Weekly Research Briefing: Plenty of Support

May 21, 2024

The pillars of support for the financial markets continue to grow. Last week's mild inflation data and another week of solid earnings led by Walmart gave investors another reason to add to their portfolios. The April CPI showed continued progress in falling goods prices while services remained a bit sticky as consumer strength remains solid. Consumer wages and investment income continue to rise faster than inflation allowing for a continued tailwind to leisure spending and home purchases. The market might be lining up for one or two cuts this year, but the Fed will need a few more tea leaves before they move to ease.

Wall Street strategists continue to gain confidence in the markets and raise their price targets encouraged by U.S. economic durability, future global central bank easing and accelerating corporate earnings growth. Add in risk-free rate stability and you have the perfect environment to explain the recent uptick in M&A activity as well as IPO optionality. It was another good week for M&A news flow as I detail below.

This week is a bit light on macro news with the only hard data in the housing sector and durable goods. But there will be an abundance of Fed speak with the tone likely to be in the mood of 'one month of better inflation data is nice, but...'. The market will also be looking toward NVIDIA's earnings to give us a read on everything AI. Congrats to everyone who still has a team in the playoffs. Ugh.

We will take next week off and be back in two weeks. Have a great week!

April's CPI put investors into a good mood last week...

Both the core and the headline figures did not upside surprise which was a nice reversal from the previous few months. Now onto May's figure!

The Daily Shot

One highlight out of last week's CPI data was that shelter prices broke lower...


As consumer inflation cools, FactSet tells us that companies are also mentioning inflation less on their conference calls...

FactSet searched for the term “inflation” in the conference call transcripts of all the S&P 500 companies that conducted earnings conference calls from March 15 through May 17. Of these companies, 219 cited the term “inflation” during their earnings calls for the first quarter. This is the lowest number of S&P 500 companies citing “inflation” on earnings calls going back to Q2 2021 (218). It also marks the seventh consecutive quarter in which the number of S&P 500 companies citing the term “inflation” has declined quarter-over-quarter.


On Monday, Target moved to lower the prices on over 5,000 products on their shelves...

This follows McDonald's announcing their $5 meal deal and Wendy's launching a $3 breakfast combo. Of course, this means that Target, McDonald's and Wendy's customers will have even more savings to go and spend on that summer Caribbean cruise.

Target will be lowering prices on at least 5,000 frequently shopped products across its assortment ranging from milk to diapers, the big-box retailer said on Monday, as it looks to attract budget-stretched customers.

Still-high food prices and borrowing costs have made cash-crunched customers more conscious of their spending on pricey items and look for cheaper products in stores and online, forcing retailers to lower prices to get more consumers to their stores...

The company, set to report its first-quarter results on Wednesday, said it had currently cut prices on about 1,500 items including frozen chicken breast and shredded cheese among others, with more planned to take effect over the course of summer.

The retailer also said these price cuts - which will be found across dozens of national brands as well as Target's own private brands - were in addition to the discounts it had planned to offer across its stores as part of Memorial Day celebrations.


Consumer strength continues to be the gift that keeps on giving...

"No signs of consumer cracks. Lower-income spending has outpaced higher-income spending on Y/Y basis since 2023, even excluding necessities. This is consistent w/strength in blue-collar wage growth since start of pandemic."

BofA Global

Wages still growing faster than prices which will continue to make consumers confident and happy...


And confident consumers leads to increased housing demand which is further supporting the U.S. housing industry...

The Daily Shot

S&P 500 forward earnings guidance continues to increase as we move past their Q1 earnings and into their analyst days and shareholder meetings...

@ericwallerstein: The stock-market rally is broadening out: 78.4% of S&P 500 cos raised forward earnings estimates over the past 3 months. Cost cutting and stock buybacks driving EPS

Morgan Stanley moved their equity forecasts into the optimistic camp today as they see future earnings strength as nothing to bet against...

Our 2024 and 2025 earnings growth forecasts (8% and 13%, respectively) assume healthy, mid-single-digit top-line growth in addition to margin expansion in both years as positive operating leverage resumes (particularly in 2025). This earnings path is based on our economists growth forecasts, output from our earnings models, and our view that AI diffusion will boost margins starting in 2025—see the Leveraging AI to Drive Efficiency section for more. In terms of industry drivers of AI-fueled productivity gains, our framework highlights that services-oriented pockets of the market possess a more significant opportunity with respect to AI-driven efficiency gains; these groups include Software & Services, Consumer Services, Health Care Equipment & Services, Financial Services, and Media & Entertainment. Just these groups alone represent over 25% of expected 2025 net income for the S&P 500, which speaks to the potential margin opportunity.

BofA Global

Another major strategist moved their target to the street high this weekend...

Deutsche Bank has raised its 2024 year-end S&P 500 target to 5,500, the highest among major brokerages, banking on strong corporate earnings to support equity valuations.

The brokerage previously expected the index to finish 2024 at 5,100 points. The new target, at the top end of its range of 5,100-5,500, is around 4% higher than the index's last close of 5,303.27.

Oppenheimer Asset Management had also predicted the index would end at 5,500.

"We see the earnings cycle having plenty of legs," Deutsche Bank strategists led by Binky Chadha said in a note on Friday.

"While all the growth may not materialize this year, we see market confidence in a continued recovery rising by year-end, supporting equity multiples."


Goldman Sachs continues to see some pessimism but wants to bet against it...

@carlquintanilla: GOLDMAN'S PASQUARIELLO: ".. a handful of the biggest money managers I know have recently made strong arguments for ongoing durability in the US economy. if there’s a common thread across them, it’s the momentum behind spending on AI, infrastructure, onshoring and defense. I agree with the broad thesis and will register that GS is calling for Q2 GDP growth of 3.2%, while the @AtlantaFed is predicting 3.6% .. it stands in contrast to the ongoing pessimism I see in the press and hear on the street (specifically regarding the consumer, which I don’t agree with)."

It will be difficult to bet against much when the G10 central banks begin a campaign to cut their interest rates...

The G10 monetary easing cycle is broadening. Following the recent moves by the Swiss National Bank and the Swedish Riksbank, we expect the ECB, BoE, and BoC to start cutting rates in June. The pace of easing is likely to be gradual because prices and wages are still growing faster than implied by central bank targets in every economy except Switzerland and unemployment remains near pre-pandemic levels in every economy except Sweden (in fact, it stands at a multi-decade low in the Euro area). Nevertheless, G10 central banks increasingly think that a policy rate which looked appropriate 6-12 months ago no longer looks appropriate now that the inflation emergency has passed.

Goldman Sachs

One of the biggest pillars in the markets remains the appetite for credit...

And not just U.S., but globally as this chart of high yield spreads around the world shows.

S&P Global

Even with tightening spreads, investors continue to give leveraged loan funds more money to lend...

BofA Global

And in another sign of extreme strength, the S&P 500 VIX closed below 12 for the first time since 2019...

The Daily Shot

J.P.Morgan announced Monday that fewer Fed rate cuts will result in higher net interest income for 2024...

Expect a similar effect at most other banking institutions and spread lenders.

J.P. Morgan

Walmart investors were rewarded last week with a beat on sales plus a fall in inventory...

Walmart with double beat in Q1 FY 25.

  • US comp sales: +3.8%
  • Total revenues: +6% [+5.8% CC]
  • Global inventory: -2.7%
  • "The Company now expects to be at the high-end or slightly above its previous guidance (cc) for net sale...& operating income growth.. .for FY25"


Travel remains great says Alaska Air and Norwegian Cruise Lines...

Alaska Air Group (ALK) executive: No demand challenges have been identified and record travel volumes are expected this summer - BoFA conf comments summary

  • Most valuable and loyal customers continue to do well economically and are not exhibiting any signs of financial stress
  • Booking curves look normal when compared to pre-pandemic, while peak demand periods have somewhat shifted away from August to the benefit of May and June as school years have started earlier


Norwegian Cruise Lines (NCLH) raises 2024 adj EPS $1.42 v $1.33e (prior $1.32), adj EBITDA $2.30B (prior $2.25B); Raises 2024 net yield growth 7.2% (prior 6.4%).

Comments: “We have continued to see very strong demand and record bookings. We are now thrilled to launch this financial plan by setting long term targets with increased 2024 guidance, putting ourselves on solid footing to enhance shareholder value in the coming years,” said Mark Kempa, chief financial officer at Norwegian Cruise Line Holdings Ltd.


Another busy week in M&A activity, IPO news and other big financial transactions...

Avangrid (AGR - $13.9b mkt cap - R1000 component) to be acquired by Iberdrola at $35.75/shr in a definitive agreement under which Iberdrola will acquire the remaining 18.4% of the issued and outstanding shares of common stock of Avangrid that it does not currently own in an all-cash transaction. (TradetheNews)

Activist investor Elliott Investment Management has built a large position in industrial giant Johnson Controls International Plc (JCI - $46b mkt cap - S&P 500 component), whose performance has lagged its peers, according to people familiar with the matter. The hedge fund’s position is worth more than $1 billion, putting it among the top 10 investors of the company, the people said, asking not to be identified discussing private information. (Bloomberg)

CyberArk Software (CYBR) confirms to acquire Venafi for ~$1.54B in cash and stock - Venafi is a leader in machine identity management, from Thoma Bravo.- CyberArk intends to acquire Venafi for an enterprise value of approximately $1.54 billion in a combination of cash and CyberArk shares (approximately $1 billion in cash and approximately $540 million in shares). (TradetheNews)

Independent Bank Group (IBTX - $1.8b mkt cap - R2000 component) To be acquired by SouthState Corporation in $2.0B all stock transaction - Subject to the terms of the definitive agreement, Independent Bank Group shareholders will receive 0.60 shares of SouthState common stock for each outstanding share of Independent Bank Group common stock. Based on SouthState's closing stock price of $80.85 as of May 17, 2024, this equates to a per share value of $48.51 and an aggregate transaction value of approximately $2 billion. (TradetheNews)

Keywords Studios (KWS.uk - 1.2b GBP mkt cap) confirms in advanced discussions with EQT fund over possible £25.50/shr cash offer (implies ~$2.58B deal at ~74% premium) - Board of Keywords Studios plc ("Keywords Studios" or the "Company") notes the recent market speculation and confirms that it is in advanced discussions with a fund which is part of the EQT Group ("EQT"), a purpose-driven global investment organisation, regarding a possible cash offer of 2,550 pence per share to acquire the entire issued and to be issued share capital of the Company (the "Possible Offer"). (TradetheNews)

Uber has agreed to purchase rival Delivery Hero’s business in Taiwan, in a $1.25bn deal that will also see the Silicon Valley company take a minority stake in the food delivery group, sending the German outfit’s shares up by 20 per cent. The two companies said on Tuesday that Uber, which operates Uber Eats, would purchase Delivery Hero’s Foodpanda brand in Taiwan for $950mn in cash, and would also acquire a 3 per cent stake in Delivery Hero for $300mn. Under the terms of the deal, Uber will buy 8.4mn newly issued ordinary shares priced at €33, a more than 30 per cent premium to Delivery Hero’s closing share price on Monday. Delivery Hero’s shares rose almost 20 per cent in morning trading on Tuesday, to €30.20. (Financial Times)

SilverBow Resources (SBOW - $1b mkt cap - R2000 component) confirms to be acquired by Crescent Energy for $2.1B - SilverBow shareholders will receive 3.125 shares of Crescent Class A common stock for each share of SilverBow common stock, with the option to elect to receive all or a portion of the proceeds in cash at a value of $38 per share, subject to possible pro ration with a maximum total cash consideration for the transaction of $400 million. (TradetheNews)

Overseas Shipholding Group (OSG - $500m mkt cap - R2000 component) to be acquired for $8.50/shr in cash by Saltchuk Resources. The purchase price represents a 61% premium to OSG's 30-day volume-weighted average price on January 26, 2024, the last day of trading before Saltchuk disclosed its non-binding indication of interest, as well as a 44% premium to the January 26 closing price of OSG's shares and a 36% premium to Saltchuk's initial indicative price of $6.25 per share. (TradetheNews)

Johnson & Johnson (JNJ) to acquire Proteologix for $850M in cash, to lead in atopic dermatitis treatment; Transaction expected to close mid-year 2024 - Entered into a definitive agreement to acquire Proteologix, Inc., a privately-held biotechnology company focused on bispecific antibodies for immune-mediated diseases, for $850 million in cash, with potential for an additional milestone payment. (TradetheNews)

Snowflake (SNOW) reportedly in talks to acquire Reka AI for over $1B - press - Reka AI was founded in 2022 and focuses on creating large language models (TradetheNews)

Bank of America (BAC) Reportedly agreed to purchase ~$3.2B of multifamily loans from Washington Federal Bank for $2.9B at more than 8% discount (TradetheNews)

U.S. investment bank Goldman Sachs is muscling into the lending market for private equity and asset managers, planning an overseas expansion as it helps fill a void left by turmoil at regional banks and the sale of Credit Suisse. The Wall Street bank and rivals JPMorgan Chase and PNC Financial Services are stepping up in this $800 billion to $1 trillion market as private equity deal activity is expected to pick up due to record-high fund-raising. Such loans are asset-based and short-term, lowering their risk. (Reuters)

Aflac is acquiring a 40% stake in Tree Line Capital Partners, a private-credit shop focused on lending to small and medium-size companies, according to people familiar with the matter. The insurance giant is paying about $100 million for the stake, the people said. Aflac is buying existing shares in the company from Tree Line management as well as its private-equity backer, Stone Point Capital. As part of the deal, Aflac is also making a multiyear commitment to help fund Tree Line with some of the investible cash the company collects in the form of insurance premiums from its customers, the people said. (WSJ)

Waystar said to be considering June IPO with $5B+ valuation (TradetheNews)

Various news sources

Speaking of private credit, did you say a $7.5b debt fundraise for an AI cloud company?

CoreWeave, an artificial-intelligence cloud-computing startup backed by Nvidia has raised $7.5 billion from investors including Blackstone, Carlyle Group and BlackRock in one of the largest-ever private debt financings.

The new debt financing follows a $1.1 billion equity funding round two weeks ago that valued the fast-growing company at $19 billion. Last year CoreWeave did another debt financing deal worth $2.3 billion.

New Jersey-based CoreWeave sits near the red-hot center of the AI boom, leasing out access to AI chips from Nvidia that are essential to creating AI systems such as OpenAI’s ChatGPT. The company operated in 14 data centers at the end of last year and plans to double its footprint to 28 data centers by the end of this year.

Much of the new funding will go toward that effort, including purchases of AI chips and associated infrastructure such as servers and networking equipment, Chief Executive Michael Intrator said.


China ups the investment spending last week with a $1 trillion announcement...

Property stocks were already on the move sensing something big was being worked on last month.

China's national team is going house hunting. State-owned enterprises and local governments are answering Beijing’s call to purchase the country's vast swathe of unsold apartments. That should help put a floor on plunging property prices.

Local authorities in Hangzhou, home to corporate titans Alibaba and Geely Automobile, kicked off the bold initiative by announcing they will buy up to 100,000 square feet of apartments in Linan district at market prices and rent them out at affordable rates. Other regions are set to follow: the ruling Politburo in April called for a nationwide effort to reduce housing inventory. China's cabinet, the State Council, is also considering a proposal that would see local governments and state-owned enterprises buying unsold homes from distressed developers using loans from state lenders, Bloomberg reported, opens new tab on Wednesday, citing sources.

It's an ambitious undertaking that represents a shift from earlier piecemeal efforts to prop up housing prices. Those included targeted financial support to a "whitelist" of property projects. As of the end of last year, China had a combined floor area of unsold homes of up to 3.6 billion square feet, per official data. Analysts at Tianfeng Securities estimate it will cost 7 trillion yuan, or nearly $1 trillion, to buy the entire stock.


Speaking of China, not many equity funds have exposure these days...

Goldman Sachs

Now for some out of consensus thinking: BofA Global sees the 10-year yield falling to 3.25%...

@carlquintanilla: B of A: “.. The soft-landing scenario is unfolding. .. we think a [ten-year yield] decline from 4.35% to the 3.25% area in the next 6-12 months is a good possibility — and likely non-consensus ..”

Citi also thinks that Treasury yields could fall sharply and are suggesting that you spend more time on smaller cap companies...

Strategists at Citi wrote in a report Friday afternoon that “all things equal, our view is that Small and Mid Cap should benefit relative to Large Cap.” That’s based on Citi’s expectations of fairly aggressive easing …200 basis points over the next 12 months. That would take the central bank’s target range for the federal-funds rate to 3.25%-3.5% from 5.25%-5.5%.

Why should smaller companies get a boost? The Citi strategists argue that they will benefit from lower interest-expense costs, particularly since small and mid caps have more floating-rate debt than larger rivals.

Bigger companies have also been piling up sizable cash balances over the past few years, earning a healthy chunk of net interest income in the process. But Citi strategists said “we expect a reversal of much of the excess interest income companies were earning on cash balances in the last few years” now that inflation seems to be cooling and the Fed could be getting ready to finally cut at some point this fall.


Who isn't going to Tokyo this summer? The AirBNB prices are a fraction of what you will find in the U.S...

@TheStalwart: Expect to see a lot of Tokyo on Instagram this summer. That weak yen doing the job of getting those tourist dollars.

Finally, I thought this was a good interview by our Co-CEO, Erik Hirsch, explaining why companies are staying private longer and what opportunities there are for investors in private companies this year...

Sectors Ripe for Private Takeovers & Lack of IPO Appetite | Schwab Network

Why have private markets surged recently? Erik Hirsch discusses what to watch in private markets. He talks about potential private takeover candidates, as well as sectors ripe for potential private takeovers. He also goes over how the lack of serious IPO appetite impacts private equity.

Schwab Network

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The author has current equity ownership in: J.P. Morgan Chase & Co., Johnson & Johnson and Hamilton Lane Inc

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