Clear Signs of Softening
Growing concerns of the consumer and labor markets softening
Summary: Earnings season began last week and there seems to be growing concern that the consumer and labor markets are softening. Reserves from the COVID stimulus are now depleted and even higher-income consumers may be pulling back. The Fed is still focused on inflation, but Jerome Powell said that the balance of risk between inflation and unemployment is starting to keep him up at night. Markets are beginning to expect more rate cuts.
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Macro
Consumer spending growth has slowed
"We are not seeing the same growth in consumer spending that we had in prior quarters. There was less traffic in the retail venues that we partner with…there are clear signs of a softening labor market and the tightening of the consumer budget." - Citigroup (C 0.00%↑) CFO Mark Mason
"The impacts of persistent inflationary pressures and higher borrowing costs over the last few years have resulted in tighter household financial conditions. Accordingly, the year-to-date performance across many food categories, including snacks, has been subdued and consumers have become more value-conscious with their spending patterns and preferences across brands, packages, and channels..a normalization and moderation in category growth rates versus the last few years has occurred with consumers remaining watchful with their budgets and choiceful with their purchases." - PepsiCo (PEP 0.00%↑) CEO Ramon Laguarta
"As has been widely reported, the macro environment and the health of consumers and retailers has worsened. Consumers are even more financially stretched and are even further prioritizing essentials over discretionary items." - Helen of Troy Limited (HELE 0.00%↑) CEO Noel Geoffroy
"...sales in the fiscal third quarter did not meet our expectations. This sales decline, which began mid-April, was sudden and unexpected…We believe the current headwinds are macro-driven…the macro environment..it's not limited to California. It's something that we're seeing across the system…The thing that we've seen is not so much spending management, just more frequency management, unfortunately." - Kura Sushi USA (KRUS 0.00%↑) CEO Hajime Uba
The lower-income consumer is struggling
"You can see the early signs of that portion of the population [who do not have assets to invest in the stock market] having depleted the reserves they had built up through the pandemic and are confronting the fact that the overall level of prices is just higher" - Bank of New York Mellon (BK 0.00%↑) CEO Robin Vince
"When you look below the surface and really dig into what is happening across differing consumers, you see that the lower-income folks are struggling" - Wells Fargo (WFC 0.00%↑) CFO Michael Santomassimo
Higher-income consumers may be pulling back too
"This need for value or more value consciousness, I think, is impacting every household in the U.S. So it is different levels of income, I think it's impacting everybody. And we're seeing behaviors in different income levels. I would aggregate all that, the consumer is much more price-conscious, is looking for more value across. So maybe you see the higher-income consumers that they are not going to expensive restaurants, they're adjusting their behavior to more affordable restaurant. Or they stay at home and then they create their own entertainment moments or fun moments at home. So you see different behaviors happening everywhere. I think the connecting line would be the consumer is more cautious" - PepsiCo (PEP 0.00%↑ CEO Ramon Laguarta
Layoffs are increasing in the industrial economy
"We continue to experience sluggish business activity that has persisted long enough at this point to be spurring an uptick in layoffs and shift reductions. There were more and longer shutdowns around the July 4 holiday. Some of those, frankly, are continuing. And overall, industrial production continues to exhibit modest declines as we saw in April and May, with the key machinery component being weaker than the overall index, and we're feeling that." - Fastenal (FAST 0.00%↑) CFO Holden Lewis
Banks tend to view the economy as solid but slowing
"Recent indicators suggest that the U.S. economy continues to expand at a solid pace. Gross domestic product growth appears to have moderated in the first half of this year following impressive strength in the second half of last year. Private domestic demand remains robust, however, with slower but still-solid increases in consumer spending." - US Federal Reserve Chair Jerome Powell
"...overall, the U.S. economy remains strong, driven by a healthy labor market and solid growth. However, the economy is slowing and there are continued headwinds from still elevated inflation and elevated interest rates." - Wells Fargo (WFC 0.00%↑) CEO Charles Scharf
“Looking at the macro environment, as we enter the second half of the year, U.S. is still the world's most structurally sound economy” - Citigroup (C 0.00%↑) CEO Jane Fraser
"...while very strong and certainly a lot stronger than anyone would have thought given the tightness of monetary conditions, say, like they've been predicting it a couple of years ago or whatever, you are seeing slightly higher unemployment, you are seeing moderating GDP growth. And so it's not entirely surprising that you're seeing a tiny bit of weakness in some pockets of spend." - JPMorgan Chase (JPM 0.00%↑)
The Fed is feeling more confident about inflation
"The most recent inflation readings…have shown some modest further progress, and more good data would strengthen our confidence that inflation is moving sustainably toward 2%." - US Federal Reserve Chair Jerome Powell
"After a break in progress, inflation now appears back on a downward trajectory." - Citigroup (C 0.00%↑) CEO Jane Fraser
"We did have negative pricing in the period of 30 to 60 basis points. Fastener prices remain down, which is not new, but we also experienced some slippage in price from non-fastener products." - Fastenal (FAST 0.00%↑) CFO Holden Lewis
Jerome Powell is focused on balancing the risk of inflation and a cooling economy
"I would actually say now the number one thing that just does keep me awake at night is the balance that I talked about before, which is we're at the critical time of inflation is coming down, the labor market is cooling, and we want to get it right for the benefit of the American people. We want to get inflation down to 2%, but we want to keep a strong labor market too, and trying to make decisions that give that the best chance to happen. That is the thing that I think about in the wee hours, you know." - US Federal Reserve Chair Jerome Powell
Rate cut expectations are rising
"...based on the latest inflation data and so on, you could usually get back to a situation with a lot more cuts in the yield curve. So we'll see how it goes." - JPMorgan Chase (JPM 0.00%↑) CFO Jeremy Barnum
Jackson Hole could be a turning point
"We had a slowdown in inflation print yesterday. Let's see how Jay speaks on Monday and how he guides out of Jackson Hole and into a September potential rate cut. But we kind of take all of those levers, and we just kind of say, for now, there's no point in me changing guidance -- to change guidance again in September or October at the next call. So we're cautiously optimistic." - Bank of New York Mellon (BK 0.00%↑) CFO Dermot McDonogh
Everyone will be processing Donald Trump’s near assassination this week
"I pray for President Trump’s rapid recovery. My thoughts are with him, the other victims, and the Trump family. I strongly condemn this violence" - Apple (AAPL 0.00%↑) CEO Tim Cook
"I’m wishing President Trump a speedy recovery. I’m shocked by today’s shooting and loss of life. Political violence is intolerable and we must all come together to strongly oppose it" - Google (GOOGL 0.00%↑) CEO Sundar Pichai
"I have been briefed on the shooting at Donald Trump’s rally in Pennsylvania. I’m grateful to hear that he’s safe and doing well. I’m praying for him and his family and for all those who were at the rally, as we await further information. Jill and I are grateful to the Secret Service for getting him to safety. There’s no place for this kind of violence in America. We must unite as one nation to condemn it." - US President Joe Biden
“We must stand firm against any form of violence that challenges democracy. I pray for former President Trump’s speedy recovery." - Taiwan President Lai Ching Te
"I am appalled by the shocking scenes at President Trump's rally and we send him and his family our best wishes. Political violence in any form has no place in our societies and my thoughts are with all the victims of this attack." - UK Prime Minister Keir Starmer
International
Europe's growth hampered despite rate cuts
"In Europe, while rate cuts have begun, the region's lack of competitiveness continues to be a drag on growth" - Citigroup (C 0.00%↑) CEO Jane Fraser
China's moderate growth faces drag in tariffs on EVs & semis
"In Asia, China is growing moderately, albeit with government stimulus, and their pivot to high-tech manufacturing is being challenged by tariffs on EVs and semiconductors." - Citigroup (C 0.00%↑) CEO Jane Fraser
Tourists are avoiding Paris during the Olympics
"...we are seeing about a $100 million impact on travel to Paris for the Olympics from June to August. Outside of this temporary event, summer travel demand to Europe is strong and consistent with our expectations...People aren't going to Paris ... very few are. Business travel remains strong, but other types of tourism are potentially going elsewhere. During the period itself, there’s a little bit of hesitation" - Delta Air Lines (DAL 0.00%↑) President Glen Hauenstein
"Air France and Transavia France are currently experiencing pressure on projected unit revenues for the summer season due to the upcoming Olympic Games in Paris, with traffic to and from the French capital lagging behind other major European cities. International markets show a significant avoidance of Paris. …Travel to and from France is expected to normalize after the Olympic Games, with encouraging demand levels projected for the end of August and the month of September." - Air France-KLM
The season for international tourism is extending into the fall. Japan is becoming a popular destination for US tourists.
"I think generally, we see the season extending as a whole group of people, whether or not it's retirees, whether or not it's people with double incomes and without children, who don't have the school concerns. It's actually a better time to go to Europe in September and October than it is potentially in July and August when the weather is so hot and everything is so packed. So we are really seeing an extension into September and October and really into through November that European demand across the board is remaining strong. So that's very exciting for us. The same thing is happening in the leisure markets in the Pacific. Interestingly enough, Japan has turned into a U.S. point-of-sale leisure market with the yen hitting at JPY 160. So we have really record numbers of U.S. tourists heading to Japan, which is such a great destination. And again, that has a very strong fall season. So really looking at U.S. origin, high-end leisure extending the season through October and into November." - Delta Air Lines (DAL 0.00%↑) President Glen Hauenstein
Financials
Loan demand remains muted
"On the loan demand front, yes, I mean, unfortunately, I just don't have much new to say there on loan demand. Meaning, to your point, loan demand remains quite muted everywhere except Card." - JPMorgan Chase (JPM 0.00%↑) CFO Jeremy Barnum
"Average commercial and consumer loans were both down from the first quarter. The higher interest rate environment and anticipation of rate cuts continued to result in tepid commercial loan demand and we have not changed our underwriting standards to chase growth." - Wells Fargo (WFC 0.00%↑) CEO Charles Scharf
Auto loan balances down 14% at Wells Fargo
“Balances in our auto portfolio declined 14% compared with the year ago, driven by lower origination volumes which were down 23% from a year ago, reflecting previous credit-tightening actions. While debit and credit card spend increased from a year ago” - Wells Fargo (WFC 0.00%↑ ) CFO Michael Santomassimo
Deposit growth is also weak
"We still think that there are net headwinds to deposit balances. So when we think of our balance outlook, we see it as flat to slightly down maybe, with our sort of market share and growth ambitions offsetting those system-wide headwinds. So in terms of normalizing higher, I guess it depends on relative to what" - JPMorgan Chase (JPM 0.00%↑) CFO Jeremy Barnum
Credit quality is normalizing within expectations
"I still feel like when it comes to Card charge-offs and delinquencies, there's just not much to see there. It's still -- it's normalization, not deterioration. It's in line with expectations" - JPMorgan Chase (JPM 0.00%↑) CFO Jeremy Barnum
"Net loan charge-offs increased 7 basis points from the first quarter to 57 basis points of average loans. The increase was driven by higher commercial net loan charge-offs." - Wells Fargo (WFC 0.00%↑) CFO Michael Santomassimo
Citi is seeing “sharper drops” in payment rates by lower FICO score customers though
"When we look across our consumer clients, only the highest income quartile has more savings than they did at the beginning of 2019, and it is the over 740 FICO score customers that are driving the spend growth and maintaining high payment rates. Lower FICO band customers are seeing sharper drops in payment rates and borrowing more as they are more acutely impacted by high inflation and interest rates." - Citigroup (C 0.00%↑) CFO Mark Mason
There’s hope that equity capital markets are opening back up
"It's progress, right? I mean we're happy to see the progress…In terms of dialogue and engagement, it's definitely elevated. So, as the dialogue on ECM is elevated and the dialogue on M&A is quite robust as well. So all of those are good things that encourage us and make us hopeful that we could be seeing sort of a better trend in this space.” - JPMorgan Chase (JPM 0.00%↑) CFO Jeremy Barnum
These are some of the reasons that IPOs are not booming even though indexes are up:
"...given the performance of the overall indices, you would think it would be a really booming environment for IPOs, for example. And while it's improving, it's not quite as good as you would otherwise expect. And that's driven by a variety of factors, including the fact that, as has been widely discussed, that extent to which the performance of the large industries is driven by like a few stocks, the sort of mid-cap tech growth space and other spaces that would typically be driving IPOs have had much more muted performance. Also, a lot of the private capital that was raised a couple of years ago was raised at pretty high valuations. And so in some cases, people looking at IPOs could be looking at down rounds, that's an issue. And while secondary market performance of IPOs has improved meaningfully, in some cases, people still have concerns about that. So those are a little bit of overhang on that space." - JPMorgan Chase (JPM 0.00%↑) CFO Jeremy Barnum
Debt capital markets pulled forward demand in the first half of the year
“...on the DCM side, yes, we made [ pull-forward ] comments in the first quarter, but we still feel that this second quarter still reflects a bunch of pull-forward, and therefore, we're reasonably cautious about the second half of the year. Importantly, a lot of the activity is refinancing activity as opposed to, for example, acquisition finance. So the fact that M&A remains still relatively muted in terms of actual deals has knock-on effects on DCM as well. And when a higher percentage of the wallet is refi, then the pull-forward risk becomes a little bit higher." - JPMorgan Chase (JPM 0.00%↑) CFO Jeremy Barnum
Private credit funds are taking market share as a preferred lender for M&A transactions
"I think we've been a part of driving this evolution of direct lending from a lender of last resort model if you go back more than a decade to a lender of first choice, and we've seen that evolution over the course of these many years now. And if you look over the last several years, private credit has played in a fairly significant role in really the majority of large-cap private equity transactions." - Blue Owl Capital (OWL 0.00%↑) Co-President Marc Lipschultz
GP-led continuation funds are going to be a big phenomenon in private equity
"GP-led continuation I think, is going to be a very big phenomenon for people trying to bridge this world of I have a great asset. It's not really a great time to be a seller, but I need to be a seller because I have LPs and need capital, and I've got to print IRRs if I want to raise my next fund." - Blue Owl Capital (OWL 0.00%↑) Co-President Marc Lipschultz
Consumer
Retail traffic has slowed
"We've heard broadly from mass retail that traffic overall is slower throughout the country and promotional pressure is increasing. In reaction to these dynamics, retailers are managing inventories more closely to account for the slowdown" - Helen of Troy Limited (HELE 0.00%↑) CEO Noel Geoffroy
Restaurant traffic has slowed too
"What we have seen instead is a general perception that restaurants as a category have become expensive introducing industry-wide pressures regardless of a given restaurant's relative value." - Kura Sushi USA (KRUS 0.00%↑) CEO Hajime Uba
Pepsi’s growth has slowed a lot
"PepsiCo delivered 1.9% organic revenue growth, which compares to 13% organic revenue growth in the second quarter of 2023...We now expect to deliver approximately 4% organic revenue growth (previously at least 4%). This modification primarily reflects the subdued performance in North America convenient foods year-to-date" - PepsiCo (PEP 0.00%↑) CEO Ramon Laguarta
Air travel demand remains strong but supply has also increased
"...while demand for air travel remains strong with record TSA travel volumes up 7% from last year's levels, domestic industry seat growth has accelerated through the summer months, impacting yield performance in the main cabin…That said, we are encouraged by the actions the industry has taken. Seat growth is decelerating and there appears to be increased focus on improving financial performance. ..Travel remains a top purchase priority and Delta's core customers are in a healthy position. The secular shift in consumer spend to prioritize experiences aligns perfectly with Delta's strategy and premium focus across our global network. Air travel demand is at record levels, with this past Sunday marking Delta's highest ever summer revenue day." - Delta Air Lines (DAL 0.00%↑) CEO Ed Bastian
The media industry may see further consolidation
"I think probably over the next year or two you’re going to see some real consolidation, whether that happens from companies buying each other, or jointly going after streaming together" - Warner Bros. Discovery (WBD 0.00%↑) CEO David Zaslav
Technology
Goldman Sachs was throwing cold water on AI hype
"Many people seem to believe that AI will be the most important technological invention of their lifetime, but I don’t agree given the extent to which the internet, cell phones, and laptops have fundamentally transformed our daily lives, enabling us to do things never before possible, like make calls, compute and shop from anywhere. Currently, AI has shown the most promise in making existing processes—like coding—more efficient, although estimates of even these efficiency improvements have declined, and the cost of utilizing the technology to solve tasks is much higher than existing methods. For example, we’ve found that AI can update historical data in our company models more quickly than doing so manually, but at six times the cost. More broadly, people generally substantially overestimate what the technology is capable of today. In our experience, even basic summarization tasks often yield illegible and nonsensical results. This is not a matter of just some tweaks being required here and there; despite its expensive price tag, the technology is nowhere near where it needs to be in order to be useful for even such basic tasks. And I struggle to believe that the technology will ever achieve the cognitive reasoning required to substantially augment or replace human interactions. Humans add the most value to complex tasks by identifying and understanding outliers and nuance in a way that it is difficult to imagine a model trained on historical data would ever be able to do." - Goldman Sachs (GS 0.00%↑) Head of Global Equity Research Jim Covello
AI will have to justify the scale of investment required
"My main concern is that the substantial cost to develop and run AI technology means that AI applications must solve extremely complex and important problems for enterprises to earn an appropriate return on investment (ROI). We estimate that the AI infrastructure buildout will cost over $1tn in the next several years alone, which includes spending on data centers, utilities, and applications. So, the crucial question is: What $1tn problem will AI solve? Replacing low-wage jobs with tremendously costly technology is basically the polar opposite of the prior technology transitions I’ve witnessed in my thirty years of closely following the tech industry. Many people attempt to compare AI today to the early days of the internet. But even in its infancy, the internet was a low-cost technology solution that enabled e-commerce to replace costly incumbent solutions. Amazon could sell books at a lower cost than Barnes & Noble because it didn’t have to maintain costly brick-and-mortar locations. Fast forward three decades, and Web 2.0 is still providing cheaper solutions that are disrupting more expensive solutions, such as Uber displacing limousine services. While the question of whether AI technology will ever deliver on the promise many people are excited about today is certainly debatable, the less debatable point is that AI technology is exceptionally expensive, and to justify those costs, the technology must be able to solve complex problems, which it isn’t designed to do" - Goldman Sachs (GS 0.00%↑) Head of Global Equity Research Jim Covello
Google DeepMind CEO: We're far from human-level AI; not even at cat intelligence yet
"Well, initially, it will be, you know, that's an interesting scientific debate at the moment. Of course, at the moment, we're far from human-level intelligence across the board. But in certain areas, like game playing, we're better than the best people in the world. Now the question is, what will happen overall when we start generalizing this? But at the moment, we're still not even at cat intelligence yet as a general system. So, we've got a long way to go. You know, I think there's a lot of big breakthroughs that are still needed. I'm of the opinion that we're going to need both scaling the existing systems and some big, big new breakthroughs." - Google (GOOGL 0.00%↑) DeepMind CEO Demis Hassabis
RAG is all the rage
"...if you come to the RAG and Fine-Tuning -- that is where we also see a tremendous -- tremendous opportunity…RAG is basically a technology, which is called Retrieval-Augmented Generation is where you don't need to retrain those models using huge cost saves, but you can deploy those pre-trained models but make it relevant to your businesses, make it updated because traditionally, those models will be trained on a year-old data, right?" - NetApp (NTAP 0.00%↑) Senior Director of Global AI Analytics, Sales and GTM Hoseb Dermanilian
RAG will generate huge storage requirements
"The RAG technology requires pre-existing data to be converted into numbers, into numerous that the models would understand better. The industry analysts, a couple of them already out there saying that, that process will actually generate almost from 1x or 100% more data to almost 10x of the data because those embedding would generate would need more numerous to be stored on." - NetApp (NTAP 0.00%↑) Senior Director of Global AI Analytics, Sales and GTM Hoseb Dermanilian
Healthcare
No impact from GLP-1 yet at Pepsi
"I don't think GLP at this point, Nik, has a material impact in our category for sure. And we have a lot of panels and we have a lot of conversations with consumers, it's not impacting us. At this point, it's an economic value relationship for our categories, and we will address them in the second half of the year." - PepsiCo (PEP 0.00%↑) CEO Ramon Laguarta
Industrials and Transport
The manufacturing sector has arguably been in recession for almost two years
"The U.S. Manufacturing Purchasing Managers' Index has been sub-50, indicating weak manufacturing activity, for 19 of the last 20 months. This is an uncommon duration that weighs on U.S. Industrial Production and our daily sales rates…Customer sentiment remains challenging and regional leadership is seeing more layoffs, shift reductions, and planned plant shutdowns." - Fastenal (FAST 0.00%↑) CEO Daniel Florness
Railcar markets are more stable than they used to be. Less prone to boom and bust
"...we see stable but good railcar demand across all our geographies. The current market is less volatile and consequently less prone to booms and busts than those in the past decades." - The Greenbrier Companies (GBX 0.00%↑) CEO Lore Tekorius
Materials & Energy
Global energy demand has been higher than expected
“I think one bit of the news is, is energy demand has grown more quickly than we thought, and it's just come back. There's just greater momentum in global energy demand.” - BP Group (BP 0.00%↑) Chief Economist Spencer Dale
There’s been strong growth in solar
“...completely surprised by just the strength of solar power. That's driven in part by these huge falls that you know fully about. We estimate that solar modules, the cost of solar modules has fallen by about 60% over the last 4 years. We expect a strong growth in solar energy. We didn't expect really, really, really strong growth in solar energy” - BP Group (BP 0.00%↑) Chief Economist Spencer Dale
Alphabet is shifting from carbon neutrality to focus on carbon removal
"We aim to neutralize our residual emissions with high-quality carbon removal credits by 2030 and to do so in a way that maximizes our positive impact on global decarbonization. This approach represents an evolution of our strategy: starting in 2023, we’re no longer maintaining operational carbon neutrality. 138 We’re instead focusing on accelerating an array of carbon solutions and partnerships that will help us work toward our net-zero goal, and are aiming to play an important role in advancing the development and deployment of nature-based and technology-based carbon removal solutions required to mitigate climate change." - Alphabet (GOOGL 0.00%↑)
AI may help drive energy efficiency, reducing its net impact on energy demand
“I'm a little bit more optimistic than you in terms of the impact of AI is how AI can improve energy efficiency, how it can start to help us digitize grids, how it can help us improve industrial processes, how it can start to find new materials that we can use for and advances that we can use for CCUS and so on. And so that's likely to reduce that direct impact. How much, so the net impact of AI, I think, is going to be less than the numbers you see at the moment, which only looks at the positive side. And in some sense, there are many commentators out there that actually think that in the medium term, the net impact of AI will be to reduce energy demand, helping the world become more and more efficient and not -- and more than offsetting that positive impact. So I think the truthful answer is I don't know” - BP Group (BP 0.00%↑) Chief Economist Spencer Dale
After record highs in 2021, lumber prices have now fallen to record inflation-adjusted lows
"I think what changed as we went into 2024 is that people were very optimistic, and the industry did not recognize how fast demand was going to continue to decline during that period. If you look at the last 25 years, lumber today, inflation-adjusted, is approaching its all-time low. So, we are extremely, extremely cheap relative to the past." - Sherwood Lumber COO Kyle Little
Real Estate
Fundamentals for office real estate continue to deteriorate
"In our commercial portfolios, losses continued to be driven by commercial real estate office properties, where we expect losses to remain lumpy. Fundamentals in the institutional-owned office real estate market continued to deteriorate as lower appraisals reflect the weak leasing market in many large metropolitan areas across the country. However, they still remain within the assumptions we made when setting our allowance for credit losses." - Wells Fargo (WFC 0.00%↑) CEO Charles Scharf
Nuggets of Wisdom
Private Equity is a euphemism for LBO
"So the PE market, which is, by the way, my origin in '95 when I started, I did LBOs, but they were called LBOs, as you know, many on this call will not particularly have used that term because we changed it in the late '90s to private equity to sound better." - Blue Owl Capital (OWL 0.00%↑) Co-President Marc Lipschultz