The Economy’s Weekly Recap

10/28/24 - 11/4/24

Raymond Lin

This Week’s Prominent Events

Big Tech Earnings

• Among the slew of earnings that came out last week, which includes Starbucks, McDonald’s, Intel, AMD, Pfizer, and more, several companies stand out as especially important: Apple, Microsoft, Alphabet, Amazon, and Meta. This is not only because they have massive market caps and influence over the stock market but also because their role in AI makes them bellwethers of AI growth and interest.

• Apple’s fourth quarter results were mixed. It reported revenue of $94.93 billion and adjusted EPS of $1.64, beating expectations of $94.58 and $1.60. However, the beat was mostly on the back of strong iPhone 16 sales, which were better than the 14 and 15, as Mac, iPad, and services revenue came below expectations. As a result, the iPhone remains critical to Apple’s business, making up 49% of Apple’s overall sales. Apple intelligence was not mentioned much during earnings as it only began to roll out last week. On the AI front, Apple’s investment and development are behind some of its tech peers, but this has allowed Apple to spare itself from spending tens of billions in capital expenditure.

• Microsoft seemed to have a splendid quarter. It beat expectations with revenue up 16% annually at $65.6 billion and profit up 11% at $24.7 billion. A major contributor to this growth has been Microsoft’s cloud service Azure, which grew 34% from last year. A third of this growth came from AI. However, Microsoft has said that, due to limited AI data center capacity, growth is expected to slow down next quarter. Despite a generally good earnings report though, Microsoft’s stock has fallen around 6% in the last few days as investors were spooked by Microsoft’s $14.92 billion capital expenditure, slightly above expectations and up 50% from last year. 

• Alphabet also had stronger than expected earnings, coming in at revenue of $88.27 billion compared to expectations of $86.30 billion and EPS of $2.12 vs. $1.85. In terms of annual growth, overall revenue grew 15% while Alphabet’s star cloud division grew 35%. This fantastic cloud growth seemed to soothe investor concerns about capital expenditures, which grew  62% annually to $13 billion, as Alphabet’s stock is still up following its earnings report. 

• Amazon shares did well too, up around 6% from the release of its earnings report where it reported revenue of $158.9 billion and EPS of 1.43, both significantly above expectations of $157.2 billion and $1.14. Amazon’s AWS cloud service grew slower than rivals like Alphabet at just 19%, but it seems it was enough that investors were satisfied as they tolerated Amazon’s 81% annual surge in capital expenditures to $22.6 billion. 

• Meta, like Microsoft, had a strong quarter. It beat revenue and profit expectations, clocking in at sales of $40.6 billion and profit of $15.7 billion, up 19% and 35% from last year. However, also like Microsoft, it announced it had spent $9.2 billion in capital expenditures. Meta also raised its spending forecast from $38 billion to $40, up from $37 billion to $40 billion in July. This increased spending spooked investors as Meta’s stock is down around 6.5% from its high this week.

• In summary, the big tech companies are prospering, hitting double digit growth in revenue and profit despite their massive size. However, despite AI playing an important role in their growth, investors are concerned about the high level of capital expenditure related to AI, causing some turmoil in these companies’ stocks.

Idle EVs

• While Ford has a decent Q3, reporting sales of $46.2 billion and operating profit of $2.6 billion compared to estimates of $45 billion and $2.6 billion, its future is still rather bleak. Ford’s guidance for Q4’s operating profit is just $1.9 billion, below estimates of $2.5 billion. 

• Additionally, Ford has announced it will be halting production of its F-150 Lightning for the rest of 2024. Despite 86% annual sales growth, weak consumer demand and continued losses have plagued the vehicle, and the automaker reported its EV unit, which includes the F-150 Lightning, lost $1.22 billion in Q3.

• Ford’s abundant supply of the vehicle reinforces the poor state of EV demand as Ford had 100-day supply of F-150 Lightning compared to Ford’s target range of 50 to 60 days. Ford’s other EVs, like the Mustang Mach-E crossover and E-Transit van, had 128 and 112 days of supply. 

• While some car companies, such as Tesla, have begun growing again, it seems tough years are still ahead for other automakers. Back in September, Volkswagen announced plans to shut down factories in Germany for the first time in its history. But facing falling car sales in China and Europe as well as a 60% drop in EBIT, Volkswagen has recently announced further plans to lay off tens of thousands of employees and an undisclosed number of factories in Germany, a stark departure from rosy hopes for the EV industry just a few years ago.

ChatGPT Search Engine

• Currently, OpenAI’s ChatGPT’s answers are restricted to its training data, which means ChatGPT is only up to date on topics before November 2023. Due to this, ChatGPT has some major weaknesses compared to ordinary search engines like Google or Bing. However, ChatGPT has finally joined its AI competitors Google Gemini, Microsoft Copilot, and Perplexity AI in offering current information. 

• It has done this by, as its competitors have, introducing a search system for ChatGPT where the chatbot will automatically respond to queries by searching the web for recent information. If ChatGPT doesn’t automatically search though, a user can manually trigger a search. The feature was released last week for those with the $20 a month ChatGPT + service and will continue to roll out for free users in the coming months. 

• But while the search capability will greatly enhance ChatGPT’s utility, it is susceptible to hallucination and reporting factually incorrect information when searching, such as when ChatGPT told the MIT Technology Review that luxury European destinations included Japan, Dubai, and the Caribbean islands.

• Nevertheless, AI powered search engines seem to be poised to displace traditional search engines. The ability of AI to recall information previously asked elevates the already convenient search experience to be more personalized and useful to users. It enables users to have a highly contextualized dialogue with AI that is beyond the capability of a Google search, possibly threatening Google’s dominant position. 

PE Energy Investments

• As tech companies pour billions into AI data centers, a major problem has begun to emerge: growing energy demand. While data centers consumed just 4% of US energy consumption in 2022, the IEA forecasts demand to grow to 6%  by 2026. Barclays predicts that could rise to 9-12% by 2030, doubling data center energy consumption in less than a decade, with AI alone accounting for 93 terawatt hours of electricity. In response, many tech companies have begun investing in energy infrastructure, such as Microsoft’s plan to recommission the Three Mile Island plant. 

• But tech companies are not the only ones investing in energy. Last week, PE firms KKR and Energy Capital Partners(EPC) agreed to invest a combined $50 billion into data center and energy generation projects. ECP founder Doug Kimmelman has highlighted natural gas as a key part of powering data centers, saying “gas is going to be at the forefront of this”. 

• While this sentiment may seem odd given many companies’ focus on clean energy, natural gas is vital for covering the current gaps between clean energy and energy demands, so it is likely that, near term, natural gas will play an important role in the energy mix of data centers. 

• When also considering Blackrock’s plans to create a $30 billion data center and energy project investment fund, it is clear that private investment into energy generation is on the rise and will be an important industry to watch going forward.

NYSE Changes

• While it may sometimes feel like the stock markets close and open are static, that is far from the truth. The classic 9:30 am to 4 pm trading hours are an American invention because, while the NYSE and Nasdaq follow it and are the world’s top exchanges, other exchanges like the Shanghai Stock Exchange, Tokyo Stock Exchange, and London Stock Exchange follow different times. In fact, the Shanghai and Tokyo stock exchanges even have a break in the middle of the day for lunch. 

• This variance in opening and closing times, as well as overall hours of trading, helps explain the NYSE’s recent announcement it would be looking towards extending its trading hours from 9:30 am to 4 pm, 6.5 hours of trading, to 1:30 am to 11:30 pm, 22 hours of trading. The move is subject to regulatory approval, but the NYSE believes that it is necessary given the strength of US capital markets and growing overseas demand. In addition to foreign investors, another group that may benefit is retail traders, who often don’t have time to trade due to their jobs. The change may also attract international companies to list on the NYSE due to increased convenience.

• However, some maintain reservations about the change. One major concern is about decreased trading volume throughout the day, which could lead to wider bid-ask spreads. Some also worry about the encouragement of impulsive late hour trading, especially by retail investors. 

• Still, no timeline has been given yet for when the change will come about, and the SEC’s average filing to response time of 240 days suggests the new trading hours will not materialize any time soon.

Future Events

Economic Reports

• It wasn’t just companies that reported how they were doing last week as the US government released a series of key performance indicators for the economy.

• Firstly, Q3’s initial GDP estimate came out at an annualized real growth rate of 2.8%, below expectations of 3% and Q2’s growth rate of 3%. However, 2.8% growth is still far better than other wealthy nations like the UK, Germany, or Canada, so it is still positive news if a bit disappointing. Consumer spending grew at a rate of 3.7%, the fastest rate in over a year and up from 2.8% last quarter. Disposable personal income grew at 3.1%, rising $166.0 billion, but it slowed down from last quarter’s 5% growth. Personal savings declined from 5.2% last quarter to 4.8% this quarter. 

• Core PCE Inflation data, the Federal Reserve's preferred metric that excludes volatile food and energy components, was also released last week. In September, the Core PCE index rose 2.2% from last year, the slowest rise in nearly a year and down from 2.8% last month. 2.2% nearly matches the target 2% rate that the Federal Reserve aims for, suggesting that the US has achieved a soft landing.

• However, Friday’s job report was negative. The US economy added just 12,000 jobs in October, according to the BLS, marking the weakest monthly job gain since December 2020 when 243,000 jobs were lost. For reference, September saw 223,000 jobs added and economists’ expectations for October were for 112,500 jobs added. 

• There are clear noneconomic reasons for this drop though. Hurricanes Helene and Milton impacted the BLS’ ability to collect data from affected regions and temporarily displaced many workers and businesses, preventing new jobs from being created. Additionally, many jobs were “lost” due to worker’s strikes. Of the 46,000 manufacturing jobs lost in October, 33,000 were Boeing machinists on strike, which means the number of jobs added is likely underestimated. Economists expect the number to be revised up in the coming months, so the disastrously small 12,000 jobs added is nothing to fear, especially when considering the unemployment rate stood still at 4.1% and the labor force participation rate minutely decreased from 62.7% to 62.6%. 

• Overall, the US economy is doing positively, experiencing slowing inflation, relatively strong economic growth, and good consumer statistics. However, given the low inflation and slowing GDP growth and labor market, it is likely that the Federal Reserve will continue to cut interest rates in November and December.

A Poor Real Estate Market

• The US real estate market has been hostile to new homebuyers since the pandemic began, and recent data suggests that it isn’t getting much better. 

• September did see single family housing starts rise 2.7% from last month, but starts fell at an annualized rate of 15.5% in the third quarter as a whole. Building permits rose 0.3% in September but were 1.2% lower than last year. Building permits for multi-family building permits plunged 10.8%. Overall home completions fell by 5.7%, and the number of homes under construction declined 1.9%.

• One reason for this trepidation in home construction is rising mortgage rates, which have been rising for the last 5 weeks and hit 6.72%. Higher mortgage rates, the result of stronger economic data than expected, lead to increased construction costs for home builders and lower demand from home buyers, resulting in fewer homes being built. With fewer homes being built, the price of homes stays high instead of coming down, leaving first time home buyers in our current quagmire where US home prices rose 4.2% annually in August.

• The 2024 Presidential election has further thrown the real estate market into turmoil as builders and buyers worry about the economy and both candidates roll out policies related to reducing home prices, leading to further unease and weakness in real estate.

• Hopefully, in the coming months, a sense of normalcy can arise in the real estate market as interest rates continue to fall, inflation is confirmed to be defeated, and economic growth remains stable, allowing for home construction, mortgage rates, and the overall real estate market to improve.

Future of Bitcoin

• The past few months have been great for Bitcoin enthusiasts as it is up 56% YTD and was sitting near all time highs last week. This success has been due to a variety of factors, such as approval of Bitcoin spot ETFs, Bitcoin exceeding Visa in daily transaction volume, US economic uncertainty pushing investors towards “hedges” like Bitcoin, and presidential candidate Donald Trump’s newfound support of the cryptocurrency. 

• These factors have resulted in a great October for Bitcoin holders, with the cryptocurrency up 12% this month and over $4 billion flowing into Bitcoin spot ETFs. Just last Wednesday, ETFs saw net flows of over $900 million, largely due to hopes of a Donald Trump presidency’s friendliness towards the broader cryptocurrency industry. 

• However, even if Trump wants to make the US a “Bitcoin superpower” and lessen regulations by firing the current SEC chairman, he’s not the only politician supporting crypto. Although less hyperbolically, Harris has also supported the technology, saying she would “encourage innovative technologies [like] digital assets”. 

• While this bipartisan support might be more the result of cryptocurrency corporations spending over $100 million on campaign donations as of June 30, 2024, making up nearly half of all corporate donations and ahead of industries like oil and pharma, it seems clear that Bitcoin is headed towards a broadly positive direction as it gains political acceptance, further legitimizing its usage. 

Weekly Question

Which of the following has not declared bankruptcy recently?

• A: TGI Fridays

• B: Red lobster

• C: Chili’s

Answer: C. While its competitors have come on hard times recently, Chili’s is still prospering, with its recent earnings seeing a 14% jump in same-store sales and 6.5% increase in traffic.