2/3 Major Indexes Cleared Record Highs 🔥 | $GM Doubles Down With $6B Share Buyback 💸 | Why Large Cap Stocks Are Leading The 2024 Rally 🏎️ | What To Expect From CPI Due Wednesday 📅
Today was a mixed bag with 2 of our 3 indexes closing at record high while shocked everyone with their AI announcements and soaring to new highs. Yes I am as shocked as you are 🤣. Lets just dive into the index performances today:
The S&P500 gained 0.3% on todays session
The Nasdaq Composite closed +0.9% driven by closing at an ATH
The Dow Jones Industrial took a loss of around 0.3% on the day
The market has been on the fence the last couple weeks with investors not sure if things were too hot or cold as of recent. However stocks have been able to make some headway int he markets over the last couple weeks, a string of inconclusive data fueled skepticism about the likelihood of three rate cuts in 2024. However May investors now predict just one reduction reduction before the years end.
GM Doubles Down on Shareholder Value with $6 Billion Buyback Plan 🏎️
General Motors (GM) is putting its money where its mouth is when it comes to rewarding shareholders. On Tuesday, the automaker announced a new share buyback plan worth up to $6 billion, adding to its existing $10 billion accelerated share repurchase program introduced last year. This move is part of GM’s commitment to its capital allocation policy, which prioritizes returning value to shareholders. The news sent GM’s stock soaring, with shares jumping nearly 2% to their highest level in over two years. CFO Paul Jacobson attributed the company’s success to its disciplined approach to incentives, stable pricing, and a vehicle portfolio that customers love.
The new share buybacks are set to begin in the second half of 2024, and Jacobson emphasized that GM is committed to its capital allocation strategy, which includes investing in its electric vehicle (EV) business. Although GM has scaled back its initial EV ambitions, Jacobson remains bullish on the segment, citing the company’s successful rollout and growing market share.
In fact, GM expects to produce between 200,000 to 250,000 EVs this year, with plans to reach variable profit positivity – meaning the company can sell its EVs for more than the cost of materials and offset fixed costs. Jacobson anticipates that GM’s entire EV fleet will be variable profit positive by the end of the year, with EBIT profitability expected in 2025.
The company’s EV business is already showing signs of momentum, with over 9,500 EVs sold in North America last month. The Chevrolet Blazer and Cadillac LYRIQ EV have seen strong gains, and Jacobson expects the entry-level Equinox EV to continue this trend. Notably, GM’s EV growth rate is outpacing its competitors.Looking ahead to 2024, Jacobson reaffirmed GM’s full-year adjusted EBIT forecast of $12.5 billion to $14.5 billion, with Q2 earnings expected to surpass Q1’s adjusted EBIT of $3.9 billion.
The only slight damper on the news is GM’s decision to invest an additional $850 million into its troubled Cruise autonomous unit, which has faced setbacks including a high-profile accident in San Francisco and management shake-ups. Despite this, GM remains committed to its vision for autonomous vehicles. Overall, GM’s latest move is a clear signal to shareholders that the company is dedicated to delivering value and driving growth. With its EV business gaining traction and a strong financial outlook, GM is poised for a successful 2024.
Large-Cap Stocks Lead the Charge in 2024 Market Rally 🫡
The 2024 stock market rally has been dominated by large-cap stocks, with the top 50 largest companies in the S&P 500 outperforming the broader index. According to Bespoke Investment Group, this trend is evident when breaking down the S&P 500’s year-to-date performance into 10 baskets of 50 stocks, organized by market capitalization value. The data shows that the smaller the stock, the weaker the returns, with the top decile of large-cap stocks being the only subsector to outperform the S&P 500 this year. This shift towards large-cap stocks is attributed to investors scaling back bets on interest rate cuts from the Federal Reserve amid sticky inflation reports.
Large-cap stocks have demonstrated more resilience to higher interest rates, partly due to their robust earnings growth. In the first quarter, earnings for a basket of “Mega-Cap Growth and Tech” stocks grew 39%, compared to 5.9% year-over-year growth for the S&P 500. This fundamental case has supported large caps despite uncertainty around interest rates and economic growth.
The artificial intelligence (AI) trade has also been dominated by large-cap stocks. Bespoke’s analysis of AI ETFs found that stocks with a market cap over $1 trillion have returned an average of 41% this year, while those with market caps under $1 trillion have gained just 0.42%. The top performers in the AI trade include Apple, Alphabet, Microsoft, Amazon, Meta, and Nvidia, which are the only US stocks with market caps above $1 trillion.
Morgan Stanley’s chief investment officer, Mike Wilson, remains skeptical about the prospects of small-cap outperformance, citing higher interest rates as a clear headwind. Instead, he recommends an overweight position in large caps, citing the economy’s continued expansion and reaccelerating earnings growth led by high-quality, large-cap stocks. As the market continues to navigate uncertainty around interest rates and economic growth, large-cap stocks are emerging as a safe haven for investors. Their robust earnings growth, resilience to higher interest rates, and dominance in the AI trade make them an attractive option for those seeking stability and growth in an uncertain market.
Markets Await Crucial Inflation Data Ahead of Fed Decision 👀
On Wednesday, investors will be closely watching the release of the May Consumer Price Index (CPI) report, which is expected to show headline inflation of 3.4%, matching April’s annual gain in prices. The report will be released just ahead of the Federal Reserve’s policy decision, making it a crucial data point in shaping future interest rate policy. According to estimates, consumer prices are expected to have risen 0.1% over the prior month, a deceleration from April’s 0.3% month-over-month increase. This would be the smallest month-over-month rise since October 2023. A decline in energy prices is likely to contribute to further downward pressure on headline CPI, according to Bank of America.
On a “core” basis, which strips out the more volatile costs of food and gas, prices in May are expected to have risen 3.5% over last year, a slight slowdown from the 3.6% annual increase seen in April. Core prices are expected to have climbed 0.3% month over month in May, matching April.
While core inflation has remained stubbornly elevated due to higher costs of shelter and core services like insurance and medical care, economists expect to see some moderation in these categories. Bank of America expects shelter inflation to be a little firmer this month, but core services ex shelter to show some moderation. Over time, economists expect to see more notable progress on services inflation, thanks to moderations in motor vehicle insurance, rent, and owners’ equivalent rent. Goldman Sachs also expects further disinflation this year, citing rebalancing in the auto, housing rental, and labor markets.
The Federal Reserve has categorized the path down to 2% inflation as “bumpy,” and recent economic data has fueled the Fed’s higher-for-longer narrative on the path of interest rates. The labor market added 272,000 nonfarm payroll jobs last month, significantly more than expected, and wages came in ahead of estimates at 4.1%. The Fed’s preferred inflation gauge, the core PCE price index, has remained particularly sticky, holding steady at 2.8% for the month of April. If the CPI report is in line with expectations, economists expect the Fed to cut interest rates once this year in December. However, the main risk to earlier cuts is a faster slowdown in employment growth or a sharper deceleration in shelter inflation.
Investors are currently pricing in a range of one to two 25-basis-point cuts in 2024, down from the six cuts expected at the start of the year. Markets are also pricing in a roughly 48% chance the Federal Reserve begins to cut rates at its September meeting.
