🐢 Is Slower GDP The Key?

Q1 GDP growth in the U.S. was even worse, but that might be a good thing May 31, 2024 | Peel #721 Silver Banana goes to... [Heron Finance. ](20Street%20Oasis///) In this issue of the Peel: - 🤔 Q1 GDP growth in the U.S. was even worse, but that might be a good thing - 🤖 AI keeps popping off, but Kohl’s investors wish they were in 1945 Dresden - 💵 96% of S&P 500 companies have dropped earnings—check out how they did Market Snapshot 📸 = Banana Bits 🍌 - Today’s PCE report is expected to be a [step in the right direction](=) - Cuts to home listing prices are starting to increase, [giving young people hope](=) (and potentially even a reason to live) - The Mag 7 is still carrying the team [with EPS growth]() - Former Pres big dawg Donnie T was found guilty on 34 of 34 charges in the way-overly-publicized [hush money trial]() Enter The Private Credit Market That Is Closed To Most Investors 20Street%20Oasis/// In today’s market, you need unconventional leads to find higher return potential and stable investments. While stock volatility has hurt conventional investments, private credit is a good alternative to consider.. If you’re earning over $200,000 a year, Heron Finance can help you invest in private credit deals once reserved for institutions. And with its robo-advisor, you get passive investing to make every cent count. In private credit’s golden moment, here’s how Heron Finance can help to maximize your returns: - Offering exclusive deals previously only available to institutional investors and the ultra-wealthy - Providing private debt assets with a 14% compound annual growth rate* - Allowing you to reinvest your monthly payments to compound your investment returns Once you’ve broken into the private credit market, Heron’s robo-advisor and team of market analysts will find the best deals with higher return potential with the possibility of less risk. Each month, you'll receive interest distributions straight to your account, meaning you get the flexibility to reinvest or withdraw your earnings based on your needs. [Access exclusive deals with Heron Finance to join the private credit boom.](20Street%20Oasis///) [Risk disclosures]() Macro Monkey Says 🐒 Growing But Slowing If Chinese or Indian economic growth is Superman, then the U.S. is Batman. Superman is objectively dope, just like annual GDP growth in these historically booming economies. Batman, on the other hand, is just some nerd with money—but still gets the jobs done—exactly like the U.S. Yesterday, we got an update on exactly how well we nerds with money grew our economy in the first quarter. So, let’s get into it. The Numbers Believe it or not, counting the total dollar amount of every single good produced and service provided in the largest economy ever in human history can be slightly challenging. That’s why the Bureau of Economic Analysis (BEA) throws up three estimates of each quarterly growth rate, roughly a month apart. Yesterday, the BEA released their “2nd Estimate” of Q1 GDP growth in the U.S., and… [Source]() Real GDP grew at an annualized rate of 1.3% in the first quarter, a downward revision of 30bps from the previously reported 1.6%. Compared to Q4’23, GDP slowed even more dramatically than previously thought, declining from a Usain Bolt-level of 3.4% growth to a range closer to the speed of me taking a calculus test. Slow growth like this isn’t particularly alien to the U.S. however. It took a strong recovery for a world-stopping pandemic to bump us back above 3% for the first time since 2005, above 4% for the first time since 2000, and 5% for the first time since 1984. This century, average annual U.S. GDP growth sits at 2.04%, a number that makes JPow quite jealous, meaning that the -2.77% and +5.95% growth rates seen in 2020 and 2021 are the anomalous ones—2022, ‘23, and ‘24 are simply reverting to the mean. So, while we shouldn’t be worried about slow growth just because the level is slow, we should be worried about the trending slowdown from 2023’s 2.5% GDP growth. Most of the variation in the post-pandemic years can be attributed to prior-year comps, with 2021 growing so strongly because we were busy screaming at each other about masks and huffing on ventilators in 2020. Meanwhile, 2022 saw a big slowdown because the U.S. economy was playing like the 2013 LeBron in 2021. That gave 2022 a tough comp, and now—finally—2023 can compare itself to a “normal” year as if there ever really is one. Now that we know the U.S. economy is simply going back to its old, slow growth tendencies, let’s find out why. Behind The Numbers You know, I was proud of us apes after the first Q1 GDP growth estimate because of how strong our donations to the economy were in the form of consumer spending, but now, I’m gonna have to take our brownie points back. The primary driver of the revision lower was weak consumer spending. Despite an upward revision to real disposable personal incomes (inflation-adjusted, after-tax income) of $40.5bn, the increase in personal savings was revised upward by $96.6bn. That means that we spent $56.1bn less than previously thought in Q1, driving most of the slowdown. But even after these revisions, real disposable personal incomes grew a solid 5.3%. We just couldn’t overcome the upwardly revised 3.8% personal savings rate. [Source](=) In other words, we’re just too damn responsible. Consumer spending wasn’t alone in the lower revisions category, however. State and local government spending, along with net exports, were also revised lower. An alternative measure of economic growth, Gross Domestic Income (GDI), which measures all wages, profits, and taxes (minus subsidies) for a given period, grew at a healthier 1.5% rate. While not bad, that’s also way down from the 3.6% GDI growth in Q4’23. The Takeaway? Yes, U.S. GDP growth is both slowing and slower than we previously thought, but that’s not completely terrible news. This is exactly what the Federal Reserve has been trying to engineer since March 2022—a slowing economy driven by slower spending in order to slow inflation. The latest PCE report drops this morning, which will give us a fresh look at JPow’s favorite inflation measure, so we’ll find out at 8:30am ET exactly how we’re doing on that front. But, based on this revision, it seems like high rates have done well at their job of incentivizing higher savings rates. Based on recent employment reports, they’ve also helped to slow hiring, so we’re feeling a little cocky going into today’s release. Unless car insurance, egg prices, and these other inflationary f*ckers have something else to say, this only furthers the “lower for sooner” interest rate argument in 2024. Slower growth = more reason to cut rates, thus pumping my portfolio (for once). And, after all, isn’t that what life’s all about? What's Ripe 🤩 HP Inc (HPQ) 📈17.0% - Like an old man would say when the Hooter’s waitress pretends to laugh at his jokes, HP’s “still got it.” The PC firm got a boost from business upgrades. - AI hype and reality have spurred businesses to invest in new tech, increasing demand for products like HP’s and their AI workstations for data analytics teams. - Still, HP managed to post a YoY revenue decline at $12.8bn, but beat estimates. EPS of $0.82/sh beat estimates too and actually managed to grow annually. Foot Locker (FL) 📈15.0% - It was a clean quarter with no fouls called as Foot Locker’s referees cruised to a partial beat while maintaining guidance amid other unexciting developments. - The discount shoe retailer pulled $1.87bn in sales, down just over 3% annually and missing estimates for $1.88bn. EPS of $0.22 beat by 83%, however. - The firm kept guidance steady, which seemed to surprise analysts who were expecting the firm to chill on its discounts and potentially crimp margins. What's Rotten 🤮 Kohl’s (KSS) 📉22.9% - You’d think every Kohl’s store in the world was getting firebombed like Dresden in 1945 with the way shares are cratering. But no, it’s just bad earnings. - But, the company’s last quarter earnings did look like Dresden post-bombing, losing $0.24/sh vs expectations of a $0.04/sh profit. Sales missed by 4.7%, too. - Guidance was (obviously) lowered too. Their CEO blamed tough comps from last year, but analysts ascribe losses to a poor turnaround strategy and merchandise mix. Salesforce (CRM) 📉19.7% - If Kohl’s is Dresden, Salesforce is the atomic bombs dropping on Hiroshima and Nagasaki. It’s bigger and gets more attention but slightly less destructive. - Salesforce posted its first revenue miss since most of us were in elementary school in 2006 on macro challenges “returning with a vengeance,” per Citi. - Next quarter estimates were also revised slightly lower. But, it seems like the Street sees this as a buying opportunity due to the firm’s potential with AI. Thought Banana 🤔 Financial Engineering FTW Reading is so much more fun when it’s just pictures. After all, they do contain a thousand words, so does that mean picture books are actually more smarter than some bullsh*t like War and Peace? We’re not sure, so we don’t want to read too far into it (lol), but that’s why [articles like this]( are my absolute favorite. FactSet just dropped their Earnings Scorecard for Q1, and with 96% of companies reporting results, let’s see how they did. The Numbers The majority of S&P 500 companies cut costs and/or paid their accountants enough to figure out a way to post an EPS beat despite significantly less beating on revenue. 386 companies (77.2%) of the index beat estimates on the bottom line, growing earnings by an index-wide average of 6.0%. Meanwhile, 61% of S&P 500 companies beat on the top line, too, posting average revenue growth of 4.2%. That’s not much of a surprise, as firms have a lot more freedom to play around with the bottom line than the top. Techniques like accruing and/or capitalizing expenses, changing inventory methods, share buyback management, sale of non-core assets, exploiting tax strategies, adjusting provisions—the list goes on—can be used to temporarily boost EPS. But, since the beginning of 2023, companies have followed a Zuckerberg/Musk-style push to get costs more under control now that money is no longer free. We saw similar data in the GDP report outlined above, with corporate profits growing healthily compared to last year, but adjusting revenue growth by inflation (which you’re not supposed to do) we learn that real revenue grew just 0.7% annually. So, while companies have grown in efficiency, they’ve really been forced to do so to avoid a share price massacre on earnings, given that demand is far more suppressed than in years past. Early AI implementation certainly helped this, and… That’s why real growth in Q1’24 was reserved for the amount of times “AI” was mentioned on company calls. [Source](=) This tells us a few things, including that unlike digital assets and NFTs from the days of yore, companies are actually using this stuff to increase revenue, cut costs more efficiently, and who the f*ck knows what else. Some of the other important data points FactSet highlighted include: - The average EPS beat came in 7.5% higher than estimates, below the 5-year average but above the 1 and 10-year averages - At 61%, the percentage of firms beating revenue estimates is below the 1, 5, and 10-year averages - The average revenue beat came in at 0.8%, also below all of those averages - Net profit margins at 11.8% held above the 1, 5, and 10-year averages of 11.2%, 11.5%, and 11.6%, respectively - The 12-month forward P/E/ of the S&P 500 sits at 20.5, above the 5-year average by 6.8% and above the 10-year average by 15.2% The Takeaway? It’s a relatively simple story as far as equity market narratives go. The economy is slowing, causing demand to slow, thus driving revenue growth below historical averages, but AI and a market-wide effort to cut costs helped elevate earnings. The biggest threat, from our view, is the market’s ability to maintain its premium above historical average multiples. With solid EPS growth and elevated margins, this makes sense. But the question is—does faster-than-average EPS growth and higher net margins outweigh slowing revenue growth? The easy argument is yes, of course, they do because 1) it’s a multiple of earnings, and 2) earnings are what investors actually have a claim on. However, slowing revenue growth—especially if below peer averages—suggests a fundamental problem with demand. This is the bet investors are making as we head into the final month of Q2. Bulls expect some multiples and/or growth to remain high enough to support elevated prices. Bears expect something to change. As always, place your bets now. The Big Question: How long can S&P 500 companies continue to slash costs to compensate for slowing demand? Will multiples maintain their elevated level? Banana Brain Teaser 💡 Previous 🗓 Ron is 4 inches taller than Amy, and Barbara is 1 inch taller than Ron. If Barbara’s height is 65 inches, what is the median height, in inches, of these three people? Answer: 64 inches Today 🕐 Clarissa will create her summer reading list by randomly choosing 4 books from the 10 books approved for summer reading. She will list the books in the order in which they are chosen. How many different lists are possible? Send your guesses to vyomesh@wallstreetoasis.com Wise Investor Says 🤓 “Remember that the stock market is a manic depressive.” — Warren Buffett How Would You Rate Today's Peel? 😁[All the bananas]() 😐[Meh]() 😩[Rotten AF]() Happy Investing, David, Vyom, Jasper & Patrick [ADVERTISE]( // [WSO ALPHA]() // [ACADEMY]( // [COURSES]( // [LEGAL](=) [Unsubscribe]( IB Oasis Corp. (aka "Wall Street Oasis") 14435 Big Basin Way PBN 444 Saratoga, California 95070 United States