The Economy’s Weekly Recap

1/26/24 - 1/2/24

Raymond Lin

This Week’s Prominent Events

Big Tech Earnings

• This week, several big tech companies reported their earnings for Q4 2023, and their earnings were quite staggering. 

• Amazon beat expectations for revenue and profit, with revenue growing 14% from Q4 2022. Additionally, key aspects of Amazon’s business grew rapidly as AWS revenue increased 13% year over year to reach $24.2 billion and subscription revenue grew 14% to reach $10.5 billion.

• Apple, defying its recent problems, grew its revenue in Q4 and beat expectations for revenue and profit as well, although growth in China fell by a concerningly high 13%.

• Meta had a fantastic quarter as it also beat expectations and tripled its profits from Q4 2022. Due to this financial success, Meta has decided to pay dividends for the first time ever and has announced a $50 billion buyback. 

• While Alphabet also beat expectations and had 26% growth in Google Cloud compared to Q4 2022, many investors were disappointed by Google’s lower than expected ad revenue. 

• Microsoft had a strong quarter as its cloud segment was buoyed by AI, with total revenue increasing 17.6% year over year and cloud revenue increasing 30%.

• An interesting facet of these earnings is the inclusion of AI as a potential source for growth and efficiency for these companies, with several of them pledging increased investment into AI.

Commercial Real Estate Losses

• Since the pandemic, working from home has led to commercial real estate becoming less and less important. This was compounded by increased interest rates as commercial real estate became more and more unattractive. While this had been apparent for months, it seems that it is now possibly finally having an outsized impact.

• New York Community Bancorp announced that it has had trouble with its commercial property loans and that it has stashed millions of dollars to prepare for future losses. Additionally, Aozora Bank has announced that its US office loan portfolio will lose money for the first time in 15 years, with the President choosing to step down on April 1. Meanwhile, in Switzerland, the bank Julius Baer said it may not get $700 million from an Austrian landlord, with the CEO resigning as a result. 

• These events highlight that small and regional banks, which often lend to commercial real estate developers and owners, are exposed to a struggling market that is due to have $2.2 trillion of US commercial property loans coming due by 2027. It is possible that another crisis, like what unfolded in early 2023, could occur again, although it is unwise to bet on it occurring. 

Amer Sports IPO

• Amer Sports, the owner of sports equipment, accessories, and clothing, went public this week at a valuation of $13 a share. In the process, it raised about $1.37 billion at a valuation of about $6.3 billion. 

• However, there are some signs that this IPO will only serve to possibly reinforce the lackluster deal flow of recent times. One sign is that the company had initially anticipated an IPO share price of around $16 to $18 but was forced to lower it to accommodate reality and continued high interest rates. Additionally, only 2.5 million of the 105 million shares offered were traded, a much lower number than the typical 10%. 

• However, some of this may only be reflective of the company itself. Amer Sports has $2.1 billion in debt and hasn’t been profitable since 2020, although it has been experiencing significant revenue growth in that same period. Regardless, it is a slow opening to what could be a slow year if the Federal Reserve does not decrease interest rates in the next few months. 

Evergrande’s Liquidation

• Evergrande, the once mighty Chinese real estate developer that generated tens of billions of dollars of revenue with rapid growth via a risky real estate development strategy, has been ordered by a Hong Kong court to be liquidated to pay its massive debt. This liquidation is to be done by Alvarez & Marsal, with Evergrande’s Hong Kong assets being taken control and sold to pay Evergrande’s $300 billion in liabilities. This comes two years after Evergrande defaulted on its debt and only a few months after it declared bankruptcy to restructure debt. 

• However, it is uncertain whether this will mean the end of Evergrande. Evergrande’s CEO has said that the company’s normal operations will be maintained. Furthermore, it is uncertain whether the Hong Kong court’s decision will have any bearing on the mainland Chinese parts of Evergrande like Hengda Real Estate Group, which is the main property development business. 

• While Evergrande’s likely continued decline will be a story to watch, it is already evident that China’s real estate market and economy are struggling when considering historic growth. However, Evergrande’s decline is unlikely to specifically have any outsized impact on China’s or the global economy. 

Walmart’s Stock Split

• While Walmart has had 11 stock splits in the past, it hasn’t had one since 1999. However, Walmart changed that this week as it announced a 3 for 1 stock split.

• The reasoning for this stock split is to ensure employees will partake in Walmart’s stock purchase plan, with Walmart’s CEO saying “it was a good time to split the stock and encourage our associates to participate in the years to come”.

• However, some doubt has been cast on this move because, nowadays, people can buy fractional shares, lessening the impact of a stock split. Furthermore, the stock split will dilute Walmart’s contribution to the Dow Jones Industrial Average, so it is possible this move could be to the detriment of Walmart. 

Future Events

Interest Rates Remain Steady

• While many are pining for interest rate hikes, it seems they will have to endure a few more months as the Federal Reserve expressed that interest rate cuts, which would help economic growth but possibly increase inflation, are unlikely to come in the next Federal Reserve meeting in March, although no interest rate hikes are expected either.

• The Fed’s reasoning for this steady interest rate is that the economy remains strong and inflation has not fallen enough to meet the Fed’s target. So, to avoid something like the inflation debacle of the 1970’s, the Fed has remained vigilant about ensuring inflation is resolutely lowered. 

• The Fed’s views were further vindicated by January’s job report as a massive 353,000 jobs were added, almost double the number anticipated and far higher than recent months. This vibrant economic activity, while good for the economy, means inflation could increase if the Fed does not remain vigilant about interest rates.

• Assuming the Fed’s views don’t change between now and March, the best hope for interest rate cuts appears to be in the following meeting in May, but we’ll have to wait and see. 

Kids On The Internet

• Recently, regulation concerning children using the internet has gained steam. For example, the KOSA(Kids Online Safety Act) is a prominent piece of legislation with bipartisan support and children’s and medical associations that would force social media networks to be more accountable and implement protective measures. 

• While this effort has been ongoing for several years, a high profile Senate hearing earlier this week has furthered KOSA.  During this hearing, the CEOs of X, Meta, Snap, Discord and TikTok were present for questioning. They spent much of their time defending their companies in response to questions by Senators, some of which made for viral moments. 

• In response to the hearing, Snap has backed KOSA, with Microsoft and X also endorsing the bill. Meta, Discord and TikTok have yet to officially weight in, although Meta is in support of legislation broadly. However, this does not mean any of them will necessarily take action until KOSA is actually enacted, making any endorsements for the bill possibly just PR.

• However, while nothing conclusive happened in the hearing, it is evident of a change in the government's role in managing technology companies that one should expect to continue in the future. 

Biden Pauses LNG Approval

• Biden has paused the approval process of liquefied natural gas export terminals to study their environmental impact. As of now, the US has 7 terminals and has another 5 already approved and under construction. However, there are 17 projects seeking permits, including a $10 billion proposed project in Louisiana, that will now be unable to gain approval until after the pause. 

• The fossil fuels industry and the Republican party have denounced this move as a loss for American industry and a generally appalling move. Meanwhile, climate activists and Democrats have praised the move for combating reliance on fossil fuels and taking action on climate change. 

• To understand this pause, one should remember that the US is already the top LNG exporter with its 7 terminals. The upcoming 5 under construction will only further this position. Additionally, Biden’s pause is not a cessation of these terminals. Rather, it simply re-examines the approval process and impact of the terminals. 

• It may also be pertinent to note that 2024’s Presidential election is coming up, and Biden’s move may be for popular support and not a radical change in government policy.

Weekly Question

Which of the following companies has the largest market cap?

• A: Amazon

• B: Nvidia

• C: Apple

• D: Microsoft

Answer: D. Microsoft. Microsoft, on the back of its financial success with AI and AI’s future potential, has seen massive share appreciation in recent times. Over the last year, its stock has risen 60%, bringing it to a market cap of over $3 trillion!