Cover Story:
-Money managers in the US are more bearish now than they have been nearly 30 years, according to Barron's latest Big Money poll. The survey found 32% of respondents are bearish on the outlook for stocks over the next 12 months, the highest percentage since 1997. This is the highest percentage since the dot-com bubble, 9/11, Lehman Brothers collapse, 2008-09 financial crisis, and Covid-19 pandemic. The bulls' ranks are also at historic lows, with just 26% of respondents stating they are bullish on the market's prospects. The change in sentiment largely reflects concerns about the potential impact of the Trump administration's tariffs on corporate earnings and the economy. Despite President Trump's softening stance and willingness to make deals with both allies and China, managers remain concerned about the possibility of a global trade war.
Interview:
-Anduril, a California-based company valued at over $30B, aims to become a prime defense contractor by building weapons systems using advanced technology quickly and at scale. The company aims to put autonomy and software at the core of its products, similar to Tesla's impact on the auto industry. Anduril's core technology is an artificial intelligence brain called Lattice, used in its drone-tracking Sentry tower, Ghost reconnaissance drone, Roadrunner interceptor drone, and autonomous unmanned aircraft Fury. Barron’s spoke to Anduril's Executive Chairman, Trae Stephens, who after college started in the intelligence industry and then had a stint at Palantir Technologies. Stephens said that Anduril has found an opportunity in the market for weapons systems that leverage modern software. The company's strategy involves vertically integrated large-scale manufacturing, with Columbus, Ohio, being the location of Arsenal-1, its first hyperscale factory. This is in competition with the largest technology companies, as the best software and hardware engineers have options for work. Anduril's growth will be based on managing its supply chain, as it must compete with the best technology companies in the world. The company's collaborative combat aircraft, designed to fly alongside the Air Force's F-47 sixth-generation fighter jet, requires a significant increase in engine production from aerospace suppliers.
Tech Trader:
-Microsoft's earnings report revealed that while all four companies reported better-than-expected earnings, the stock reactions following their results highlighted that digital bits win over atoms in a global trade war. Shares of Microsoft and Meta Platforms surged, while Apple and Amazon underperformed. Apple CEO Tim Cook said tariffs would add about $900M to the company's costs for the June quarter, while Amazon CEO Andy Jassy said the company had yet to see significant impact from the levies. Both Apple and Amazon sell many physical products and couldn't provide much clarity about the potential tariff impact for the rest of the year. Beyond tariffs, reports of artificial intelligence's demise have been greatly exaggerated. Microsoft announced it would increase European data center capacity by 40% over the next two years and reaffirmed its prior guidance to spend $80B on data center capacity this fiscal year ending in June.
The Trader:
-Refiners, which convert crude into gasoline and other products, are influenced by the larger supply-demand picture for oil but are more dependent on the balance between the price of oil and the fuels they make. The fuel market appears tighter than the broader oil market, with the difference between the price of oil and the wholesale price of gasoline rising to $27 at the end of April. This gap is due to a fundamental difference between the oil and fuel markets today. The supply of crude oil is rising due to OPEC's increasing crude production, but the supply of fuels is not as much. There aren't enough refineries to turn all that crude into gasoline and diesel. Nearly as many refineries have been shutting down as opening this year, leaving the world in a relative deficit. LyondellBasell shuttered a Houston refinery in February, and Phillips 66
PSXInventories of gasoline are at the low end of their five-year average and have plunged to 12-year lows on the West Coast. Diesel inventories are also low. Fuel demand in both the US and Europe has remained relatively strong, even as gasoline demand is rising in many countries where the USA exports fuel – but unlikely to rise in the USA itself. Stocks of major refiners like Valero and Marathon Petroleum have fallen this year and are down more than 20% over the past year. Analysts see them bouncing back and nearly doubling by 2027.
-The S&P 500 has rebounded from its April lows as markets reflect President Donald Trump's less draconian stance on tariffs. However, the impact of tariffs may not be evident in the hard data until May or June, and the market is only one Trump Truth Social post away from another tumble. Many stocks don't look attractive, especially given the lingering hazards. The CBOE Volatility Index (VIX) has fallen but remains above 20, suggesting higher-than-average risks. Evercore ISI strategist Julian Emanuel screened for stocks with poor momentum and are buying back more stock than others, indicating management remains confident in a company's earnings potential and wants to support the stock price. Examples include Devon Energy, AES, Trex, and Enphase Energy, which have averaged declines of 11% this year, far more than the S&P 500's 3.6% drop. Pinterest, a $17.6B stock, has been a big repurchaser of its shares, trading at about 4.1 times expected sales for the next 12 months, down from a three-year peak of about 7.6. While it's more expensive than smaller platforms like Snap and Etsy, it is much lower than other fast-growing internet stocks like Airbnb and Booking Holdings, which trade over six times.
Features:
-Market strategists predict an imminent economic recession due to President Trump's tariff policies, while consumer confidence has declined for a fifth consecutive month. Despite last year's 2.8% growth in the US GDP, adjusted for inflation, there are reasons to believe the economy will avoid a recession this year. Hard data, including GDP growth, employment, inflation, and retail sales, doesn't provide a clear picture of economic distress, and consumer data shows continued growth in spending. GDP fell at an annual rate of 0.3% in the first quarter, with most of the decline due to a 41% surge in imports. Inflation-adjusted final sales to domestic purchasers gained 3%, and consumer spending rose 1.8% in the quarter.
-Palantir Technologies CEO Alex Karp expressed enthusiasm at his company's annual AIPCon gathering, stating that the company is thriving and has a strong investor base. However, the company has been the subject of debate on Wall Street, with analysts generally agreeing on its near-term growth opportunity. Analysts expect revenue to grow 36% to $862M, with earnings surging 62%. However, price targets among Wall Street analysts range from $40 to $130, with Palantir recently trading at $118. The uncertainty also affects Palantir's daily moves, with daily average spreads of 5.6 percentage points since going public in 2020. The volatility and debate stem from the company's nontraditional roots, as it grew up in the staid world of national security and defense. A devoted base of retail investors further clouds the company's value.
European Trader:
-Shell, the London-based oil-and-gas company, reported better-than-expected earnings for the first quarter despite falling crude prices. The stock rose and Shell maintained its $3.5B level of quarterly share buybacks, contrasting with rival BP, which scaled back its program. Shell's results show it can perform well even with oil prices at around $60 a barrel amid trade wars and recession concerns. CEO Wael Sawan pledged to increase output, focusing on profitable liquid natural gas operations. First-quarter adjusted earnings came in at $5.6B, better than consensus forecasts and up from $3.7B in the fourth quarter. Adjusted earnings were 92 cents a share, beating the 82 cents median estimate on FactSet. London-traded shares rose 3.4% in early trading, while American depositary receipts added 3.7 before the market opened.
Emerging Markets:
-No update
Commodities:
-The mineral-rights deal signed on April 30 has provided the US with preferential access to resources in Ukraine, including minerals and traditional energy resources like oil and gas. This deal is seen as part of the global race for resources that will intensify over the coming decades. Ukraine likely has an abundance of materials such as lithium, titanium, and rare earth elements, which are used in electronics, lasers, and wind turbines. However, the country doesn't have any commercially viable mines yet. As the US tries to wean itself off imports from China, one critical bottleneck for tech companies is that China is currently the biggest exporter of key minerals. Most of the minerals required to make machines that will power AI in the future aren't that scarce, but they're just not easy to access. Mining these materials is expensive, time-consuming, and can be harsh on the surrounding environment. China is miles ahead of everyone else in this area, with the largest-scale extraction facilities. The US Geological Survey calculates that more than half of the US needs for rare earths are met by imports from China, and 93% of US needs for yttrium, an element used in making LED lights, came from China last year.
Streetwise:
-Walt Disney is set to report its quarterly financial results on Wednesday, following two significant milestones. The live-action Snow White remake has surpassed $200 million in worldwide box office receipts, but ticket sales have been low after six weeks in theaters. Disney has halted Tangled, a live-action remake based on the Rapunzel story. Netflix has also surpassed Disney in stock market capitalization, becoming the most valuable media company in 2018. Disney plans to use Thunderbolts, a superhero team-up, for theater redemption. However, McDonald's has reported its biggest same-store sales decline since the Covid-19 lockdown. Disney+, which launched in the U.S. in 2019, has seen its subscriptions increase from $6.99 without ads to $9.99 with ads, ranking third in subscribers behind Netflix and Amazon.com's video kick-in for Prime subscribers.