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Strong Economic Data, CEO Warnings, and Better-Than-Expected Retail Earnings Are Giving Investors Whiplash

Retail analysts have had a tough year, balancing weak retail data one month with retail stocks soaring 20% in a single day the next. Recently, Wall Street got a clearer view of America’s spending problem as McDonald’s ($MCD), 3M ($MMM), and Tesla ($TSLA) warned of mounting economic pressures on customers. Bank of America ($BAC) CEO Brian Moynihan noted that consumers are pulling back — with spending from cards, checks, and ATM withdrawals growing just 3.5% in May, down from 10% last year.

Return of spenders? Some retailers offer a different perspective. In May, Target ($TGT) reported its fourth straight quarter of sales declines but saw an improvement in discretionary spending in Q1. Target wasn’t the only firm to share that sentiment, as a handful of retailers stunned investors with strong results last week.

• Abercrombie & Fitch ($ANF), Gap ($GPS), and DICK’s Sporting Goods ($DKS) reported record earnings, with their stocks rising nearly 20% after their reports.

• Costco ($COST) also reported a 9.1% revenue increase driven by artificial trees, wagyu, and Kirkland gold club — or “unique items at great value,” according to CEO Ron Vachris.

Can Discretionary Brands Become Essential Again?

Strong earnings boosted the SPDR S&P Retail ETF ($XRT) by over 8% in the past month, extending its five-year return to 94%, slightly outpacing the S&P 500’s 89%. But what the $XRT doesn’t show is which part of retail is thriving, as investors remain skeptical of a discretionary (a.k.a. stuff you don’t need) comeback.

• The Consumer Discretionary Select Sector SPDR Fund ($XLY), which includes Tesla and Lululemon ($LULU), has significantly underperformed the S&P 500 over the past five years.

• The $XLY recently hit its biggest discount against S&P 500 names as energy, tech, and financial industries continue to outperform this year.

Business not as usual: Since the pandemic, analysts have juggled confounding market data with GDP, stocks, and wages rising — while Americans sink into debt, cut back on spending, and believe that the US is already in a recession. The question may not be if consumers are spending but where they’re spending. Moynihan pointed out that spending on travel and entertainment is increasing, with more Americans embracing savings and paying down debt. Another BofA survey showed that 47% of workers feel “financially well up,” a jump from 42% last year.

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LARGECAP RECAP

💳 Amex Mounts Banner First Half of 2024, Thanks to Gen Z

While some Americans are tightening their budgets, American Express ($AXP) cardholders are still spending to their hearts’ content. In the latest quarter, the credit giant saw a 6% year-over-year (YoY) increase in spending — even as discretionary spending barely grew. But the company’s real bright spot was attracting a surge of new cardholders, especially younger Americans who were once thought to avoid their high annual fees.

• In 2023, Gen Z and Millennials opened over three-quarters of new accounts for Amex’s flagship Platinum and Gold cards — consumers with higher earnings and credit scores than industry norms.

• Amex’s young clientele are willing to pay hefty annual fees — $695/year for the Platinum card or $250/year for the Gold card — in exchange for membership rewards, concierge benefits, and airport lounge access.

Card glow-up: Amex’s rapid growth has helped it meet a key promise to investors: to boost revenue by 10%+ YoY, outpacing credit and payment network competitors. This year, $AXP is up 29% year-to-date (YTD) — but after years of outperforming the S&P 500, Amex plans to refresh over 40 card products this year. This move might lead its younger, picky customers to evaluate if the new benefits are worth the higher annual fees.

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Markets & Economy

Bill Ackman to take Pershing public: It’s rare to take a hedge fund public, but the billionaire hopes to leverage his newfound social media fame. His fund, Pershing Square, holds a portfolio of large, undervalued companies and is expected to be valued at ~$10.5B when it IPOs in 2025. [Read]

Pending home sales gauge hits four-year low: Sky-high prices and massive mortgage rates deter potential home buyers, with homes under contract falling 8% in April. [Read]

Donald Trump found guilty on 34 felony counts: Trump has made history as the first former POTUS to be convicted of a felony. He faces three more criminal cases, though this one may be the only one decided before voters head to the polls. [Read]

Business & Wealth

Democratic Senators to investigate OPEC-oil industry collusion: Chuck Schumer and 22 other Senators want to figure out if oil executives like Pioneer ($PXD) CEO Scott Sheffield worked with OPEC to limit oil output and keep pump prices high. [Read]

Bitcoin rally is producing 1.5K millionaires a day: The crypto asset keeps setting all-time highs, now at $73K, creating 1.5K investors a day who hit “crypto millionaire status.” This is less than the 2021 bull run, which minted 4K millionaires each day. [Read]

Dell ($DELL) beat earnings estimates in Q1… but Wall Street still isn’t happy: Shares fell 15% after Dell reported its AI server business isn’t profitable. AI server sales rose 42% due to hot demand — but once again, AI costs remain high, disappointing profit-hungry traders. [Read]

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DIGIT OF THE DAY

Bear or Bull Survey Results: 57.5% of Investors Are Bullish Heading Into June

Your roommates’ plants might be dying, but investors haven’t forgotten to water their portfolios this year. According to our latest Bear or Bull survey, 57.5% of investors are bullish heading into June despite the famous stock market adage, “Sell in May and go away.” Even the most bearish analysts have raised their S&P 500 forecasts as major US indices keep breaking new records.

• The S&P 500 and Nasdaq 100 are both up over 10% this year, with positive monthly returns in six of the past seven months.

• As of May 15, nearly $172B had flowed into US mutual funds and ETFs after two years of outflows.

Where do markets go next? With such substantial numbers, it’s hard to believe interest rates are at 23-year highs and over $6T is still in money market funds. So, what’s driving this rally? According to Apollo’s chief economist, foreign investors might be pouring money into US markets for its stronger economic outlook — or to capitalize on AI enthusiasm that’s lifting the markets. This leaves two key questions for investors: What happens if international markets become more attractive or if AI doesn’t deliver? And for the bulls, what will happen when interest rates drop, and money moves from money market funds to higher-yielding opportunities?