Banananomics: Opportunities Between The S&P 500 And CPI

Opportunities Between The S&P 500 And CPI

The 459 companies in the S&P 500 that have reported this quarter have posted profits on average 8.4% higher than expected,

Inputs that matter: The anticipation of a recession may contribute to notable outperformance.

• Companies are strengthening their bottom lines, cutting costs, and stockpiling cash to ward off the impacts of an economic slowdown.

• Earnings revisions also dipped heading into the first quarter, leaving room for more upside potential.

• Lombard Odier Asset Management Head of Macro Research Florian Ielpo said in an interview that " companies have been "trying to do more with less.

The opportunity: CNBC's Jim Cramer on Friday guided investors through next week's market action, telling them to pay attention to several earnings reports, including Home Depot, Alibaba, and Walmart.

• Remarks from Federal Reserve officials will continue to shape the market.

• "The more these Fed officials entertain us with their hawkish commentary, as long as they keep us on the edge of their seats, the more likely it is that the Fed can cut rates in the not-too-distant future," Cramer said.

Zoom in: "The utilities perform best when the economy's throttling back," he said. 

• If the Dow Jones Utility Average (DJUA) were up for a week or even two weeks, I might ignore it.

• But for the [utilities] to rally this long, it is flashing red for the economy, telling us we're headed into the slowdown.

• These stocks do well in a slowdown because they are not discretionary, as consumers must pay their utilities bills.

Between the lines: Rising housing costs and stubbornly high inflation are battering many consumers, and the hit to their wallets is now hurting America's low-cost restaurants.

• Chains, including Red Lobster, which is considering a bankruptcy filing, and TGI Friday's Inc. are becoming even more distressed as their labor expenses increase and more diners eat at home. 

• Analysts from Moody's Ratings wrote last week that the fast-casual segment's reliance on lower-income households means its customer base has been disproportionately impacted by rising prices.

• Chains relying on that demographic "are feeling it the most," said Dennis Cantalupo, chief executive officer of credit-rating and consulting shop Pulse Ratings.

Follow the money: It seems clear at this point that the path for monetary policy is higher for longer.

• Don't be surprised if the April Consumer Price Index (CPI) report suggests more trouble for the Fed. 

• After all, the CPI is just an index of goods and services, and the index, both seasonally and non-seasonally adjusted, has been rising consistently since August 2022 in a nearly linear path.

• CPI swaps are assigning a risk of the CPI report rising by more than 3.4%, with swaps currently trading at 3.42%.

Largest Tariff Surge For China

The Biden administration plans to raise tariffs on electric vehicles and other clean energy goods from China next week.

Inputs that matter: Chinese electric vehicles currently face a 25% tariff, and the administration is expected to raise that as much as 100% to make it more expensive to buy the product from China.

• The new tariffs are not expected to include traditional gasoline-powered cars that are made in China.

• These tariffs are also expected to include new levies on semiconductors, which Biden has worked to boost domestically. 

• They also said that a rate hike would apply to Chinese batteries and solar panels — two areas in which the Biden administration has invested domestically. 

The opportunity: To circumvent the tariffs, companies such as Ford, GM, and Tesla are creating domestic battery plants by partnering with Chinese companies.

• Norway, with 79.6%, Iceland, 58.4%, and Denmark, 44.9%, are the leading EV countries.

• China has 23.8% EV adoption, and the U.S. comes in at 8.1%.

Zoom in: Sen. Sherrod Brown (R-OH), the Banking Committee chairman, has called on the Biden administration to ban Chinese electric vehicles completely due to privacy concerns about people's data.

• GlobalFleet reports, "While Ford generated huge profits in 2023, the company's E.V. segment reported a $4.5 billion loss, and GM is not expecting earnings in the E.V. segment until 2025."

• GM postponed opening its second electric truck plant in Michigan to 2025.

Between the lines: Meanwhile, in Germany, activists began protesting an expansion of a Tesla plant in the city of Grünheide on the outskirts of the German capital, Berlin, on Wednesday, loudly voicing concern over the environmental impact the expansion could have due to the need to clear a large swath of forest for construction.

• Another point of contention is the factory's massive use of public water supplies for production.

Follow the money: Tesla is the largest seller of carbon credits in California.

• Since 2009, the automaker has made over $9 billion from carbon credit sales.

• In 2023, Tesla generated $1.79 billion in regulatory credit revenue.

• These credits are sold to their fossil fuel competitors.

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