Weekly Research Briefing: Looking Up

April 30, 2024

The markets dodged a coconut last week. The March PCE inflation statistic came in at +0.32% month over month which is higher than we wanted. But the markets digested the hot figure as corporate earnings were even stronger and many AI capital spending announcements were up in the clouds. And don't forget that AI spending is just not on semiconductors and software. It is also on real estate, cement, copper, air conditioning, power generation, and big burritos. Economic spending ripples are increasing, and they are helping many companies across multiple industries put up strong Q1s. Just look at these names from last week beating their numbers: General Motors, General Electric, Westinghouse Air Brake, Union Pacific, Carrier Global, Kimberly Clark, Texas Instruments, Google and even Chipotle.

So, it would seem that the markets are fine with higher inflation as long as it is paired with a ripping economy and strong earnings and outlooks. For those looking for stagflation, go look in another country because the U.S. is just not slowing down right now. The bond market was a bit jittery last week as the 10-year yield tapped 4.73% before backing off to today's 4.6% level. Are bonds now more scared of inflation or strengthening earnings? Maybe we will get a sign this week when the market reacts to the details and commentary from the FOMC meeting. Recent data and Fed speak indicates that the Fed might be on rate pause until the 2nd half of 2024. Along with good earnings and bouncing stock markets, the credit markets remain in great shape, the M&A markets are surging, and the IPO market continues to improve. Even Chinese equities are starting to break from their multi-year downtrend which could indicate that the future economic picture might be better than the recent past.

This is the last very big week of U.S. large cap earnings with Amazon and Apple headlining. In addition to the FOMC decision and presentation on Wednesday, this is the first week of May which means plenty of employment and jobs related data to hit the tape. So have fun with all the work and the great weather that we are having.

When was the last time that you heard a major banker describe the U.S. economy as "unbelievable" and "booming"?

JPMorgan Chase CEO Jamie Dimon expressed confidence in a robust U.S. economy backed by strong employment and healthy consumer finances.

The U.S. economic boom is "unbelievable," Dimon said at an Economic Club of New York event on Tuesday. "Even if we go into recession, the consumer's still in good shape."

Still, he warned about the potential economic effects of the rising national debt, inflation and geopolitical conflicts.

Dimon, who has run the largest U.S. lender for more than 18 years, has cautioned that inflation could be more persistent than expected, keeping interest rates higher for longer.


Last week's GDP print was a bit deceiving with that +1.6% print. The bond market tells you it was closer to 3%...

@ernietedeschi: Real GDP growth came in at 1.6% in Q1, softer than expected. But that appears to be driven by weakness in volatile components, especially net exports. Private domestic final purchases--"core GDP" made up of consumption & fixed investment--grew 3.1%, a very strong print.

Now onto our Q2 2024 GDP forecasts...

U.S. rail traffic confirms that Q2 GDP is off to a strong start...

@SethCL: Rail traffic, a metric for the strength of the #economy, remains the strongest in more than a year.

Even Canadian National's product breakout shows many more green shoots...

@bluff_capital: $CNI Canadian National - Demand Overview

Inflation acts sticky and so the Fed will continue to wait, watch, and have their interest rate gun ready...

In particular, inflation data has consistently been firmer than expected, with recent months getting revised somewhat higher in subsequent reports. This trend has led investors and Fed officials to rethink whether rate cuts will be appropriate this year.

“I always say, one month is no months, but three months—that’s at least one real month,” said Chicago Fed President Austan Goolsbee in an interview last week. “Now that we’re seeing—after six, seven months of very strong improvement and close-to-2% inflation—something that’s well above that, we have to recalibrate, and we have to wait and see.”


WalMart says that we are good on food inflation. Now can they help us with insurance inflation?

WALMART U.S. CEO: ".. we are now seeing prices that are in line with where they were 12 months ago. I haven’t been able to say that for a few years .. The last few weeks, we've taken even more prices down in areas like produce and meat and fresh food.”

ABC News

Earnings surprises are coming in strong, as expected. Unfortunately, the macro and geo-political might be holding back the stock rewards...

@wallstengine: $SPY | "Q1 earnings season has delivered a high beat rate with muted price reactions," said Morgan Stanley.

"We think this is attributable to the pressure on valuations from higher rates, a condition that could remain with us in the near term unless Powell surprises on the dovish side at this week's Fed meeting."

"Looking forward through June, easier bond yield comparisons present a headwind to valuation even if rates stay at current levels,"

"From there, rate headwinds should ease if yields don't accelerate higher over the summer."

Goldman Sachs

Here is the very big list for this week...

@eWhispers: #earnings for the week of April 29, 2024

Now a look at some of the more notable earnings and comments...

If you are a growth stock investor, then you already own and know the Chipotle story. But for everyone else who only eats there, take a look at these numbers. Not bad for a burrito seller. The constant line to the door at lunch and dinner was your tell.


So many other great comments and reads from this earning's season across multiple industries last week...

  • GM posted quarterly results that topped consensus and raised its annual forecast, citing stable pricing and demand for its gas-engine vehicles. CEO: "We delivered double-digit EBIT margins in North America, pricing has been steady, and we gained retail market share with incentives much lower than the industry average" (Hammerstone)
  • Kimberly-Clark boosted its FY sales and profit forecasts on higher prices and strong demand after beating Q1 expectations with sales of $5.15B above the $5.09B estimate and better EPS of $2.01; guides 2024 organic sales to rise in mid-single digits vs prior forecast of low- to mid-single digit rise. (Hammerstone)
  • "I would say the consumer globally, we think is very resilient. And we see it in, as you saw from our international business performance. And it's basically supported by two facts, very low unemployment or quite low unemployment globally and wages growing at a good pace in majority of the countries where we participate." - PepsiCo CEO Ramon Laguarta (The Transcript)
  • Toothpaste maker Colgate-Palmolive, raised forecast for annual organic sales growth on Friday, banking on resilient demand for its highly priced self-care and pet nutrition products. Demand for Colgate-Palmolive's products, including personal care and pet food, held strong as consumers stretched their budgets to spend on daily essentials... Colgate-Palmolive now expects full-year organic sales growth in the range of 5% to 7%, compared with its prior forecast of 3% to 5% growth. Benefits from price hikes and easing costs of raw and packaging materials helped the company expand its margins by 310 basis points to 60%. (Reuters)
  • Packaging Corp: “Throughout the quarter, containerboard and corrugated products demand exceeded our expectations…Despite these efforts, with the higher demand, we ended the quarter at a record low weeks-of-inventory supply for this time of year.” (@conorsen)
  • Watsco CEO (HVAC equipment): “While softer market conditions persisted during what is essentially the low-season for product sales, we are currently experiencing growth in end-market demand as we enter the summer selling season. (Trade The News)
  • GE raised its full-year profit forecast on strong demand for jet-engine parts and services as carriers keep their older planes in the air to tide over a shortage of new commercial aircraft. (Hammerstone)
  • Steel Dynamics CEO (steel producer and recycler): Underlying steel demand was steady in the quarter; however, we experienced some steel order volatility early in the quarter as customer inventories remain incredibly low and scrap prices declined month over month in the quarter. Customer orders rebounded strongly in March supporting increased pricing and solid order backlogs, especially within our value-added coated flat rolled steel products portfolio. (Trade The News)
  • Tractor Supply CEO: "We saw several positive signs in our business during the quarter, including ongoing market share gains, transaction growth and strength in big ticket sales. Most importantly, we believe that our customer base remains healthy and engaged" (@TheTranscript_)
  • "Consumer spend across all segments from low to high spend has remained relatively stable. Our data does not indicate any meaningful behavior change across consumer segments." - Visa CFO Christopher Suh (The Transcript)
  • Fiserv CEO: "The Fiserv Small Business Index, based upon the spending activity at 2M small merchants in the US, shows spending rose 3.4% in Q1 24, up from 2.5% in Q4. The early read on April is that growth is tracking slightly ahead of the Q1 average" (@TheTranscript_)
  • Avalon Bay Communities $AVB: “We've been surprised, as I mentioned in my prepared remarks, about Seattle. The trends and the firming in Seattle certainly seems to have sort of a greater foundation to it than what we've seen in the Bay Area just yet.” (@conorsen)
  • MSFT Total Azure growth accelerated to 31%, well ahead of consensus estimates, while within this AI-related Azure, revenue contributed 7% to growth, implying a $4B annual run-rate, which was up from 6% last quarter while core Azure grew 24%, an acceleration from 22% a quarter ago. Op-margins 140 bps ahead (gross-margin strong, headcount ex-ATVI down 1% YoY) and FCF ~$6.8B better. MSFT Intelligent Cloud revenue grew +21% y/y to $26.7B, driven by Azure & Other Cloud Services growth of +31% y/y. MSFT Mar Q capital expenditures grew +66% y/y to $11.0B (cash paid for PP&E) to support demand for MSFT's cloud and AI offerings. (Hammerstone)

(Multiple news wires and sources)

Meta's capex number was not friendly to their shareholders, but it will be great for all that are on the receiving end...

"Turning now to the CapEx outlook. We anticipate our full-year 2024 capital expenditures will be in the range of $35 billion to $40 billion, increased from our prior range of $30 billion to $37 billion as we continue to accelerate our infrastructure investments to support our AI roadmap. While we are not providing guidance for years beyond 2024, we expect CapEx will continue to increase next year as we invest aggressively to support our ambitious AI research and product development efforts." - Meta Platforms CFO Susan Li

The Transcript


Google and Microsoft will also be big capex spenders on AI...

The first questions from analysts Thursday on earnings calls for both Google and Microsoft were about plans for future spending. The numbers are going up for both. Alphabet Chief Financial Officer Ruth Porat said capital expenditures for the remaining quarters of the year will be “roughly at or above” the recent period’s levels. That implies about $48 billion for the full year, or 14% of Alphabet’s projected revenue compared with 10% last year.

Microsoft CFO Amy Hood said capex would “increase materially” in the current quarter and grow further in the next fiscal year. Wall Street was already projecting about $47 billion for Microsoft in the current calendar year, which would be about 18% of the company’s projected revenue compared with 15% the year before. Positively, Hood noted that “near-term AI demand is a bit higher than our available capacity.”


And where do you think this $6b is headed?

@wallstengine: Elon Musk's xAI is reportedly RAISING $6 Billion at a potential valuation of over $18 billion, with the deal expected to close within the next 2-weeks

GrokAI is currently being trained on 20,000 $NVDA H100 GPUs, & will require 100,000 GPUs to train its next iteration, Grok 3.0

Source: The Information

Got Electricity?

Data center power demand likely to rise 160% by the end of the decade vs. 2023 from 1%-2% to 3%-4% of overall global power demand by 2030. If all of the projected data center electricity demand growth was concentrated into a new country, it would be among the top 10 power consuming countries. Our US Utilities Research team sees US power demand growth accelerating to a 2.7% 5-year CAGR by 2030 vs. 0% for the past 10 years, with data centers driving 0.9% CAGR increase and representing 8% of US power demand by 2030 (vs. 3% in 2022). In Europe, our Utilities Research team sees EU-27 power demand accelerating to a 3.7% 5-year CAGR by 2030 from 0% for the past decade.

Goldman Sachs

All the AI spending will create bottlenecks and shortages as the Wall Street Journal described in detail last week...

The frenzy to build data centers to serve the exploding demand for artificial intelligence is causing a shortage of the parts, property and power that the sprawling warehouses of supercomputers require.

The lead time to get custom cooling systems is five times longer than a few years ago, data center executives say. Delivery times for backup generators have gone from as little as a month to as long as two years.

A dearth of inexpensive real estate with easy access to sufficient power and data connectivity has builders scouring the globe and getting creative. New data centers are planned next to a volcano in El Salvador and inside shipping containers parked in West Texas and Africa.

Earlier this year, data-center operator Hydra Host found itself in a bind, searching for 15 megawatts of power needed to operate a planned facility with 10,000 AI chips.

The company went from Phoenix to Houston to Kansas City, Mo., to New York to North Carolina to find the right space. It is still on the hunt.

The locations that had the power didn’t have the right cooling systems required to keep the servers operational. New cooling systems would take six to eight months to arrive, thanks to a supply crunch. Meanwhile, buildings that had the cooling didn’t have the transformers required to receive the additional power—those would take up to a year to arrive.


Who would have thought five years ago that the HVAC industry was going to catch the AI tiger by the tail?

@bluff_capital: $CARR Carrier - Data Center Opportunity

So many deal announcements in the last week. Here is a big sample...

  • Deciphera Pharma (DCPH - $1.2b mkt cap - R2k component) being acquired by Japan's Ono Pharmaceutical Co (4528JP - $7b mkt cap) for $2.4 billion in cash, with Ono Pharma offering $25.60 per share, a premium of 74.7% to Friday’s close.
  • UMB Financial (UMBF - $4b - R2k) has agreed to acquire rival Heartland Financial USA (HTLF - $1.5b - R2k) for about $2 billion in an all-stock transaction.
  • Reinold Geiger is offering HK$34 a share for the L’Occitane shares he doesn’t already own, according to a statement Monday. This represents a premium of 61% to the 60-day undisturbed share price of the French luxury retailer of body, face, hair, fragrance and home products. The deal values the company at €6 billion ($6.4 billion) on an equity basis. (BBG)
  • Darktrace (DARK.uk - $5.3b) To be acquired by Thoma Bravo for £6.20/shr in cash (~$7.75/shr) based on EV of $5.0B
  • Blackstone increases offer for Hipgnosis (SONG.uk) to $1.30/shr (104ps/shr) in cash in deal valued $1.57b.
  • U.S. Silica (SLCA - $1.2b - R2k) entered into a definitive agreement to be acquired by funds managed by affiliates of Apollo in an all-cash transaction that values the Company at an enterprise value of about $1.85B
  • Private equity firm GTCR has agreed to pay $2.7 billion to buy AssetMark Financial (AMK - $2.5b - R2k), in a deal that would take the wealth management platform private more than five years after its initial public offering. (Reuters)
  • IBM (IBM - $153b - S&P 500) confirms agreement to acquire Hashicorp (HCP - $6.5b - R1k) for $35 per share in cash.
  • Blackstone Inc. agreed to sell a student-housing portfolio to KKR & Co. for $1.64 billion. Blackstone Real Estate Income Trust will offload 19 student-housing properties with more than 10,000 beds to funds managed by KKR, according to a statement Thursday. The deal, which is expected to be completed by the third quarter, includes properties located near 14 public universities. (BBG)
  • Hibbett (HIBB - $1b - R2k) to be acquired by JD Sports (JD.uk - $7.5b) for $87.50/shr in cash at EV of $1.11B.
  • Blackstone is acquiring Tropical Smoothie Cafe for close to $2B, including debt for the company, which is currently owned by private-equity firm Levine Leichtman Capital Partners.
  • BHP Group (BHP - $142b) is considering making an improved offer for Anglo American (NGLOY - $44b) after its $39B initial proposal was rejected by the London-listed miner, a source familiar with the matter told Reuters. BHP is in discussions on a revised bid for Anglo American to be made in coming weeks, the source said. (Reuters)
  • Nvidia said it has agreed to acquire Run:ai, a Tel Aviv-based provider of artificial intelligence computing workload management software. Terms of the deal were not disclosed. According to Crunchbase, Run:ai has raised $118 million in venture capital from TLV Partners, Insight Partners, S Capital, and Tiger Global Management. (Barrons)
  • French private equity firm Ardian has agreed a near £2bn deal to sell a majority stake in UK music equipment maker Audiotonix to rival PAI Partners, in the latest example of buyout activity picking up after a slow 18 months. (FT)

Multiple news wires and sources

Not only are mergers hot right now, but so are the opposite: Spin-offs!

Nasdaq's IPO Pulse Index is looking up and they are ready for it...

"With the strength of -- in the markets, we've begun to experience an uptick in IPO activity. In the first quarter, the US markets welcomed 39 operating company IPOs, the most in two years, highlighted by 9 IPOs with market caps in excess of $1 billion. Additionally, as we referenced in our most recent Nasdaq IPO Pulse Index, we're seeing five out of six leading indicators of future IPO activity continue to improve, suggesting an improvement in the US public equity capital raising environment over the coming months." - Nasdaq CEO Adena Friedman

The Transcript

Speaking of IPOs...

Viking Holdings increases IPO to 53M shares from 44M shares, as the number of shares being sold by selling shareholders increased by 27%, to 42 million shares from 33 million. The company is still offering 11 million shares and the pricing of the IPO is still expected to be between $21 and $25 this week.

Hammerstone Markets

Hot tech IPO priced above top end of range and trading 10% higher...

Rubrik Inc., a cloud and data security startup backed by Microsoft Corp., has drawn about 20 times as many orders for its planned initial public offering as there are available shares, people familiar with the situation said...

The company is marketing the sale of 23 million shares for between $28 and $31 each. At the top of the range, Rubrik would have a market value of roughly $5.4 billion, based on the outstanding shares in the filings.


Would you pay $3 trillion for $35 billion in earnings?

I updated my public equity small cap index P/E valuation data over the weekend. This is based on the last twelve months earnings, so these are trailing numbers. The Russell 2000 is currently showing 42% of its companies unprofitable (27% of mkt cap). A full inclusion of all the money losing companies moves the P/E from 15.3x to 85.7x.

Over at the S&P 600, 21% of its companies are unprofitable (15% of mkt cap). This moves the trailing P/E from 14.8x to 25.9x.

And finally, one glance at the major Chinese public equity indexes...

What might they try to be telling us about the future of the Chinese economy?


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The author has current equity ownership in: J.P. Morgan Chase

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