Steve Eisman made his name betting against the housing market before the Global Financial Crisis—a trade immortalized in The Big Short. So when he sees risk building in the market, investors pay attention. But this time, Eisman isn’t predicting another crash. In fact, he’s net long.
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FROM AMBER’S DESK
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Here are five things to know today
1.
Stocks on edge, bond sell-off continues, oil rally, France in focus
Stocks are down again this morning on a combination of higher yields and higher oil prices. We’ve become used to those worries but now we can add two more: France’s fiscal situation and a tidal wave of AI debt-fueled fundraising. At the centre of all of this is debt. That four letter word that leads to every single market meltdown. Earnings season will be a welcome distraction but also a necessary proof point of AI investments. “It’s clear that higher yields have not slowed the AI spending spree, but they make the eventual payoff increasingly important,” wrote Ipek Ozkardeskaya of Swissquote, “As such, earnings will remain key in determining whether the tech rally has more room to run. Any disappointment — and/or a sharp downward correction in tech valuations — could be catastrophic for broader risk markets.”
But what’s this? Something positive? Seasonality! Earnings growth! The mid-term elections! “The S&P 500 has risen in 21 of the last 23 midterm election cycles over the period from one month before the election to two months after,” writes Jim Reid of Deutsche Bank. Unfortunately the two exceptions were during rate scares and the most recent one was a Trump mid-term in 2018. Let’s see if earnings growth north of 30% can make this time different!
2.
Pepsi pops 1% in pre-market despite profit warning
Shares of the snack and soda maker hit a 6-year low ahead of earnings so a small rally off the lows is hardly anything to celebrate. Pepsi beat sales and profit expectations in the reported quarter but warned earnings per share will only grow 1-2% from their previous view of 4-6%. Higher costs are eating into the bottom line. It doesn’t help that organic revenue also declined slightly in its North American food and beverage divisions. Pepsi, like other consumer staples, have reached the limit on how much they can increase prices at the same time that costs are going up and consumer habits are changing.
Pepsi isn’t the only food-related company in the dumps: Campbell’s, General Mills, Kraft Heinz, and Hormel have all suffered similar underperformance. Coca-Cola stands in contrast. While shares have been weak recently, they are up 23% so far this year. It boils down to this: earnings growth at Coke has been better than at Pepsi. But multiple expansion is also at play. Pepsi’s multiple has contracted to 14x from 16x while Coke’s now stands at 25x. Coke reports at the end of the month and a profit warning likely wouldn’t be rewarded with a slight bump in the stock.
3.
Costco sales soar but no one cares
Comparable sales at the bulk retailer’s stores increased an eye popping 11.4% in September – better than the 9.9% expected yet there is no move in the stock today. Comparable US sales excluding gasoline were up 8%, also better than expected. Canadian sales were lower at 4.9% but that was still better than consensus. So why no move in the stock? It would be easy to say it is too expensive. But that is getting less true by the day. Sure it still trades at 40x forward earnings but it used to be 50x. And earnings estimates are moving higher, not lower meaning the stock has gotten cheaper while its profits are going higher. I may be talking myself into a purchase if this keeps going!
4.
Palantir +2.5% on Goldman upgrade
The underperformance of the shares over the past year is a buying opportunity as their total addressable market increases. “(It) may be setting up for another step function change in depth,” wrote Goldman’s Gabriela Borges. The expansion would be driven by the shift to sovereign AI, bespoke applications, and the company’s newer verticalization strategy. While it still trades at 120x forward earnings, Borges says its underperformance makes it cheaper than other growth compares. The price target implies 18% upside.
5.
Levi’s lower because its jeans were not
Shares of the jeans maker are down 3.5% in pre-market despite raising its full-year earnings outlook and promising improved sales growth ahead. The rub in the quarter was that direct-to-consumer sales only grew a tepid 2% because Levi’s back to school efforts focused on baggy jeans instead of low-rise jeans (shudder). The idea of low-rise jeans returning to the mainstream is haunting for most millennial women I know, but what’s old is new again for Gen Z. It was a surprise to investors because the previous quarter saw 11% growth – so it was a meaningful misstep. Levi’s CEO says they are getting back on track, however, and sales will increase by a mid-single digit (ie better than 2% but not back to where they were before). Earnings also got a boost from tariff refunds so they won’t get full marks for that either.
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