Cover Story:
-Defense stocks like Northrop Grumman, Lockheed Martin, and General Dynamics are facing disruption in the military-industrial complex. The changing way wars are fought, such as the Russia-Ukraine conflict and the Middle East, has led to the weaponization of cheap drones and unmanned aerial vehicles. The Trump administration has also brought change, with Elon Musk advocating for AI-enhanced technology from upstarts like Palantir Technologies and Anduril Industries. Shares of Lockheed, Northrop, General Dynamics, and L3Harris Technologies have slumped 10% on average since the election, shedding $25B in market value. However, traditional defense contractors have a history of delivering new weapons when needed, and there will still be a need for more-traditional jets, boats, tanks, and missile systems that Northrop and Lockheed can provide.
Interview:
-Teva Pharmaceutical Industries CEO Richard Francis has said that if President Donald Trump imposes drug tariffs on cheap generic medicines, the company will have to raise their prices. He said that the cost would pass on to the purchaser. Drug makers are waiting to learn their fate this week, as Trump has repeatedly warned of a "major tariff on pharmaceuticals." Top executives of pharma giants have offered mixed messages about the tariffs' implications. Teva said that the broader tariffs already in place are factored into its guidance. The big question is what the sector-specific drug tariffs Trump has threatened will mean, if implemented. Big pharma companies have been rushing to cram as much product as possible through their supply chain into the US before any sector tariffs go into effect, and drug imports skyrocketed in March.
Tech Trader:
-Alphabet stock has dropped 5.9% this week after Apple's senior vice president of services, Eddy Cue, said Google Search volumes on Safari browsers declined in April for the first time in court testimony. Cue cited the rise of artificial-intelligence chatbots, including Perplexity, Anthropic, and ChatGPT, for the slowdown. Skeptics argue that Google's dominance of search, which accounts for over half of Alphabet's revenue, is being eroded by AI, and there is little the company can do about it. Alphabet immediately took issue with the testimony and conclusions drawn from it, stating that the number of search queries was still growing and users were accessing it for new things and in new ways. However, there is little doubt that Google Search is being disrupted, and it's a question of extent and timing. Barron's argued that the company would be able to survive both disruption to its search business and government lawsuits, which have been harsher than expected.
The Trader:
-Microsoft's better-than-expected earnings on May 1 boosted Salesforce stock by 8%, benefiting software companies, particularly those betting on artificial intelligence. The earnings report showed no signs of customers soured on AI or tightening budgets due to a tariff-driven economic slowdown. Salesforce, which reports earnings on June 6, could benefit from increased cloud services investments. Analysts expect Salesforce's sales to grow to $9.95 billion, or 6.7% year-over-year growth, due to its ability to cross-sell customer-relationship management applications at higher subscription prices. Salesforce's projected growth is achievable due to the weakened dollar and the company's 9% sales growth in 2024, suggesting that current estimates should be achievable if the dollar stays near its current level.
-The US may be heading for a recession; then again, it may not, and if it doesn't materialize, economically sensitive stocks, known as cyclicals, will be the place for investors to be. Recession fears are justified, as tariffs may slow consumer and business demand and bring the economy to a halt. However, there hasn't been any hard evidence of this, and the first-quarter GDP growth showed that consumer spending and business investment grew. The Institute for Supply Management services purchasing managers' index rose to 51.6%, which was expected to fall to 50.2%. If the trend continues, it would bode well for stocks in cyclical sectors, which take the hardest hits in recession and perform best when the economy grows. Some of these stocks are still trading well below peaks and have lots of ground to recover if the US sidesteps a recession.
Features:
-Barron's believes that defense contractors will adapt to changing times and technologies, with companies like Northrop Grumman, L3Harris Technologies, Booz Allen Hamilton, and AeroVironment showing positive performance. However, there are other stocks for investors to consider, including European players. Palantir Technologies, an AI leader, is valued at almost $275B, more than Lockheed Martin, Northrop Grumman, and General Dynamics combined. AeroVironment, a smart weapons maker, is also gaining popularity due to its merger with BlueHalo. Kratos Defense & Security Solutions and Karman Holdings are two small-cap companies working to fuse AI and unmanned vehicles and weaponry. Karman is uniquely positioned in the defense supply chain, serving hypersonic propulsion, space launch, and missile defense segments. Its stock trades for about 96 times estimated 2025 earnings, but is expected to grow by 33% a year on average for the next three years.
-The Trump administration's tariffs have led to earnings warnings, highlighting the potential damage to publicly held American companies. However, small businesses are in survival mode, often lacking the resources and cushion of larger companies to navigate a rapidly changing global trading system. Tableware maker Haand, co-founded by Chris Pence, started the year with plans to show its pottery at a trade show and begin exporting to Canada. However, distribution concerns about tariffs on Canada have slowed Haand's export plans, forcing it to reduce growth expectations. The company sources premium porcelain from Spain and the UK for tableware, which is at risk of becoming more expensive and harder to obtain due to the tariffs. As a result, orders that would arrive in one to two weeks now take up to eight weeks. Small businesses are living opportunity to opportunity, with many facing higher tariffs than megacap companies like Apple and Ford Motor.
Europe:
-Alphabet is being sued for €2.97B ($3.34B) in damages by Italian company Moltiply Group, alleging that the company abused its position as the dominant search engine to favor Google Shopping between 2010 and 2017. Moltiply owns the Italian price-comparison website Trovaprezzi.it. Google was hit with a €2.42B penalty by the European Union in 2017 for promoting its own comparison-shopping service in search results and demoting competitors'. A number of private claims against Google have been resumed or launched following the EU's final decision. Google spokespersons said that the changes made in 2017 following the European Commission's decision are working as intended and the number of comparison shopping sites in Europe using Google's shopping features has multiplied from just 7 to more than 1,550.
Emerging Markets:
-No update
Commodities:
-Oil prices have been sliding, and investors are bearish. Despite a rally to $61 a barrel by Friday, West Texas Intermediate crude remains far off the January high of $78. Oil has supply-and-demand problems, with OPEC and its allies ramping up supply faster than expected. Daily production is set to rise by nearly a million barrels by June from March. OPEC wants to regain market share from countries like the US, and seems willing to endure lower prices to make it happen. Demand isn't rising fast enough to sop up extra supply. Global oil demand in April was flat with year-ago levels, says JP Morgan. Most other sectors only face demand pressure, mostly from tariffs. If they go away, those sectors could be in the clear, but energy would still face a glut. Bullish energy investors are hoping US producers pull back drilling operations, leading to a fall in US output and lifting prices. At $50 a barrel, most companies can still make money on operating wells, but they will almost certainly spend less on policies like stock buybacks, and few will be able to drill new wells profitably. Analysts' earnings expectations have come down, but they may still have room to fall.
Streetwise:
-Jack Hough suggests the markets have entered a phase of “tariff purgatory.” Last month, President Donald Trump announced global tariffs, leading to panic among markets. He introduced a tariff teaser rate of 10% for 90 days, except for China, which gets 145% for now. Markets felt better about this, but markets were uncertain whether he was referring to May 2026, when Jerome Powell's time is up, or a more complicated situation. The US and the UK have announced a trade deal, with the 10% tariff mostly sticking. Wall Street is also concerned about the 145% tariffs coming down. Three explanations for this situation include the president's right to claim the US is "getting rich on tariffs," Corporate America's gravitational pull, and the development of buythedipitis, a condition brought on by four decades of rising global trade. This has boosted profits and held down US prices, allowing interest rates to move lower, making stocks an even better deal. Symptoms of buythedipitis include excessive reliance on policymakers to act as a put, pulling various financial levers to get gains going again. Retail investors, unlike institutional investors, remain invested in the market and have been buying the dip, with first-quarter growth being weak due to tariff front-running