Last night’s presidential election debate brought more antics than substance on the economy. Inflation and slowing growth are risks, but the stock market—which many Americans see as a barometer of prosperity—is on a tear.
The S&P 500 has gained some 15% since January, a blistering run marking the best first half for the market in an election year since 1976. Whether that lasts is another matter. Investors should worry more about the pillars of the rally.
While the S&P 500 tends to have a better second half in election years than non-election years, such a strong six-month start could point to outperformance petering out. When the S&P 500 is up 15% or more in the first half of the year it only advances in the second half 54% of the time, with an average bump of just 2.5%.
Caution could be warranted on companies that have outperformed. In 2024, that means chip stocks and others that have benefited from the artificial-intelligence boom. Think
Nvidia
,
The reaction to Micron’s quarterly figures this week could be a harbinger. Despite an earnings beat and robust demand where it mattered most, investors now used to blowout numbers soured on the strong results, and it weighed on Nvidia as well.
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Hardware names such as Micron have trounced software peers this year, in part because they haven’t needed the same capital expenditures to meet AI demand. But Micron flagged that it will have to spend more to make enough chips. That could bode ill for Nvidia, and may suggest the outperformance of hardware relative to software is beginning to revert—a trend Barron’s called a month ago.
That said, investors betting against AI have been burned. Calling the top in Nvidia stock may be a more dangerous game than wading into presidential politics.
—Jack Denton
***
Walgreens Closing Significant Number of Stores as Outlook Weakens
Retail pharmacy chain
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acknowledged its current model isn’t sustainable, reporting lower-than-expected earnings on weak consumer spending that has forced it to cut full-year guidance. It will close a significant number of stores, saying as many as a quarter of its 8,700 locations aren’t performing.
- CEO Tim Wentworth told investors on Thursday that American consumers continue to feel pressure, becoming more selective with their purchases. Pharmacy chains such as Walgreens have faced years of challenges, including plummeting reimbursement rates for prescription drugs.
- About 75% of its U.S. stores contribute all of the performance, with the remainder of them being slated for imminent changes that include closing a substantial number of them in the next three years. Wentworth noted Walgreens is losing money on filling prescriptions for weight-loss drugs such as
Novo Nordisk
’sOzempic and
Eli Lilly
’sZepbound.
- Adjusted operating income for Walgreens’ U.S. retail pharmacy segment was $501 million in the quarter, down from $962 million a year ago even though sales for the segment rose. Walgreens said as part of its changes it is re-evaluating its product assortment and emphasizing its own brands.
- The company also said it was accelerating its digital and omnichannel offerings. It makes 80% of same-day delivery orders within one hour, and sees room for improvement there. It also has plans to build on its loyalty program, which it said has 120 million members.
What’s Next: Walgreens now expects full-year fiscal 2024 earnings of $2.80 to $2.95 a share, down from previous forecasts for $3.20 to $3.35 a share. Walgreens aims to align its U.S. pharmacy and healthcare operations and save $1 billion this year through store updates and layoffs.
—Josh Nathan-Kazis, Angela Palumbo, and Janet H. Cho
***
Supreme Court Deals Another Blow to Agencies in Curbing SEC Tribunals
The Supreme Court ruled that the Securities and Exchange Commission can’t bring securities-fraud cases in its own administrative tribunals, in a 6-3 decision by the court’s conservative majority to limit the SEC’s powers over Wall Street. It has the potential to crimp the power of other federal agencies.
- The decision in Securities and Exchange Commission vs. Jarkesy, written by Chief Justice John Roberts, said defendants charged with fraud punishable by a civil fine have a right to a jury trial in federal court. It’s the latest ruling that pares back the power of federal agencies.
- The SEC for years has sued people in either federal court or its own internal court, drawing complaints that those internal courts didn’t afford defendants the same rights to challenge evidence. Roberts, arguing for separation of powers, said the SEC can’t play the role of prosecutor, judge, and jury.
- Justice Sonia Sotomayor dissented, saying the ruling will wreak havoc on federal agencies and leave some, such as the Occupational Safety and Health Review Commission, the Federal Mine Safety and Health Review Commission, and the Agriculture Department, with no way to penalize wrongdoers.
- In a separate 5-4 ruling on Thursday, the court stopped an Environmental Protection Agency plan to cut air pollution from drifting across state lines while legal challenges to the plan make their way through lower courts.
What’s Next: Still pending is a decision on a longstanding rule that courts defer to federal agencies’ reasonable interpretations of federal law. Conservatives say this so-called
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doctrine gives too much power to regulators, while defenders warn that federal judges can’t be experts on what all agencies do.
—Bill Alpert and Janet H. Cho
***
Nike Outlook Confirms Fears of Weakening Consumer Demand
Athletic apparel maker
Nike
’s
guidance confirmed fears about weakening consumer demand in North America and China, and its fourth quarter and full-year revenue fell slightly below expectations. The company has been losing market share to competitors such as
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New Balance, and Hoka.
- Nike believes fiscal full-year 2025 revenue will be down mid-single digits, with the first half down high single digits. In March, Nike said sales in the first half of the year would be down by low single-digit percentages from the comparable period a year earlier.
- First-quarter revenue will be down about 10% compared with a year ago, Nike CFO Matthew Friend said on a call. Analysts had projected a roughly 3% decline. Friend said the challenges they have been navigating are expected to have a more pronounced effect on fiscal 2025.
- Nike also expected that sales will take a hit from a softer consumer outlook in China, muted wholesale orders, and weaker-than-expected online sales for its lifestyle business, and its plans to limit the supply of some classic footwear styles will also weigh on sales in the short term.
- Nike reported fourth quarter adjusted earnings of $1.01 a share on $12.6 billion in revenue. Sales fell 2% from a year ago on a reported basis, dragged lower by an 8% decline in direct-to-consumer sales. Gross margins improved by 1.1 percentage points to 44.7%.
What’s Next: Nike CEO John Donahoe said the company is gearing up to release new franchises for its fitness and lifestyle categories in the second half of its fiscal year. Nike’s product development group is accelerating product development.
—Sabrina Escobar and Liz Moyer
***
Falling Mortgage Rates, Cooling Home Prices Favor Homebuyers
Mortgage rates fell for the fourth straight week to an average of 6.86% for a 30-year fixed-rate mortgage, the lowest since early April, according to Freddie Mac. Chief economist Sam Khater said rates are expected to keep declining this summer, potentially enticing home buyers back into the market.
- There are more homes available. New listings rose 13% in May from the same time in 2023,
said. For the first time since 2020, the typical home sold for less than its list price in late spring, and the likelihood of others selling below asking price is rising,
Redfin
’sDana Anderson wrote.
- Rising inventory and mortgage rates below 7% add up to good news for prospective buyers, especially families with children looking to move before the next school year, said Bob Broeksmit, president and chief executive of the Mortgage Bankers Association, MarketWatch reported.
- But the fallout from higher mortgage rates and record home prices continues. Pending home sales, where contracts have been signed but sales haven’t closed, dropped 2.1% to a record low in May from April, the National Association of Realtors’ monthly index said. Home sales fell for the second-straight month.
- The NAR sees the 30-year mortgage rate staying above 6% through 2025, even if the Federal Reserve cuts rates. It projects that median existing-home prices will rise to $405,300 in 2024 and $412,000 in 2025, and that median new home prices will rise to $434,100 next year.
What’s Next: After hitting a record $419,300 in May, home price increases are expected to ease in coming months. NAR chief economist Lawrence Yun expects moderately lower mortgage rates, higher home sales, and stabilizing home prices in the second half of 2024.
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—Janet H. Cho
***
Do you remember this week’s news? Take our quiz below to test your knowledge. Tell us how you did in an email to thebarronsdaily@barrons.com.
1. Which of the following companies split its stock 50-to-1 in one of the largest splits in New York Stock Exchange history?
a. Nvidia
b.
c.
d.
2.
cut its delivery guidance and operating profit outlook, citing which of the following factors?
a. Shortage of engines
b. Shortage of skilled workers
c. Geopolitical challenges
d. All of the above
3. Which European auto maker is investing $5 billion in electric vehicle maker
as competition in the sector heats up?
a.
b.
c. Ferrari
d. None of the above
4.
cut its guidance for some revenue measures, citing current booking patterns. But it expects capacity to rise more than expected, potentially by as much as:
a. 7%
b. 9%
c. 11%
d. 13%
5. Banks passed the Federal Reserve’s latest stress test, demonstrating they have enough capital to withstand a financial crisis despite collectively losing a hypothetical amount of money based on various extreme scenarios. How much does the Fed estimate that to be under this year’s test?
a. $585 billion
b. $635 billion
c. $685 billion
d. $735 billion
Answers: 1(c); 2(d); 3(a); 4(b); 5(c)
—Barron’s staff
***
—Newsletter edited by Liz Moyer, Patrick O’Donnell, Brian Swint
