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The inflation rate in the first quarter was also revised downwards, leading to higher interest rates. (0:16) Analysts defend Salesforce after losing revenue for the first time since 2006. (2:02) Is the 60/40 portfolio back? (4:17)
This is an abridged version of the podcast.
Our biggest story yet. Rate advocates got some relief from the continued, longer-higher knock from Fed members with some weak data this morning.
Real GDP for the first quarter was revised to an annual rate of 1.3%, down from the first estimate of 1.6%. The decline was mainly due to the downward revision in consumption, which fell to 2% from 2.5% initially, and was in line with economists’ expectations.
Core PCE rates were revised down to 3.6% from 3.7%. This compares to a consensus of 3.7%.
“Final sales to domestic buyers were revised down to 2.8% from 3.1%…overall, a slightly weaker reading than the original reading,” noted Cathy Jones, fixed income strategist at Schwab.
Also this morning, initial weekly unemployment claims rose to 219,000, compared to the expected 218,000 and 216,000 the previous week.
“The trend in claims appears to be rising, albeit intermittently and from a very low level,” says Ian Shepherdson, economist at Pantheon Macro. “But the four-week average has now reached its highest level since late September, and a range of leading indicators indicate – Layoff announcements, warning notices, and measures of consumer fear of layoffs – further increases.
These numbers were enough to boost expectations for a quarter-point cut in interest rates in September. But it’s worth noting that the Atlanta Fed’s GDP forecast model is currently tracking a 3.5% growth rate for the second quarter.
Following the data, prices fell. The 10-year Treasury yield (US10Y) fell below 4.60%. Stocks also moved off their lows.
The S&P (SP500) and Nasdaq (COMP.IND) fell less than 0.5%. But the Dow Jones Index (DJI) fell nearly 1%, dragged down by falling prices for Salesforce components.
Salesforce fell after reporting its first revenue loss since 2006, with guidance also missing the mark. This has Wall Street analysts playing defense.
Mizuho Securities analyst Greg Moskowitz said he believes Salesforce remains “well positioned” to help its customer base participate in digital transformation. However, it will likely do so with a focus on “profitable growth above all else,” as the company continues to navigate a challenging macro environment.
While weak bookings in the first quarter will likely “test investors’ patience,” the stock does not reflect any expectations from generative AI and core earnings growth is “below prices” at current levels, Morgan Stanley analyst Keith Weiss said.
Elsewhere in profits. C3.ai (AI) stock rose after reporting strong fourth-quarter financial results and issuing a better-than-expected outlook for fiscal 2025.
“The fact that C3.ai is seeing an acceleration in subscription growth is evidence that any headwinds the company experienced from moving to a usage-based revenue model are subsiding,” Northland analyst Mike Lattimore said. He boosted his rating to outperform from market perform and increased his price target. To $35.
Lattimore added that strong beta growth and growing demand for generative AI indicate that C3.ai’s high growth should continue.
Foot Locker (FL) stock rose on better-than-expected first-quarter earnings and upbeat guidance. The above consensus profit was overshadowed by comparable store sales and a modest decline in revenue. But with what it called “disciplined expense management,” the company was able to maintain profit despite a 3% decline in revenue.
And in other notable news. Activist investor Nelson Peltz has sold his entire stake in The Walt Disney Company (DIS). This is according to what was reported by CNBC.
Peltz’s Trian Fund Management sold all of DIS’s shares for $120 per share, making about $1 billion in investment.
Peltz’s exit comes weeks after the activist lost a proxy battle with Disney leadership. Disney’s proposed slate of directors was re-elected at its annual meeting in April, defeating a pair of competing slates from Trian and Nelson Peltz’s Blackwells Capital in what became the most expensive proxy contest ever.
Trian Peltz and former Disney CFO Jay Rasulo has been nominated to the board.
And in the Wall Street research corner. After its reputation has taken a hit recently (especially after the 2022 bear market for stocks and bonds), the 60/40 portfolio is gaining some attention again.
A split of 60% stocks and 40% bonds was the traditional rule of thumb on Wall Street. Goldman Sachs took a look at its performance during different economic periods in history.
The analysts looked at four structural systems in a data set covering 150 years of economic and market data for 16 countries.
The systems followed are: economic recovery, with growth and inflation higher than 3%; recession, with growth of less than 2% and inflation of less than 4%; stagflation, with growth below 2% and inflation above 4%; and moderation, with growth above 3% and inflation below 3%.
“Stagflation and moderation regimes were relatively common and led to significant differences in performance across assets,” said analyst Christian Müller-Glesmann.
On the other hand, “recessions and stagflation have led to several prolonged periods of weak stock and/or bond returns,” such as those in the 1970s and Japan in the 1990s.
Another study by Macquarie this year, which extends US historical data back to 1792, confirms that before 1870, US stock returns and equity risk premia were often low for long periods.
