 6-7%
"One is we, as a percent of GMV are low single digits right now. And I do think that we have the opportunity to improve that dramatically. Amazon's, the composition of their business is more general merchandise versus food and so it stands the reason that you're going to see more advertising dollars flow through to general merchandise versus food like it's better to advertise for a pair of sneakers versus a head of broccoli. So the composition of their business might give them the ability to have that number be a little bit higher. On an apples-to-apples basis though, if you normalize for the categories, I think that we have the right to be every biggest as what they are. So really excited about that." - Walmart (WMT 0.00%↑) CFO John Rainey
Technology
Apple is betting on AI at the edge
"Apple Intelligence is comprised of multiple highly-capable generative models that are specialized for our users’ everyday tasks, and can adapt on the fly for their current activity. The foundation models built into Apple Intelligence have been fine-tuned for user experiences such as writing and refining text, prioritizing and summarizing notifications, creating playful images for conversations with family and friends, and taking in-app actions to simplify interactions across apps. In the following overview, we will detail how two of these models — a ~3 billion parameter on-device language model, and a larger server-based language model available with Private Cloud Compute and running on Apple silicon servers — have been built and adapted to perform specialized tasks efficiently, accurately, and responsibly." - Apple (AAPL 0.00%↑) Machine Learning Research
Adobe is betting on models trained with licensed data as a differentiator
"We've created our own foundation models in imaging and video, but also at the National Association of Broadcasters show recently (The NAB), it's the big video show, Nikolai. We showed how we can actually integrate other models as well. And so we showed, whether you're in Premiere, you can think about whether it's OpenAI, Sora, whether it's RunwayML, or whether it's a peeker, you can actually create and integrate these models. And so that's why I like this taxonomy that we have of, "What are we doing at the interface layer? What are we doing at the foundation models layer? And what kind of data are we using to train whatever models?" We were differentiated in that we said we will train our models only on data that we have licensed for. And so we can indemnify a customer like you. And so if you're using our model, we can indemnify you. The world has other models, and we have to be supportive of the other models that other customers might be using" - Adobe (ADBE 0.00%↑) CEO Shantanu Narayen
Other players are betting on large-scale infrastructure
“Building the next-generation models. Not everyone can do that at scale. And those models are getting very large and the infrastructure is getting huge. So we're seeing them build amazing next-generation capabilities and scale. And of course, that's not just a physical building and putting things in the building, but actually figuring all the software, the algorithms and training at that scale over that many billions and trillions of tokens and the software that has to go into that." - NVIDIA (NVDA 0.00%↑) Vice President Ian Buck
Legacy data center players are seeing boosts from AI
"In Q4, Oracle signed the largest sales contract in our history, led by huge demand for training large language models as well as record levels of sales for OCI, Autonomous, Fusion, and NetSuite. RPO was $98 billion, up $18 billion from Q3 and up 44% year-over-year from $68 billion last year... OpenAI selected Oracle to run deep learning and AI workloads on Oracle Cloud infrastructure. ... In total, we signed over 30 AI contracts for over $12 billion this quarter and nearly $17 billion this year." - Oracle (ORCL 0.00%↑) CEO Safra Catz
"HP is helping Microsoft extend the Azure AI platform to customers like OpenAI. And I think that's just evidence of the quality of our portfolio, the fact that customers like that like to work with us. And frankly, a lot of that is based and predicated on our skills in liquid cooling, which I think is also another point that came up on the call yesterday. Liquid cooling is a skill that HPE has had for decades." - Hewlett Packard Enterprise (HPE 0.00%↑) CFO Marie Myers
“...for every $1 billion you spend on GPU…if you just take optical connects in totality, switching, all the networking components, it goes into -- attaches itself to clustering a bunch of GPUs, you probably would say that about 25% of the value of the GPU goes to networking, the rest on networking." - Broadcom (AVGO 0.00%↑) CEO Hock Tan
The ROI on GPU capex is compelling
"...infrastructure is hugely profitable. Every dollar a cloud provider spends on buying a GPU, they're going to make it back at $5 over four years. The second thing we're seeing is growth in token serving, just building and providing AI inference, whether it be a Llama or a Mistral, or Gemma and providing it to the community's users to serve tokens. Here, the economics are even better. So for every $1 spent, there's $7 earned over that same time period and growing." - NVIDIA (NVDA 0.00%↑) Vice President Ian Buck
Inference and training are increasingly sharing GPUs
"I think one of the interesting things, our products used to be much more segmented to inference and training. You use a 100-class GPU, the big iron for training. The smaller PCIe products for inference, due to the cost or size of model. Today, the models and the infrastructure that could be used for training at scale is also frequently used for inference, which I know is difficult for this community to digest and figure out what's inference and training. I'm sorry about that. But that is the benefit, their capacity." - NVIDIA (NVDA 0.00%↑) Vice President Ian Buck
Are users just experimenting with AI or ready for mass adoption?
“So there's evidence that there's activity but not mass adoption yet that has manifested itself into a change of the workloads…So I think we're early days, and we don't know how it's going to go, but there's good evidence of activity in these different directions." - Datadog (DDOG 0.00%↑) CFO David Obstler
AI in action
"I want to touch on to close. AI, a lot of buzz about AI, we have 1,000 wildfire cameras in the state of California, and of the 1,000, 600 of them exist in our footprint. AI was enabled on all 1,000 cameras last year and the results are tremendous. AI is picking up wildfire hits faster than the human. I can see them. Imagine sitting there and trying to monitor 600 cameras versus AI doing it. It's so effective that CAL FIRE, the state fire department for California is actually dispatching their crews to fires off of AI hits. They're not relying on a phone call. Hey, there's a fire at this intersection or over here. They are actually dispatching right off of AI hits, and I will tell you, they have several examples where a call was never received and they're knocking these fires down under an acre, 2 acres and if left unsuppressed and waiting for a phone call, this could have been more catastrophic. So that's a very effective post-ignition layer of protection that we intend to move forward and install more cameras" - PG&E (PCG 0.00%↑) SVP of Wildfire & Emergency Operations Mark Quinlan
"...parts of our discovery suite just to give you an example is communications mining. What does that mean? That means you can ingest all of the millions and billions of e-mails in a corporation to understand what people are doing. So you can interpret data that is flowing through e-mails, using artificial intelligence, using AI, and you can start creating automatic routing and categorization of that." - UiPath (PATH 0.00%↑) CFO Ashim Gupta
"It might seem like a fairly ordinary topic for some, but the degree to which there is the opportunity to use AI to understand how to mix and combine different flavors to produce something better than we've had in the past is happening as we speak. The work on Sprite and Fanta at the moment is derived from that new flavor technology that we have. So it's everywhere." - Coca-Cola (KO 0.00%↑) CFO John Murphy
“Oracle is very involved with taking biopsy slides and using microscopes to read biopsy slides, recording those images and then using AI to diagnose cancer from these biopsies. It's one of the projects we're working on on the medical side of our business. And these large language models, strangely enough, are also looking at biopsies. They're not just reading things language. They're also looking at images and interpreting images. So that is actually a bigger and more complicated problem than understanding language." - Oracle (ORCL 0.00%↑) CTO Lawrence Ellison
The broader semiconductor industry is still trying to find bottom
"...so all of that has resulted in an overhang that the industry is correcting through at this point. And we think we're getting to the bottom of this cycle and where it's at, but I don't think there's as much visibility into what is the shape of the recovery going to look like." - Microchip (MCHP 0.00%↑) CEO Ganesh Moorthy
Automotive semiconductor markets are weak
"So clearly, the macro this year in auto is weaker than last year if you look at the total SAAR. Last year SAAR growth, I think, was 9% year-on-year. This year, it's going to be flat. So you have already from that a 9% less strong market." - NXP Semiconductors (NXP 0.00%↑I) CEO Kurt Sievers
Healthcare
The Life Sciences market isn’t back to the boom days but it is stabilizing
"What we expect we will see is a growth trajectory similar to what was 2014 to 2017 as opposed to the exponential growth we saw between 2018 and 2021, where money was free, every VC firm in America was looking at life science. The companies were grabbing dollars at ever-increasing valuations, and they were sucking up space like there was no tomorrow. And landlord after landlord was saying, this is the key to my success. I'm go the life science building or I'm going to convert a life science building. We are now dealing with the digesting of all that space and the change in the capital raising of those companies. There is money being put into the VC firms. There is a significant recovery in the [ IXB ] that market is recovering, but they are doing it in a very different way. So today, if we look at the markets that we operate in, we are seeing very small companies looking for a small incremental space. We are not seeing companies saying, we must have huge new installations. We are looking for companies to put the burden of those improvements on the landlord. So rebuilding or building out space for those customers seems to be a prerequisite for doing a small transaction and we have a lot of space to absorb. And so I would say that neither the technology or the life science market is anywhere close to where it was in 2020 to '22. But we are as confident in life science as we are in technology. We are in a relatively good position relative to our availability." - Boston Properties (BXP 0.00%↑) President Douglas Linde
There is unprecedented demand for obesity drugs
"First, if you look at the demand we are facing now, it's unprecedented. We have a huge, huge unmet medical need when it comes to obesity. We are estimating 110 million people in the US suffering from obesity, 650 million outside the US. So I think just if you look at the combined capacity of us and the competition, that's really hard to meet with injectables only. Having said that, we are leaning in fully in terms of expanding our manufacturing capacity. We have announced since 2020 investments above $18 billion in manufacturing alone. We are building several sites in parallel." - Eli Lilly (LLY 0.00%↑) President of Lilly Diabetes and Obesity and Lilly USA
Industrials and Transport
8 quotes — The EV market, China’s EV growth, GM 0.00%↑ in China, and Waymo's autonomous ridership
Materials & Energy
Tech firms are seeking city-scale power for US data centers
"We’ve had some come to us and say, ‘Can you show us sites that can accommodate 5 gigawatts of demand?’…Think about that. That’s the size of powering the city of Miami…There's now 2 conversations that have to be had. You're not only working with the customer that wants the 5 gigawatts, right?" - NextEra (NEE 0.00%↑) CEO John Ketchum
"...it was a real question. It was asked in real earnest. I don't know that they fully comprehend that that's the size of Miami plus a lot. And you go to any utility across the country and you asked to connect the size of Miami right here, you'll be met with some interesting looks and interesting conversations. …Even a 1-gigawatt solution somewhere is not insignificant. I think what that suggests is you'll see more projects like the ones that we can put together." - NextEra (NEE 0.00%↑) President & CEO Rebecca Kujawa
"What we haven't talked so much about is we're also building the largest data centers in the world. We talked about -- I think we talked briefly about 1 last call, where we can park -- it's a 70-megawatt data center where we can park 8 747s nose to tail in the data center, the huge AI training data center. While we're also building a 200-megawatt data center. In fact, this past quarter, we sold about half of that data center for the -- for a period of time. So we're now bringing 200-megawatt data centers online. So we are literally building the smallest, most portable, most affordable cloud data centers all the way up to 200-megawatt data centers ideal for training very large language models and keeping them up to date. This AI race is going to go on for a long time. It's not a matter of getting ahead, just simply getting ahead in AI, but you also have to keep your model current. And that's going to take larger and larger data centers. And some of the data centers we have that we're planning are actually even bigger. There -- some are getting very close to our there, say, 1 gigawatt, which is a pretty good-sized city or 1 enormous AI cloud training data center." - Oracle (ORCL 0.00%↑) CTO Lawrence Ellison
Energy-efficient cooling is important for data centers
"Saving $60 million may not be a really big deal and motivation for some big corporate. But through liquid cooling, we can reduce huge amounts of CO2 emissions and make our planet win by doing this. Giving me a happy mind all day, every day. You can do the same if you like, I'm pleased. Additionally, DLC computing will reduce power requirements, save for the previously mentioned typical [indiscernible] data center. air cool will need roughly 50 megawatts of power. With DLC cooling, total you only need 10 megawatts to power the whole data center. For cities and countries where power capacity is limited, this will open the door for a new class of data centers" - Super Micro Computer (SMCI 0.00%↑) CEO Charles Liang
Real Estate
6 quotes — Blackstone’s outlook, Boston Properties’ leasing pipeline, mortgage market trends, and recovery in "tech cities"
Nuggets of Wisdom
Sometimes you’re going to lose. Put it behind you and move forward.
"In tennis, perfection is impossible... In the 1,526 singles matches I played in my career, I won almost 80% of those matches... Now, I have a question for all of you... what percentage of the POINTS do you think I won in those matches? Only 54%. In other words, even top-ranked tennis players win barely more than half of the points they play. When you lose every second point, on average, you learn not to dwell on every shot. You teach yourself to think: OK, I double-faulted. It’s only a point. OK, I came to the net and I got passed again. It’s only a point. Even a great shot, an overhead backhand smash that ends up on ESPN’s Top Ten Plays: that, too, is just a point. Here’s why I am telling you this. When you’re playing a point, it is the most important thing in the world. But when it’s behind you, it’s behind you... This mindset is really crucial because it frees you to fully commit to the next point… and the next one after that… with intensity, clarity, and focus. The truth is, whatever game you play in life... sometimes you’re going to lose. A point, a match, a season, a job... it’s a roller coaster, with many ups and downs." - Former Professional Tennis Player Roger Federer