The Transcript Commentary
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Change in Tone
Capital markets shifted last week, but earnings calls commentary was relatively unchanged from previous weeks. If anything, earnings call transcripts provided slightly more positive data points than we had seen in recent weeks.
Weak Economic Data
Weak readings on the ISM survey and unemployment report helped reinforce trends that we first highlighted in our July 15 newsletter that there have been “clear signs of softening” in the economy and labor markets. The quotes from business leaders in the ISM survey were particularly concerning. ISM quoted respondents as saying “Consumer behavior is changing more than normal…It seems consumers are starting to pull back on spending” and “It seems that the economy is slowing down significantly.” Meanwhile, the prices paid component rose to 52.9, indicating some degree of stagflation.
These comments are consistent with those that we’ve been highlighting in the Transcript. We continued to see signs of weakness last week. One quote from McDonald’s CEO captured consumers’ current mood. He said that “beginning last year, we warned of a more discriminating consumer, particularly among lower-income households. And as this year progressed, those pressures have deepened and broadened.” Amazon also said that consumers are “being careful with their spend, trading down, looking for lower ASP products, looking for deals.”
Fed Comments too Hawkish?
These trends aren’t new or surprising, but they are somewhat inconsistent with Fed policy, which was also updated last week. Beneath the headlines, the Fed’s comments may have been slightly more hawkish than markets were hoping for. The FOMC signaled that they are likely to lower rates at their September meeting, but Jerome Powell seemed to imply that the Fed was only ready to move to “dial back the restriction” and reinforced that the Fed’s job is not yet done on inflation. While the Fed is moving in an easier direction, “less restrictive” is not “stimulative.” Given the data that we’re seeing, the stock market may be starting to think that there’s a need for a stimulative policy response from the Fed along with aggressive interest rate cuts.
Even if the Fed cuts by 50bps in September (which is something that Jerome Powell said they were not considering on Wednesday last week) they would still have to bring down rates by a lot before they get to a stimulative stance. If the Fed pursues a measured pace of interest rate changes, it could be many months before monetary policy becomes stimulative. By that time, a recession could be more severe.
Reasons for Optimism
Even though the stock market fell last week, there was plenty of optimistic data in the transcripts that we read. The most surprising positive data point was from Mondelez’s CEO who said that they are “seeing volume growth start to rebound as inflation cools. Consumer incomes are rising…private label growth in our categories is decelerating.” One quote does not make a trend but this is an unexpected change and something worth paying attention to.
Mastercard also had relatively positive comments about the consumer, noting that “The bottom line there is that for now, the consumer is supported, and that's pretty much irrelevant of income cohort, is supported by a strong labor market.” We always put heavy weight on Mastercard and Visa’s view of the world given the breadth of spending that those companies see.
Also, comments from Live Nation and Norwegian Cruise Lines seemed to reinforce that consumers are still spending, but just on experiences where they see good value. Concerts are expensive but are also good value for the $50-$100 ticket price. NCLH noted that cruises have a 40% value gap over hotels and is seeing “absolutely 0 decrease in onboard spend.” Restaurants in contrast are not seen as good value for the dollar.
These comments may imply that consumers are still spending but are just doing so in a “discriminating” fashion–hence the title of this week’s newsletter.
AI Bubble?
Beyond the macro, last week was a heavy week of earnings for technology companies with Apple, Microsoft, Meta, and Amazon reporting. In our Tech section, we pieced quotes together into an extended discussion on AI. The section started with a question that a lot of people seem to be asking: is AI a bubble? We saw arguments supporting both AI bulls and AI bears.
In support of bears, Meta tempered expectations of AI as a revenue driver in 2024. Further, two quotes from Meta and AMD captured a bubble-like mentality driving capex spend. Mark Zuckerberg said, “I'd rather risk building capacity before it is needed rather than too late.” AMD CEO Lisa Su said “I think the overall view on AI investment is we have to invest. I mean, the industry has to invest.” These quotes suggest that the investment may be driven by competitive fears rather than real demand, which could lead to an eventual letdown.
Still, the gargantuan CapEx plans are likely justified. Microsoft and Amazon both implied that demand for current AI processing capabilities is greater than supply. Mark Zuckerberg made an important point: even if the models don’t get any better from here there would still be a huge amount of economic value created by them. And the models are likely to continue to improve. Zuckerberg said “I'm not really planning our product roadmap assuming that there isn't future innovation. On the contrary, we are planning what's going to be in Llama 4 and Llama 5 and beyond.”
It’s rational for him to think ahead: “I actually think all the companies that are investing are making a rational decision. Because the downside of being behind is that you're out of position for the most important technology for the next 10 to 15 years.”
The Week Ahead
While we didn’t find signs of a steeply accelerating recession, given last week’s stock market movement, we’ll likely see more discussion on the state of the economy and potential recession in this week’s earnings calls. Because the environment shifted quickly, It’s possible that our newsletter was lagging by a little bit. This will be the biggest question that we’re watching for in this week’s earnings calls.