Big Day of Tech Earnings | Bloomberg Markets: The Close 4/25/2024

Big Day of Tech Earnings | Bloomberg Markets: The Close 4/25/2024

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Live from Studio two here at Bloomberg's headquarters in New York. I'm Shonali Bassett. And I'm Gina martin Adams. We're kicking you off to the closing bell here in the U.S. Let's get a check on where markets stand.

As you can see, the S&P 500, the NASDAQ, not so bad. We're flying our way back from those and those lows earlier this today when the GDP report certainly took out stocks, Treasuries certainly selling off quite a lot and the dollar not doing much. Something abnormal with the Treasury, selling off on the dollar, not doing much as stocks are really where all the action is. As we're going into earnings finale, we're looking at those treasuries selling off. As you've been saying, we have the two year yield hanging out just under 5%. And today's GDP and inflation numbers fueling stagflation jitters, leaving investors with even more uncertainty to the path of Federal Reserve policy.

And speaking of the Fed, Chicago Fed Austan Goolsbee saying in an interview that the central bank has to recalibrate after the latest string of higher than hoped for inflation. Data traders today paring back expectations for a rate cut now fully pricing in the first cut in December. But there's big tech here in focus. The stakes are high for Microsoft and Alphabet results after the bell today. Those results coming just a day after Metro revealed it will spend billions more dollars than expected this year and it's been triggering gina a stock selloff. Let's take to kick things off on the tech earnings expectations with stuart Keiser, head of equity trading strategy over at citi.

Stuart, tell us where are we in the cycle right now because clearly the tech stocks have been struggling a little bit. We got that news yesterday, met a beat expectations and yet the outlook wasn't as good as investors were expecting. What are you doing in your equity portfolio and how does that relate to where we are in the cycle? I mean, I think you hit on the key point here, which is the results haven't been that bad, but you need to separate that from what the stock price reaction has been. And clearly, a lot of these companies that have put up decent numbers but either guided a little soft or maybe not hit on a few kind of key metrics and have traded off pretty hard.

And I think that says if you're overweight these tech stocks, you need to be a little careful. We've been recommending using, you know, triple Q's triple Qs perch to kind of hedge that long tech portfolio as we go into earnings just for this reason. Not that we're negative on the fundamentals, but the crowding and the positioning does seem pretty full right now. Right. Speaking of, there's some volatility you're seeing in the names.

You see it in Meta today. How much more downside risk is there now that we're getting some of these numbers out of the gate? I mean, downside of the market, I think there's a little bit I think, you know, as you and I mentioned earlier, the GDP print this morning probably opened up a little more space to the downside than we thought you would had. You know, our view coming into earnings was a combination of strong GDP and a strong EPS growth set a very high floor for us equity markets, you know, getting higher inflation and lower growth and you would have wanted probably opens up a little more space there. And you have key stocks, whether that's metal, whether it's ASML, whether it's Taiwan, Sony, whether it's Netflix, you know, some of these key high flying stocks kind of coming under pressure, I think hurt your risk reward. It probably opens up a little more space to the downside than I would have thought we had a couple of days ago. What has surprised you so far in this earnings season? I know it's early. You were sort of positioned for a

rockier period, given expectations in tech, anything outside of tech that's been interesting or that we should keep an eye on? Yeah, I mean, look, tech has gotten all the focus. I think, you know, the financials earnings I think to start were interesting because we did start to see a little bit of that deal calendar coming back. And obviously Goldman and Morgan Stanley responded a little bit more positively to that. So that's a positive if you're looking for the rest of the year.

But, you know, there's three themes that we were really looking for in earnings. One was A.I., which I think everybody's focused on, right? You're number two is what happens to margins and the margin outlook a couple of quarters out and tech is going to be a key aspect of that. And then the third topic is going to be later in the quarter.

What are retailers saying? You know, is there any evidence of this really strong consumer spending pattern, you know, kind of seeing some weakness? So, you know, the biggest surprise, I guess, is going to be we came in pretty bullishly positioned, pretty small and part moves option set up very positive stocks that are putting up what I would consider decent numbers missing on sort of a KPI or something are really getting hurt. So that's probably the the number one, you know, surprise so far. You know, it's interesting, speaking of outside of technology, you look at some of the best sectors this year, the energy sector in the S&P 500 still up more than 15% on the year. Some of these stocks are still reporting pretty gangbusters profits and seeing a sell off after that, too. I mean, are these sectors overbought? And if that's the case, and what does it mean for the S&P? Yeah, I mean, overbought stuff, I think I think stock by stock basis should probably need to go, you know, about that from an S&P level. We actually triggered what we would call oversold the middle of last week on the sell off.

So the equity market itself doesn't feel overbought. But I think there are pockets that are we've seen a tremendous amount of demand for energy stocks, for copper and sort of that commodities exposure. So that stuff's probably gotten a little bit more ahead of itself than it was last quarter. I would have argued coming in that

positioning in tech actually looks a little bit less overbought than it did last quarter. So, look, when you have valuation where it is, we think the ERP is probably in its 15th percentile in the last 30 years. I mean, you're at an extended valuation spot right now. So any blemishes are going to be treated, I think, more harshly in that situation than they otherwise would of our view on valuation. That's potential energy, not kinetic energy. What releases potential energy.

In this case, it seems to be good, but not great results, essentially. I'm curious how you're incorporating movements in the bond market into your strategies. Clearly, the bond market has been a new animal in the post-pandemic cycle relative to the pre-pandemic cycle.

How do you think about that in the midst of earnings season when you have these really big bond market moves, how do you incorporate that on a day to day? Look, it's a it's a big important part of the macro macro landscape. From our perspective, we tend to focus more on the size of the moves and the volatility in the bond market than necessarily the absolute level. Like, even if we got to 5%, that's not a forecast. But even at those levels, if bond market volatility sort of pegged itself there, I think equities can do just fine in that environment.

What's tricky here is we went from nearly 5% down to four and now we're kind of on our way back up to five. So I think we're considering that two ways. One is the velocity of the move and then to which stocks have the most sensitivity to that.

You know, most of the equity market is basically long growth and and has a negative impact for higher yields. So it eats into your valuation. But again, for us, it's much more about volatility in the bond market than it is about the absolute level. I think it's worth kind of doubling down here on what gets impacted if you still have a two year closer to 5% and for how long. At what point does that pain start to multiply? It's a great question. I mean, it's funny because people have been calling for this credit event now for a while, Right. But the fact is, most of corporate America is actually pretty well situated from a credit perspective.

Even the companies that need to refi don't need to refine now because people were smart enough to lock stuff in. So I think my view is if you're higher for longer, yes, eventually that starts to get into your weaker credit type stocks. But for most of the first quarter, you were higher because of better growth. And if you're getting better growth and

that's pushing yields higher, I think equity markets could deal with that just fine. What's really been disruptive the last 4 to 6 weeks is you've had higher yields and that's becoming know be coming from the inflationary side. So, look, if we get into the second half of next year and we're still pushing out cuts, then yet people are going to take a second look. But we actually had a lot of trouble finding companies that actually have to refine the next 24 months. So it's one of these things, yes, it's an issue, but it's hard to sort of identify the specific stocks that might be impacted.

Sticking with the macro, how are you incorporating currency and sort of the divergences that we see globally? You know, we lived in a world for so long where everybody moved together and now it seems to be quite divergent activity between the U.S., China, Europe, Canada, the name your country. How do you incorporate currency? Is that a part of your thought process? It is. I think my experience in general has been you need the dollar to move pretty big and then stay persistently at that level to really get into earnings. Right. So that this is you know, a lot of these companies hedge their their currency risk on a waterfall fashion, right. You need big moves that are persistent. I think the question here is if you start to get currency volatility, and that's because you're either getting growth divergence or central bank policy divergence, well, now you're talking about risk sentiment and that can kind of get into your valuation. So similar to rates that give the dollar

is grinding one way or the other, a little bit less concern. But if we do start to see central bank policy divergence and that gets into your risk and I think that's what we'd be the most concerned about, you know, gold is a perfect example. This obviously, you know, gold has been moving almost of its own volition. And I think equity folks are thinking, I don't really understand what's going on over there. Maybe I need to be more careful just because I don't understand.

And I almost put the dollar in the same category right now. So we have to leave it there. Thanks for joining us on what's been a tough tape and a very busy day of earnings and a very busy week ahead still, Stuart Kaiser, head of equity trading over at Citigroup. Coming up, Chipotle's strong earnings beat sending shares surging today, extending a nearly six month rally that's seen the stock climb nearly 66%. And the CEO, Brian Nichols, joins us to discuss what's fueling that growth. Plus, Hertz driving in the opposite direction.

Shares hitting an all time low after reporting a loss that was nearly three times worse than analysts expected. And it's our stock of the hour. And Southwest is considering ditching a classic hallmark of its business model. We'll discuss the airline's potential move as it grapples with slowing growth.

All that and more coming up. This is a close on Bloomberg. Stay with us. And. Earnings season is here. I think we're all asking the same question just how much earnings growth you're expecting. Bloomberg is first to break the numbers. Iliad just coming out right now, we have take two numbers shares of pinterest lucid group coming out with its earnings all eyes right now on nvidia a loss still to come with the smartest insights how much better could profit and revenue have been better than what the street was expecting? Bang in line with estimates, we will have full and instant analysis. Continuing coverage on Bloomberg Context changes everything.

Shares of Southwest are sliding today, and that's as the airline ends service at four airports and offers voluntary leaves to address challenges that are stemming in part from reduced deliveries of Boeing planes. Bloomberg Intelligence senior analyst George Ferguson joins us on the airlines all over them really this week. George, when you think about the problems that Southwest are facing today, exiting airports, how do you feel about the changes being made? Yes. So, I mean, when I think about Southwest, I think, frankly, they've been trying to add too much capacity to the marketplace. And so, look, as much as they need Boeing aircraft because they're they're larger. And the increase in pay they gave to their pilots unions, those larger aircraft allow them to, you know, to spread the cost of that pilot over. More people in the airplane help them

lower their costs. So for sure, the lack of getting airplanes is really making it difficult for them to drive down costs and improve profitability. But this is an airline that was looking to grow its schedules at 6% in an economy that's grown maybe 2% since last year. I think really the post pandemic bouts where everyone had to go away and summer vacation fly somewhere on summer vacation is over. So that extreme demand, I think, is fading. And I think so, you know, fares just aren't rising anymore. They were flat at Southwest.

They were down at American today. And so I think part of what Southwest really needs is less capacity, less flying. And that's why they're cutting back these cities. Is there a read through from southwest Jorge to the rest of the industry? You mentioned American as another specific example, but when you're looking about across the entire airlines industry, is this something we need to look for across the space? It is, right. So I think you saw in JetBlue's earnings, I think the more your airline is focused on the domestic business and the basic economy seat, the more challenges you have. There's just too much of that capacity

in the marketplace, we think. Right. And that means that that's a commodity and you're going to have to lower prices to fill airplanes. To the extent you're in premium seating, you can provide, you know, any kind of sort of upgrades more more a better meal, you know, more more space. And those are the deltas. Those are United's. You're going to see better yield development, which is the price paid per mile flown.

And that's what we've seen. American is one of the full service carriers that actually caters more to the economy, you know, seating and a little more of the interior of the country. I think that's why they had more of their problems today. It's interesting you have Southwest saying that the restructuring steps that they're taking so far could contribute 1000000000 to 1000000005 to the pre-tax profits this year. But the market doesn't seem to be biting

on the plan. Why is that? Well, again, I think we're seeing some softness in the in the marketplace. And so I'm not sure, you know, the market really believes that Southwest can get fares to rise to the level they need.

And it's going to be hard for them to cut expenses because, like I said, they're just not going to get all the deliveries of the Boeing MAXS. And so they're going to have a hard time, you know, sort of spreading those costs over more seats. So they're in a bit of a rough patch here because they can't really reduce expenses well and revenues and isn't going to cooperate for them, I don't think. Speaking of those expenses, I'm curious how the airlines are now positioned for higher fuel costs, higher oil costs. We've seen the cost of oil obviously accelerating pretty rapidly so far this year. How are they positioned going into the second, third quarter? And where might we see some surprises on the input cost side? Yes. So I think that if fuel costs keep going

up and frankly, even if they just stay here, they're going to be higher year over year and that's going to create a real challenge for the airlines. Right. So they don't hedge theirs. So most of them don't hedge. I mean, you get a bit of hedging at JetBlue and Alaska. But the core and I will say actually Southwest does hedge as well. So those airlines could potentially fare

a bit better as fuel prices rise, but most of them don't. And so that'll be a challenge. And to again, we think the basic economy seats are probably in excess and so therefore pricing a little bit soft, it'll be really hard to push through that increased costs to to that basic economy customer. Now, if you're United and you're at

Delta and the front of the airplane is, you know, is is really demanding summer vacation travel no matter the cost, you could probably push it through to them. And to the extent business continues to flow back for those big full service airlines, you push through to them the increased costs and they'll be able to manage it. But the more you're in the basic economy world, it's going to be really hard to do. You know, you saw Southwest really address significant challenges in part from the reduced deliveries of these Boeing planes. Where else can we see the Boeing challenge start to ripple into the airline industry? Well, so United should have it.

But I'd say, you know, United used to be less focused on. Their domestic business and they used to use smaller gauge airplanes on it. So they've been increasing size, which has been helping them, and they've been sort of bridging some of that gap between them in Delta and in fares. So you should see it there. But you don't because again, of this

change going on it united Alaska is another one I get concerned about. They're very big Boeing shop taking a bunch of deliveries. Alaska showed some pretty good results this quarter and it was driven by, you know, what they called a nice return in California business travel. And we saw Southwest tell us the same thing.

And so that tells me that Alaska might be getting a bit of a bump from maybe some better West Coast trends. Alaska does have some premium seating, too. That helps, but those are the ones I worry about, most notably Southwest. They'll be Alaska. They'll be United are the other big Boeing customers here in North America.

George, we have to leave us. We have to leave it there. Thank you so much for your time and for all your analysis this week on a very busy word, earnings week also for the airlines, of course. That is George Ferguson of Bloomberg Intelligence. And coming up next, we're going to talk about tech because artificial intelligence and cloud infrastructure are top of mind over at Microsoft.

We'll preview what to expect for the third quarter report. This is a close on Bloomberg. And it's time now for our top calls. A look at some of the big movers on the back of analysts recommendations, starting with Monster Beverage Truist cutting the energy drink company two notches from buy to sell. Analyst Bill Chappell calls Monster a great company, but with limited reach, he questions its ability to tap into new customers for sales and growth.

He also says there's no reason why it should continue to hold a super premium valuation multiple. This is Monster's only sell rating. J.P. Morgan also downgraded the stock this morning and shares are moving down more than 2.2%. And Deckers outdoor next in line. The owner of the footwear brands HOKA and UGG a downgrade to neutral from buy at Bank of America. Near-term trends at Deckers are fine, but the analyst cautions that a softer than expected margin outlook could temper the pace of upwards earnings revisions. Therefore, he sees better opportunities

elsewhere within his coverage. Shares also down more than 5% on that name. Finally, UPS upgraded to buy from hold at HSBC. Price target raised to one $70, up from

1.50. The analyst expects the shipping and logistics company to shift its focus on volumes and margin recovery. This, coupled with its UPS Postal Service contract, could restore confidence in its 2026 guidance and shares now moving up about 2/10 of 1%. And those are some of our top calls. And we're also less than an hour away from Microsoft's third quarter report. Revenue expected to increase 15% in the quarter, mostly driven by its Azure cloud computing unit.

Joining us now for more on this is Truist analyst Joel Fishbein with a buy rating on Microsoft. Do you still see risk going into the earnings today, given the sentiment we see around the big tech names and any signs of weakness? Only. Thank you for having me, first of all. But the only risk we really see this is macro related. Obviously, we can't control what happens with interest rates and and the economy and the markets moving on this economy. But we think that Microsoft is amazingly positioned here to capitalize on this big trend that you brought up in your preamble, which was A.I.

And frankly, there's no better positioned company there. And we think those numbers coming out of Microsoft are going to be very positive. And we've got a lot of data points, and we've done a proprietary survey that says 80% of the customers we surveyed are going to increase your spend with Microsoft. So we think Microsoft is well positioned to come out of this earnings and several others in a very positive light. John, can you put Microsoft in the context of the overall software industry? You mentioned that it is something of an outlier. It has unique tailwinds relative to the

rest of software. What are you looking for across the space in addition to sort of Microsoft's nuanced approach, what are we seeing in software? What should we look for in this earnings season? It's great. It's a great question. You know, we think it probably has been

overhyped. There's billions of dollars being spent in AI from infrastructure to applications. And if you think about what your social positioning be, over over 1,000,000,001 billion users of Microsoft Office, they have a massive cloud computing network and not unlike Google and Amazon and also Oracle Building one as well.

But we are now seeing them move from people trialing, piloting into actual production, and companies like Walmart and Mercedes are using Azure as a service which will be driving the number. It's not only here in the near term, in the long term, and I think that puts them in a very unique position relative to a lot of the other companies. And this is one of the needs in our space that we're actually seeing monetization. People are actually making money on on air and we think that that could drive the growth rate higher. We think the Azure growth here, the bogey here is 20%.

We think it'll would likely be higher streets to 50% overall top line growth. We think they'll probably be closer to 60 to 70 driven by this trend. And we think that will continue. If you're in the early stages and continue for some time. You know, Joe, we asked you about the downside risk, but what about the upside? If you think about where they have the potential to really expand on expectations currently set out by the street, where do you think that they could provide a little more color? So I think that's going to be the real question here. How much do they want to disclose from a competitive positioning that you talked about? They are contributing to their actual growth going from 1% three quarters ago to 6% right now? We think they're on a trajectory of it being closer to 8 to 9%. Did they disclose that number? Number one? Number two is do they disclose how many co-pilot and co-pilot users they actually have? Again, from a competitive perspective, they probably don't want to, but they're really going to get pushing a lot of color about that. Again, externally, we're hearing demand

is very, very strong and we're moving from trial and piloting into real production. And people are talking about. Massive cost savings by enabling this. So those are some of the key factors that I think we're looking for from Microsoft. And they'll be pressured to give a lot of color around them. Talk a little bit to us about their capital deployment.

What is Microsoft doing with their cash at this point in time? How does that differ from the rest of the software and then the rest of tech? So the first thing they've been doing is deploying it towards A.I. investment. So you probably seen a massive amount of investments. The latest one was in the Middle East

building out data centers there. I think they've spread the love around in terms of investments here. They've done some what I call a few hires where they're going to some of these companies and hiring engineers.

That's number one. I think they'll continue to buy back stock to offset dilution. And I think that you'll continue to see the small dividend going forward. They do need to you know, this is a

capital intensive business, the building of this data center. So you'll think of majority of the cash investment will go towards. We got to leave it there. That's thanks to Joel Fishbein over at Truist. And coming up next, we're going to talk about Chipotle's sizzling hot quarterly results and a pickup in traffic. That's all up next, conversation with the CEO.

This is a close on Bloomberg and. For our television and radio audiences. I'm happy to welcome now Brian Niccol, the CEO of Chipotle, who, of course, has just announced that the full year outlook over at Chipotle would be boosted for the year because there is more growth there than at other fast casual rivals in this space here. Brian, what's going differently for you than perhaps a lot of the industry? What is driving people into the stores? Yeah. Well, great to be with you guys. And look, you know, I think the purpose

of Chipotle has always been food with integrity, using classic culinary techniques so that we give people delicious, nutritious food. And, you know, I think that I think we've just done even better of late is bring that experience to people in a fast way. So, you know, one thing that also makes our brand really special is the customization that you can get with all these great ingredients.

And so we've been working hard to ensure we're staffed, we're trained or deployed so that our team members can give people exactly the burrito or bowl experience that they want at a pretty meaningful speed so that people can get on with their day. So I think that's what you're seeing is the power of great food, great culinary, great people, and now also some great operations around throughput. Can you talk to us a little bit, Brian, about the general state of the consumer? I think this stands out as a very strong success story, but also in the midst of a lot of skepticism with respect to how much the consumer can continue to spend and the general health of the consumer. What do you see from your consumer? Is it Chipotle specific or do you generally see a very strong consumer out there? Yeah, look, when we do the research on a broad scale basis, we definitely see that consumers are feeling a little bit of pressure on the economic side of things. Right.

Gas prices are elevated. They've been dealing with inflation for a while. Fortunately, the wage market has been strong and unemployment has been really low. So the good news is jobs are there. Wages are there. But they are feeling pinched on, you know, kind of their budgets as it relates specifically to Chipotle. Fortunately for us, the feedback we get

is the value proposition has never been stronger. So if there being more, you know, choice in how they're going to choose their ten or $15 on a meal away from home, what we continue to hear is we're one of the great solutions for that type of outlay of cash. And so, you know, we're that's why we're so dedicated to having great ingredients, you know, great culinary, and then obviously giving people the customization that they want so they get the food at the speed that they want to. So I think that's that that is the thing that's separating us right now is our ability to provide this great culinary, great ingredients at what are pretty reasonable prices. It's interesting because some of your

products are so popular that not just the earnings today are grabbing a lot of attention. It's this idea of chicken. And the chicken shortage is really being faced. You know, we had reported that you told staff or recommended, rather, that they stop eating the chicken, given the popularity of some of your chicken items on your menu. How has this been perceived by employees? There have been some pushback on the idea of itself. And do you have to change anything in terms of the way you handle the product? Oh, no. I think this is a story that's looking for a headline.

You know, what would actually happen is the supply got really tight. We asked all our employees, including myself, to pitch in for a week to maybe try something else on our menu. The good news is we're through that pinch. There's no challenges on our chicken supply. Actually, our supply teams that are for now, you know, fabulous job of securing supply to what has been really tremendous demand. So,

look, the good news is our employees were happy to pitch in. I guess there were maybe some employees that didn't want to pitch in on this one. But in the end, we came together, did what we needed to do. And, you know, we're going to continue to focus on giving people great experiences with our product. And that includes chicken. You know, it's interesting because you guys have been very fast to pivot around a lot of things here. I'm really curious around other potential ways you react to the consumer.

You had mentioned kind of the general states so far, but do you think that the consumer would be vulnerable to any future price hikes? Do you think that the price hikes already having been put on products or as far as you can go? You know, look, I don't know the answer to that for everybody. The good news for Chipotle is we definitely believe we still have some additional pricing power if we needed to take pricing in the future. Our hope always is that we can hold our pricing because we want to protect our value proposition always. And I think frankly, it's one of our

competitive advantages are really positions of strength is just the strength of the brand because of our unique commitment to ingredients and the speed at which. We can give people these customized meals. So, you know, look, I definitely think the consumer is feeling pressure. All right. We've had inflation for the last couple of years.

In some cases, things are up 20, 30% from where they were just not that long ago. And now here we are, hopefully with inflation starting to moderate. But still, things are, well, elevated from where they were a couple of years ago. And I think that's what positions us so uniquely in this space is at the end of the day, you can still get a really meaningful bowl or burrito from Chipotle. They for around ten bucks, if you choose not to have chips and Glock or drink and stuff.

So, you know, look, I would suggest everybody look hard at their value proposition and ensure people feel great about what they're getting for what they pay. And if that plays out, you'll be rewarded with business. I think that's what we're seeing happening. Let's talk a little bit more about those embedded costs and just the general sort of embedded inflationary costs and how you're managing through that inflation. I know that Chipotle has several automation projects underway. Maybe talk to us about where your

automation priorities are and how much that might offset the margin pressures from study or inflation. Yeah, So thanks for asking about this. You know, obviously we set out to figure out what are ways we can be more productive in the restaurants. And specifically we started with asking our employees what are the what are the pinch points, what are the things that are most challenging to do? And one of those things that came up was cutting coring and scooping avocados every morning to make our guacamole. And so we've created a new robotic or robotic device that will cut core and scoop the avocado. We still have to hand mash it and we still have to, you know, add the cilantro, lime juice and onions and stuff. But, you know, it gets rid of some of

the harder parts of making guacamole every morning. And those are that's just one example of many other things we're looking at. We got feedback that frying the chips is a difficult task. So we experimented with a a robotic arm to fry the chips. That one hasn't worked out. So we're going back to the drawing

boards. But the good news is the learning from the robotic arm for frying chips informed what we did on designing what we call auto koto and then other places that we're looking to build innovation is on our digital make line. Is there a way for us to help our employees build bowls and burritos on that line so that with the one or two people working on the line, they're capable of producing even more burritos and bowls. So other things too, like AI and machine

learning to help us in our rewards program, our forecasting, our supply chain. So I'm really optimistic about the innovation that we've got coming down the pike. Obviously, we have to take it through our stage process validated, ensure that it really plays out the way we want. But I think we're we're hunting in the right place that will make the job better, protect the experience for our customer and provide no compromise on the culinary. You know, it's interesting, speaking of inflation, curious about the California $20 an hour minimum wage for fast food workers since this has happened here. Curious, Bryan, about your view on what else would be impacted with that rise in minimum wage for workers here. How do you think about how that fits

into your broader cost picture and whether you need to make changes elsewhere? Yeah, I mean, look, obviously we move the wages accordingly and then, you know, I'm sure you're familiar with this, but that creates compression for wages throughout the business, meaning managers and apprentices and people that have more tenure at the crew level. So we adjusted all those wages accordingly. And we did take a price increase in California to offset the wage inflation that we're dealing with, which was close to 20% wage inflation. And what I'm happy to say is, you know,

we didn't have to change anything else. You know, we're not cutting corners on our food. We're not cutting corners on portions. We're not cutting corners on the speed at which provide our service.

You know, we're committed to giving people the Chipotle, the experience they know and love with the culinary that they know and love. And, you know, obviously, we had to raise prices a little bit. But, you know, the reality is it's more expensive to do business in California. And, you know, we adjust accordingly. Brian, we thank you so much for your

time. We should say Chipotle shares actually today hitting a record off the heels of those results as well. That is Brian Niccol, the CEO of Chipotle Mexican Grill. We're going to stick with that last thing we were talking about, that California wage hike that we've seen. Bloomberg Economics says that it could also raise the risk that the Federal Reserve delays its first rate cut. Joining us for more context is Anna Wong.

She is Bloomberg economics chief economist. Very curious about how you see this wage hike really impacting the broader economy. Of course, California being a whale in the room here. When you think about how many people

live there in the United States. Yeah. So, you know, California employed about 12% of the total national employment. And the number of workers that are directly affected by this fast food minimum wage hike is about half a million. And just those half a million workers seeing 20% increase in wages would boost the employment cost index, which is a wage measure that the Fed pays a lot of attention to.

It would boost it by 0.1 percentage point. And add to that, as Brian just said, not only are the fast food workers seeing 20% hike, but they need to raise the wages for managers and a lot of other related jobs that could that could boost the ECI by a total of 0.2 percentage point. And the Fed is getting these numbers on

the second day of their July FOMC meeting. So that means that it could be that when they looked at the employment cost index, they would be like that would be like maybe they couldn't do the cut in July. And we also think that if they don't cut in July, then they probably missed the window for cutting because they are after unfavorable seasonal patterns. Base effects would cost a 12th month change in inflation to drift up. And along with Bloomberg Economics, we thank you so much for keeping an eye on something that is under the surface. Perhaps not a lot of people had noticed how that would be a bigger impact here.

Now, coming up, we're going to talk about shares of Hertz now hitting an all time low after the company reported a loss that was nearly three times worse than analysts expected. Tons of ripple effects. It's our Stock of the hour up next. Stick with us. This is the close on Bloomberg. And.

Time now for today's Stock of the Hour. Shares of Hertz hitting an all time low and Abigail Doolittle joins us to explain. And this is a total mess. So they put up a loss of a dollar 28 per

share. That's almost three times worse than what they were expected to do. But they put up $2.1 billion in revenue, which actually beats that speaks to a margin problem, problems with costs and it really having to do with their pricey EVs. They have this huge inventory of Teslas now, ironically, the huge inventory of Teslas, that's because of their biggest owner, Knight had Capital asked them to buy these EVs a couple of years ago, thinking the values would go up, but the values have declined. So now they're taking big depreciation

charges to write them down. In addition, they've closed locations. Collision costs an issue revenue per car. So lots of issues here. But the new CEO, Gil West, he came from the former GM Robotaxi, the head there. He's an operations geeks. He's saying he's going to turn it around.

He's determined to get it right. Still a lot more for him ahead and more for us ahead as well on the close. Stick with us. More markets into the close. This is Bloomberg. This is the countdown to the close, emotionally Basic, alongside Gina martin Adams and Gina, we are looking at a market that has been having a bit of a tough day. Pretty remarkable. If you look at it, the S&P 500 still down after some big tech earnings only really now down one half of 1% with the Nasdaq 100 down 6/10 of 1%.

The ten year yield now still above four seventies. So even that bond market sell off still quickening and the dollar now on the decline, but essentially flat on the day. Interesting to see here the equity reaction on the tape, isn't it? Yeah, and it is all about equities, which tells you it's probably mostly about earnings. So the bond market isn't reacting

materially to GDP. Then what's really going on here? I thought at the beginning of the day it was really about GDP, it was really about earnings, it was really about what's going on in the economy. But I do think the market is a little bit nervous.

Well, these tech stocks really put out the earnings numbers that we're hoping for, particularly after Mehta sort of disappointed with an outlook that wasn't quite what investors were were counting on. Biggest moments of the day still after the bell. Now, earlier today, we spoke with Stuart Kizer of Citigroup and we asked about the increased downside risk in equities after today's GDP numbers. The GDP print this morning probably opened up a little more space to the downside than we thought you would had. You know, our view coming in to earnings

was a combination of strong GDP and strong EPS growth set a very high floor for us equity markets, you know, getting higher inflation and lower growth and you would have wanted probably opens up a little more space there. For more market analysis, let's welcome Leo Kelly. He's founder and CEO of Burden's Capital Advisors. You know, this idea of downside risk I think is interesting, particularly because we did see some, let's say, brutal selling in the last couple of weeks. We did have that optimism come back this

week. But at what point do you think the selling is over? But I think the selling is over when we get through what I was what I would call the inflation bear market, this is all a continuation of a two year plus time period from 2022 when inflation really started heating up and bond yields started to rise. So until we settle this, until we know how this is going to end, I think we see continued volatility at an elevated pace. Talk to us about what you do with sectors if you're worried about inflation, your point about volatility continuing check has done very, very well over the course of the last year or so, despite the concerns about inflation. Would you stick in tag or do you move to other sectors that are maybe a little bit more inflation sensitive? Yeah, I think you have to be very careful with tech here. Specifically with the handful of names have gone to astronomical levels now they've corrected a little bit, but the valuations are still high.

The answer to your question is you have to mind valuation. I think the market and the market started to get overly optimistic about these. The six rate cuts, which for the life of me, I never understood how they came up with six rate cuts, let alone even one rate cut now seems seems to be a question.

And what we know about technology is technology does better in lower rate environments where capital is plentiful, more people are running to risk assets. That's when high valuation assets do well. So our thought is the risk is higher for inflation to continue. Remember, the Fed has to make a decision here, either take the economy to the brink of or into recession to fix inflation, or just stay off of recession and deal with inflation. Never really hitting target, continue to

go higher. That's not the best environment for long bonds. It's not the best environment for tech. So I do think you have to be active here, financials, small cap stocks. I think the international markets look interesting. Why those markets, it really doesn't have to do with the Fed, has to do with valuation being significantly cheaper than these these top names that everybody's fallen in love with in the last 18 months.

I'm interested in your view here outside of the United States, because we know there are still the strong dollar dynamic and you're seeing it not only hurt other countries, you're also seeing it really weigh on some of the multinationals. Do you think that that dynamic continues and can continue to put a pinch and some of the expectations investors had coming into this year? Well, again, I think international stocks, despite the dollar strength, international stocks have done quite well here over the last year or so. They're holding up well. And again, it comes down to valuation. They're cheaper than their U.S. counterparts. And so while there's a lot of risk in Asia with what's been happening with China, the markets outside of that still to us look to be opportunistic.

I think you have to be very patient there. Long term plays, you get nice dividends in some of these markets. The valuations are lower. And so I think there's still opportunity there. Remember what the US did here with with

the. Increasing money supply by 40% in two years. That's third world countries, stuff that happened all over the world. So really what we have is water rising,

all boats up and down. And I think we'll continue that pace. Talk to us a bit, Leo, about how you balance your portfolio of equities and bonds in an environment where inflation is more volatile, more pervasive, more concerning at large, and stock prices and bond yields are positively correlated. I think this is the biggest challenge for asset allocators and and investors in general. How do you look at the world when when we're in that kind of broader macro landscape? And where do you find some value outside of stocks and bonds to kind of offset that imbalance? Yeah, it's a great question. We have been really of the mindset that yields will stay higher for longer and will potentially go higher.

I was on the show, I think, in January and, you know, we thought the six rate hike thing was crazy. So what we've been doing to offset the risk of interest rates rising and long bonds getting hurt and some of these growth stocks going down, we've moved money into value oriented stocks with dividends. Okay. And income replacement. We're keeping our duration in our bond portfolios low. In other words, buy short bonds, you get a higher yield and less risk. And we really are interested in the

private equity markets. Specifically, we like private credit. We've allocated capital to private credit. It's a good place to be. Yields are high.

It's not as susceptible to movement with the bond yields in the public markets. And so I think that's a great place to put money. I will say this, though, you have to be incredibly discerning when you go into the private markets. You need to understand or have a manager that understands credit quality and is as good as that as they are at reading a balance sheet. Leo, We have to leave it there. That is Leo Kelly, founder and CEO of Verdant Capital Advisors, certainly taking us all across the market. Gina There's certainly a lot going on in

almost every asset class you look at today. Yeah, and it is a big challenge. I do think that that is the biggest challenge for the broader investor class, is what do you do in an environment like this where we sat in an environment for 20 years where stock prices and bond yields were negatively correlated. So there was an offset. Any time you had some weakness in

equities, you had bond strength. That has not been the case in the post-pandemic world, and that's really disruptive for asset allocators and managers of of capital. I do think it also feeds through to the equity market and we've seen that a little bit through the volatility in the sector rotation. It's a very, very challenging climate. Gina Of course we are certainly looking at limbo for a lot of investors out there, but now we are moving closer to the closing bell for market coverage right here on Bloomberg as we take it to the bell and beyond. Beyond the Bell Bloomberg's Comprehensive cross.

Coverage of the U.S. market. Close starts right now, about 2 minutes away from the end of the trading day. Sonali Basak and Gina martin Adams counting down to the closing bell. And here to help us take us Beyond the Bell with a global simulcast, we're joined now by Carol Massar.

And since then, Vivek bringing together our Bloomberg Television, radio and YouTube audiences worldwide to parse through the crucial moments of the trading day. And certainly it has been quite the day Carol. Yeah, interesting. Right? And we're definitely well off our worst levels of the session. Having said that, I look at the S&P 500,

you still have more than 300 names to the downside. And folks, if you look at some of the ones that are going to be reporting Google, it is down right now just shy of 2%. Microsoft, it is down about 2.4%. So you're seeing these names as we get

ready for earnings trending, lowering the trade, incredible range in today's trade to the Nasdaq, 100 down half a percentage point right now. It was down as much as 2% earlier in the session. Gina, the S&P 500 down more than 1.6% earlier in the session, now down only half a percentage point. Yeah, and a nice climb back. And tech is not leading the downdraft, which is interesting considering all the nervousness around tech. This really is seems to be related to

matter. And a market that was caught off guard by what Maytag said regarding their spending and their future growth prospects. It's definitely weighing on the rest of the communications space, putting a lot of pressure on Google after the close or alphabet as as the younger folks say. Nonetheless, I do think it's notable that tech stocks are actually in the green now, the tech sector rising, and that's helping the broader S&P 500 closely out of this negative territory. Yeah, it's interesting. And we'll see what today has to bring as well. Just a lot of uncertainty out there as

we wait to see what more of the tech giant has to say. We are getting the bells here now down to the close and we are indeed ending the day again in the red here. We're looking at the S&P 500 really still down on the day, having closed close to one half of 1% lower with even bigger declines here on the Dow Jones Industrial Average, down almost 1%.

That NASDAQ 100 now down about 6/10 of 1%. Of course, snapping that winning streak we saw earlier in the week. All right, guys, real quick on some of the movers in today's session.

Nvidia, that stock up about 3.6%. This this has to do with what we got from Metta, basically, because as they have saying, we're going to do up our spend our CapEx. We're doing a lot of things when it comes to AI. So companies that play in the air space benefited and that included NVIDIA. It was up about three and a half

percent. And you also had super micro, it was up about 4.3%. Hey folks, we've got Microsoft, so let's get to it. Crossing the Bloomberg terminal, third quarter revenue, 61.9 billion better than what the Street was forecasting. That was a forecast of 60.87 billion third quarter EPS. We're looking at $2.94 a share. Let's go to cloud revenue.

So key for this company, Intelligent Cloud for the quarter, 26.71 billion better than the street forecast of 26.25. Looking at personal computing revenue that to a slight beat, 15.58 billion versus the estimate of 15.7 productivity revenue pretty much on target 19.57 billion. The Street was looking for 19.54, but

that third quarter revenue folks coming in better than forecast and you've got the stock up almost 5% here in the aftermarket. Yeah, expectations were for about $61 billion. We're seeing it at about $62 billion for the third quarter. Going to the press release. Looking at what Satya Nadella chairman and CEO of Microsoft has to say about the quarter, quote, Microsoft, co-pilot and co-pilot Stack are orchestrating a new era of AI transformation, driving better business outcomes across every role and industry.

Finally now, it's interesting. We do have Intel also now out. You do have adjusted EPS forecasts, missing analyst estimates here. The second quarter revenue is estimated to be 12.5 billion to 13.5 billion and

the estimate had been 13.6 billion, a little shy of expectations there, even with revenue very narrowly beating estimates here. Intel shares now down more than 2%, fluctuating more than 2.5%, quickening its losses now after market. And what a contrast between the two.

You've got the software company contrasting with the hardware company. Clearly, Microsoft has been just a dominant force in software, investing in all the right places, growing in all the right places. Intel, a little bit of a different story. And that's definitely showing up in this quarterly earnings season with not necessarily bad results, but not an across the board just pummeling of expectations like that which we saw from Microsoft. Okay. Let's get on over to Alphabet, because

we're seeing the results come right now. It looks like a B when it comes to first quarter revenue, 80.54 billion, beating estimates of a $79.4 billion first quarter EPS. Well coming in way above expectations at a dollar 89 versus estimates of $1.53. We're also seeing first quarter

operating income significantly beat expectations up 25.47 billion versus 22.4 billion. The stock just surging right now up by. 8% while taking a page from, should I say, whose book matters book The company, the board approving initiation of a cash dividend, declaring a cash dividend of $0.20 a share. You want to know why the stock is really popping in the after hours? That's got to help in a big way. Well, it's interesting. You're just seeing it soar past 9% after

market and Alphabet right now. And you are really seeing these results coming out of Alphabet and Microsoft shrugging off a lot of those problems you saw in technology. You got to go there. Yeah, share buyback, too. This is something that investors are certainly loving right now. Alphabet authorizing to buy back up to an additional $70 billion in shares. Shares Alphabet higher by 9.5%.

Definitely needed this in the communications space, which was really beholden to what what Metta said with respect to the outlook. This is should turn the tide for communications at large, depending on what the other stocks do. But remember, this is the fourth largest stock in the S&P 500. This could make a really big difference

to the tone of the market. Yeah, as we open up tomorrow, I got to say that alphabet move, man, that is just a big one, nine and a half percent to the out to the upside here. You know, initiating a dividend, a big buyback. And what's interesting is talking with our own Mandeep Singh about, you know, alphabet.

It's all about engagement. And this is what you want to see at this company. Advertising revenue at Google, 61.66 billion that was above street estimates. YouTube ads, revenue that was above what

the street was anticipating, services revenue coming in. So really cloud revenue, that too was above what the street was expecting. So you look at all of the businesses across the board. But what's really key, again, this is an engagement company.

This is about advertising and that is certainly firing on all cylinders. Yeah, worth reiterating the cash dividend of $0.20 per share. Also, the company authorizing that share buyback add up to an additional $70 billion worth of shares. I go to the press release and I look to

see what Sundar Pichai, CEO of the company, says that the results in the first quarter reflect strong performance from search, YouTube and cloud. We are well underway with our Gemini era. That's what investors want to hear about and there's great momentum across the company. Our leadership in AI research and infrastructure and our global product footprint position as well for the next wave of innovation. Remember, investors want to see that the company companies search product is keeping up when it comes to AI and competing effectively against everyone else. She's working on integrating AI tech into search a.k.a meta platforms.

Every headline Crossing the Wire is making investors love this story more. Look at that 12% higher on the day. And it's because not only of that 70% $70 billion share repurchase reauthorized here you also have that cash dividend declared of $0.20 per share. And not only, Tim, to your point here, Sundar Pichai just really highlighting here the Gemini era and momentum across the company, particularly leadership in AI A.I.. You do have him really expanding more

there in their operating results about consolidating their teams as they've announced that focus on building AI models. So driving efficiency here while focusing on the future, that's that's what's holding on here to this stock right now. All right, guys. So you've got Alphabet up about 12% in the aftermarket. You've got Microsoft a gain of about five and a half percent in the aftermarket.

Made me want to look at the Nasdaq 100 e-mini futures. And you've got that up, that index up about just shy of 1%. So providing some upward momentum overall to certainly the Nasdaq trade. Okay. Let's go back and check out what shares of Microsoft are doing, up 4.5% as we speak.

Shares rising after third quarter revenue beats estimate. Worth repeating these headlines, third quarter cloud revenue coming in above estimates at $35.1 billion. Estimates are for $33.93 billion. So a beat there. Also third quarter revenue coming in at $61.9 billion, handily beating those estimates of $60.87 billion.

Yeah, and a nice little payout to shareholders as well. And more than $8 billion, $8.4 billion to shareholders via dividends and buybacks over the quarter. That I think is a very welcome surprise for investors that are really counting on Microsoft to be a spender, but then give a little back a bit back to shareholders and it certainly adds a bit of juice to the stock price, which is soaring in after hours.

Very different story. So Microsoft soaring, Alphabet is soaring. Not the case when you look at Intel, that stock in the aftermarket, we're looking at about a five and a half, almost 6% decline here as we speak. The weak forecast exactly giving a weak

forecast. You know, big maker of personal computer processors, such a big part of their story, but giving that lackluster forecast for the current period, it is still struggling to right the ship, turn it around and kind of get back to the top tier. The chip industry having a tough time. All right, guys, last name for you is the big names and some big movers. So we're going to certainly track this

into the after hours and certainly into the Friday trade. All right. That's a wrap. Are cross-platform radio, TV, YouTube, Bloomberg Originals. We will see you again, folks. Same time, same place tomorrow.

Now let's get more on Microsoft results. Anurag Rana Bloomberg intelligence senior technology analyst, joins us now. What do you think about the results that you saw first blush? What is there to like that investors are most holding on to? And does it hold into tomorrow? The Azure growth of 3

2024-04-27 13:16

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