What's News in Earnings: Insights Into Banks, EVs, Retail and AI

Summary

WSJ What’s News: Detailed Summary of "What's News in Earnings: Insights Into Banks, EVs, Retail and AI"

Episode Overview

Released on November 20, 2024, the Wall Street Journal's podcast episode titled "What's News in Earnings: Insights Into Banks, EVs, Retail and AI" delves into the current corporate earnings landscape, highlighting key sectors such as the auto industry, banking, retail, and artificial intelligence (AI). Hosted by Chip Cutter, the episode provides an in-depth analysis of how these industries are navigating economic challenges, consumer behavior shifts, and technological advancements during the ongoing earnings season.

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1. Navigating the Auto Industry’s Electric Vehicle Transition

Segment Duration: 00:12 – 04:11

The episode kicks off with a focus on the automotive sector, a critical industry grappling with declining demand and the tumultuous shift towards electric vehicles (EVs).

Key Discussions:

• Earnings Performance: Approximately 93% of the S&P 500 companies reported a 4% year-over-year increase in earnings, with the auto industry presenting mixed results.

• Electric Vehicle Demand: Sean McLean, the auto industry reporter, highlights the central dilemma facing automakers: "The biggest question facing automakers today is where EV demand is headed" (02:10).

• Company Highlights:

  • General Motors (GM): Notably resilient, GM’s robust traditional gasoline business has offset struggles in its EV segment, surprising analysts with better-than-expected performance (01:41).
  • Ford: In contrast, Ford has been experiencing significant losses in its EV divisions, signaling challenges in their aggressive EV rollout strategy (01:41).
  • Toyota: Adopting a more cautious approach, Toyota has focused on hybrids rather than full EVs, which has positively impacted their earnings. McLean notes, "Whether or not that hybrid demand is sustainable in the long term will ultimately decide whether or not Toyota is right or wrong" (03:22).

• Political Influences: The potential impact of the Trump administration looms large. McLean discusses concerns over possible changes to EV tax credits and import tariffs from Mexico, stating, "Carmakers are very worried about whether or not Trump could throw a wrench in their product planning" (02:24).

• International Market Dynamics: US and European companies assess their positions in the Chinese market, weighing the costs of competing in a low-profit landscape against focusing on more lucrative regions (03:06).

Insights:

The automotive sector is at a crossroads, balancing the promise of EVs against immediate financial pressures and uncertain political landscapes. The contrasting strategies of GM, Ford, and Toyota illustrate differing paths towards achieving sustainability and profitability in a rapidly evolving market.

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2. Banking Sector Signals a Potential Soft Landing

Segment Duration: 04:11 – 07:56

Transitioning to the financial realm, the podcast examines the robust performance of major banks and what their earnings reveal about the broader economy.

Key Discussions:

• Bank Performance: Alexander Saidi, the WSJ banking reporter, observes increased confidence among big banks. Executives are hinting at a "soft landing" where the Federal Reserve can raise interest rates without triggering a recession (04:41).

• Consumer Spending Shifts: Saidi outlines divergent spending behaviors:

  • High-Income Consumers: Increased spending on leisure and travel, reflecting heightened confidence (05:14).
  • Middle and Lower-Income Consumers: Greater expenditure on necessities, indicating budget constraints and financial stress. High credit card balances persist, revealing sustained borrowing (05:14).

• Business Investment Outlook: Companies remain optimistic about investment banking and commercial banking services, with reduced debt levels compared to past economic cycles. Saidi remarks, "...companies are in a much better place probably than the consumer is." (06:05).

• Future Watchpoints: The regulatory landscape under the potential Trump administration is unpredictable. Saidi emphasizes the importance of "financial regulation" as a critical area to monitor, especially regarding consumer-related fees and broader financial system regulations (06:58).

Notable Quote:

"Companies are feeling really good about the signs and the fact that the fundamental economy is... still strong that companies will at least borrow more, spend more and help the economy chug along." — Alexander Saidi (06:05)

Insights:

The banking sector's strong performance suggests resilience in corporate finances despite consumer strain. The prospect of a soft landing indicates cautious optimism, but regulatory uncertainties pose potential risks that could shape future economic conditions.

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3. Retail Sector Faces Pricing Challenges Ahead of Black Friday

Segment Duration: 07:56 – 11:17

The discussion then shifts to retail, where companies are strategizing to navigate pricing pressures and shifting consumer behaviors as the holiday shopping season approaches.

Key Discussions:

• Earnings Divergence: Target reported disappointing quarterly results, whereas Walmart showcased strong consumer demand and revenue growth, highlighting disparate outcomes within the retail industry (09:19).

• Pricing Strategies: Sarah Nassauer, the WSJ retail reporter, explains that retailers have reached a "ceiling for most types of products," prompting companies like Ikea, Nike, and Walmart to negotiate supplier prices and implement strategic discounting to maintain sales without alienating price-sensitive consumers (09:19).

• Supply Chain Adjustments: Manufacturers are actively reducing supply chain costs and sourcing more efficiently to offer competitive prices. Nassauer notes, "You have to prepare... accepting lower margins and... offering discounts." (09:56).

• Tariff Concerns: The potential imposition of additional tariffs under the Trump administration poses a threat to retail margins. Nassauer details ongoing lobbying efforts and strategic adjustments by companies to mitigate price increases (10:16).

• Black Friday Preparations: Retailers are contending with a later Thanksgiving, reducing the window for holiday shopping. Despite this constraint, the season's kickoff has already begun, with companies adapting their strategies to maximize sales in a compressed timeframe (11:05).

Notable Quotes:

"We're seeing a lot of strategic discounting out there." — Sarah Nassauer (09:56)

"They're not happy... but they have a playbook." — Sarah Nassauer on dealing with potential tariffs (10:23)

Insights:

Retailers are balancing the need to attract consumers with limited disposable income against rising costs and supply chain challenges. Strategic pricing and discounting are pivotal in maintaining sales momentum during the critical holiday period, despite external pressures from potential tariffs and market saturation.

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4. AI Investments Highlighted in Corporate Earnings Reports

Segment Duration: 11:17 – 12:46

The episode concludes with an exploration of the burgeoning role of artificial intelligence (AI) in corporate strategies, as reported in recent earnings calls.

Key Discussions:

• AI as a Strategic Priority: Companies across various sectors, including Wayfair and Disney, are heavily investing in AI, signaling its importance in future business operations. Miles Krupa, the tech reporter, emphasizes the scale of these investments: "They're spending tens of billions of dollars really to build data centers... ahead of demand that they expect in future years" (11:43).

• Revenue Uncertainty: Despite substantial investments, tangible revenue from AI remains elusive. Krupa points out the lack of detailed financial disclosures from tech giants like Google regarding AI-related income streams such as access to AI models like Gemini (12:05).

• Market Expectations: The tech industry is awaiting more granular data to assess the actual financial impact of AI initiatives. Current earnings reports show growth rates, but the specific contributions of AI to revenue are yet to be fully articulated (11:43).

Notable Quote:

"We're more than a year in to Google having this chatbot product, and we still don't know." — Miles Krupa (12:05)

Insights:

AI continues to be a significant investment area for major corporations, promising long-term benefits but currently offering an unclear financial return. Companies are prioritizing infrastructure expansion to support future AI applications, awaiting clearer metrics to gauge the technology's profitability and integration into their business models.

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Conclusion and Forward Look

As the earnings season winds down, the WSJ podcast underscores the diverse challenges and strategic maneuvers across key industries. Upcoming reports from giants like Nvidia, John Deere, and Best Buy are anticipated to shed further light on these trends. The intersection of economic policies, technological advancements, and consumer behavior remains pivotal in shaping the market's trajectory in the near term.

Final Thoughts:

"If you like what you hear, or even if you don't, let us know, send an email to wnpodsj.com..." — Chip Cutter concludes the episode, inviting listener feedback and engagement (12:46).

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Key Takeaways:

• Auto Industry: Balancing EV ambitions with traditional vehicle sales amidst political uncertainties.
• Banking Sector: Corporate optimism contrasts with consumer financial stress, with regulatory developments to watch.
• Retail: Strategic pricing and supply chain optimizations are essential for navigating holiday sales pressures.
• Artificial Intelligence: Major investments with future-oriented expectations, though current financial impacts remain unclear.

This comprehensive analysis offers listeners a nuanced understanding of the current earnings landscape, providing valuable insights into the operational dynamics and strategic directions of pivotal industries.

Transcript

[Sean McLean]

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[Chip Cutter]

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[Sean McLean]

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[Chip Cutter]

Plus see [e-mail] hey listeners, I'm Chip Cutter for the Wall Street Journal and I'm here in the what's News feed with something new that we're trying out what's News and Earnings our look at some of the main themes that are standing out in the current corporate earnings season. And we're looking at what these reports can tell us about what's going on under the hood of the American economy. Take a listen and let us know what you think. Drop us a [e-mail] in this latest earnings season, most companies did fairly well. About 93% of the S&P 500 had released their results through last week and earnings were up about 4% year over year for those companies, according to the data provider FactSet. The earnings reports and the conference calls that go along with them can give us all a view on where corporate leaders see their businesses headed. Today we'll be looking at the auto industry and why executives still can't quite figure out what to do about electric vehicles. Plus, we check in on retailers and how they're thinking about setting prices ahead of the holidays. And we'll look at the split in American life that the latest bank earnings reveal. Let's start with the auto industry, which is in a tough spot. Demand is down and some companies are laying off workers or closing factories. The transition to electric vehicles is bumpy and taking longer than many anticipated. Joining us to talk about what what's going on is Sean McLean, our auto industry reporter. Sean, thanks for being here.

[Sean McLean]

Thanks for having me.

[Chip Cutter]

What are automakers saying in the earnings calls? How are they navigating this environment?

[Sean McLean]

The biggest question facing automakers today is where EV demand is headed. GM has surprised all of us this quarter with how well their gas business has buoyed the sluggishness in the EV business. Ford has been losing money hand over fist. A lot of the EV businesses have been losing money. On the other side you have companies like Toyota, which have been more cautious about jumping into EVs and are betting more on hybrids which have taken off, especially in the US and you're really seeing that boost their earnings.

[Chip Cutter]

So there's also the Trump factor in all of this. The president elect could make it more difficult for consumers to claim tax credits for buying EVs, but he also now has Tesla's Elon Musk on his side. So how are automakers adapting to these possibly contradictory trends?

[Sean McLean]

Carmakers are very worried about whether or not Trump could throw a wrench in their product planning, which goes out five to ten years in advance. The Elon Musk factor is a huge question mark. We don't know how Elon Musk feels really about tax credits. He says he would not be opposed to them going away. Partly, a lot of analysts believe, is because he's the only one that really makes money on EVs, and so the tax credit going away will hurt others more than him. Maybe. But certainly the biggest worry right now in the auto industry is what a Trump administration will mean for tax credits on EVs, but also for imports from Mexico, where a lot of them build cheaper vehicles.

[Chip Cutter]

Let's move to China. What's the turnaround plan there for US Companies?

[Sean McLean]

For a lot of US Companies and European companies who are in the same boat in China, it's a question of trying to figure out the right balance of whether or not it's worth fighting back in an expensive but low profit market like China, or concentrating their money in more profitable markets.

[Chip Cutter]

So is there an automaker that you're watching or you think we should all watch over the next few months that you think will be particularly emblematic of how the industry attempts to recover and where it goes from here?

[Sean McLean]

The industry as a whole is paying attention to Toyota. Toyota because it has been so cautious with EVs and because it has ridden this demand in hybrids. Whether or not that hybrid demand is sustainable in the long term will ultimately decide whether or not Toyota is right or wrong. The others to look forward to are GM and Ford. In the US GM has been more cautious in their EV rollout, and you've seen it in the results. Ford has been more aggressive on EVs and you've seen it in the results. So where those two companies go in the coming year is going to really tell where the US Industry is going to land when it comes to competitiveness on the global auto industry.

[Chip Cutter]

That was our auto industry reporter, Sean McClain. To get a sense for how the economy is holding up and how consumers and businesses are faring, we turn to the country's biggest banks, including JPMorgan Chase, bank of America, and others. Wall Street Journal banking reporter Alexander Saidi has spent plenty of time sifting through their results, and he joins us now. Hi, Alex.

[Alexander Saidi]

Hey, Chip.

[Chip Cutter]

So big banks appeared more confident this quarter than we've seen in the past. What stood out to you. As these companies reported their results, we.

[Alexander Saidi]

Had for the first time executives from the big banks coming forward and saying we are seeing indications of a so called soft landing, which refers to the process by which the central bank, the Fed, raises interest rates and does so without putting the economy into recession.

[Chip Cutter]

So this much discussed, elusive soft landing may be here yet. Throughout the political campaign, we also talked a lot about inflation being a major concern. Consumers feel stressed. So what did the results tell us about how consumers are shifting their spending patterns?

[Alexander Saidi]

If you look into the numbers a bit, you'll see different types of behavior playing out in different income segments. High income Americans are spending more. They are very confident. They're spending on leisure and travel. The more middle class and lower income consumers were spending much more on necessities, which is a sign that they are increasingly concerned about their budgets and how much money they have in their bank accounts. We also saw credit card balances continue to remain high. So people are borrowing a lot still and not necessarily paying back everything on their credit cards over time.

[Chip Cutter]

So let's talk about businesses. Companies have been hesitant lately to spend big on new projects or invest in their inventory, new facilities, whatever it might be. What did the bank say in the earnings calls about what's ahead for business spending?

[Alexander Saidi]

They're feeling very good about the prospect of investment banking deals and commercial banking for corporates. Companies are in a much better place probably than the consumer is. They're not too indebted compared to previous economic cycles. There is also, with the election of Trump, hope that there will be less red tape, less regulation. There are still headwinds. Interest rates are still higher than they were before the pandemic. So that raises the bar to sort of make a successful M and A transaction work. But people are feeling really good about the signs and the fact that the fundamental economy is, well, it's not perfect. It's still strong that companies will at least borrow more, spend more and help the economy chug along.

[Chip Cutter]

What are you watching in the months ahead? What are you paying attention to? What should we all be watching from banks and financial companies?

[Alexander Saidi]

I mean, financial regulation is probably the space I'm going to watch the most for the first year because the Biden administration ended up taking a much more progressive tact than people had assumed they would when it was elected into office. And the Trump administration seemingly, if they sort of follow the playbook of the first Trump administration, will be much lighter touch. However, there is a populist impulse within the Trump movement which isn't necessarily pro wall street or pro big business. So the thing to watch is for especially the really like consumer touching regulations like late fees, overdraft, debit card fees, credit card fees, do they choose to go ahead with those because that is impacting people's wallets, people spend, which is exactly kind of what they were elected to do, or do they follow the more traditional Republican playbook and just try to not regulate anything in the financial system?

[Chip Cutter]

Alexander Saidi is a WSJ banking reporter. Coming up, the state of retail heading into Black Friday and why some companies are hitting limits and raising prices. That's after the break.

[Alexander Saidi]

Ok, I have to tell you, I was just looking on ebay, where I go for all kinds of things I love.

[Chip Cutter]

And there it was, that hologram trading card, one of the rarest, the last one I needed for my set. Shiny like the designer handbag of my dreams. One of a kind. Ebay had it. And now everyone's asking, ooh, where'd you.

[Sean McLean]

Get your windshield wipers?

[Alexander Saidi]

Ebay has all the parts that fit my car.

[Sean McLean]

No more annoying, just beautiful.

[Sarah Nassauer]

Whatever you love, find it on eBay.

[Alexander Saidi]

EBay, things people love.

[Chip Cutter]

Retailers are beginning to release their earnings reports and some are doing better than others. Target today posted disappointing quarterly results. While yesterday discount giant Walmart reported strong consumer demand and increased increased revenue for the period. It's clear that some companies are hitting their limits on raising prices. Wall Street Journal retail reporter Sarah Nassauer joins us to explain. Hi, Sarah. Hi, Sarah. We've been talking about all the ways that people are shifting their spending habits this year. How are retailers and consumer goods companies thinking about setting their prices right now? Are we hitting limits on people's willingness to accept price hikes like we've seen?

[Sarah Nassauer]

I think we've definitely hit the ceiling for most types of products. We've seen retailers like Ikea, manufact like Nike restaurants, Walmart for years talk about trying to get its suppliers to lower prices. And it's a demand issue. People are stretched. Even though inflation is cooling, prices for things you need are still higher than they were a few years ago. And that's the reality for the companies and the shoppers they're going after.

[Chip Cutter]

So if you're a manufacturer trying to sell things this holiday season, how are you adjusting? How are you kind of coping with this new world and thinking about how to actually lower the prices of your goods?

[Sarah Nassauer]

Two things. One is you've done a lot of work already, right, to reduce cost in the supply chain to work on where you source things and knowing that customers are going to be sensitive to these prices. So you have to prepare. And in some cases they're accepting lower margins and in some cases they're offering discounts. We are seeing a lot of strategic discounting out there.

[Chip Cutter]

So what are the company's plans if the Trump administration does follow through on its promises to levy more tariffs on goods that are produced overseas?

[Sarah Nassauer]

They're not happy. For now. They're doing a lot of lobbying, they're doing a lot of educating, trying to get folks in Washington to see that those tariffs will increase prices. At the same time, this is not new to them. Right. They live through Trump 1.0. Biden continued. Those tariffs, I was talking with the CFO of Walmart who said, you know, we've been dealing with this for seven years and they have a playbook, right? They negotiate with their suppliers. In some cases, manufacturers have switched where they're manufacturing things. Eventually they'll raise prices, but for now they're just saying, we don't like this and here's why.

[Chip Cutter]

Okay, so finally, Black Friday is just around the corner and retail earnings can help us understand what's coming for the holidays. What do retailers expect and what are they doing differently this year?

[Sarah Nassauer]

Well, they're contending with a later Thanksgiving, which means there's a little bit less time between the moment when psychologically a lot of people start to think about gift buying and Christmas. And that gives them a little less room to play with. But it's already kicked off.

[Chip Cutter]

That was Wall Street Journal retail reporter Sarah Nassauer. And finally, it feels like you can't get through a corporate earnings report without hearing about AI. In recent weeks, executives at companies ranging from the furniture giant Wayfair to Disney all talked about the technology as they released their results. Miles Krupa, a tech reporter based in San Francisco, says that we need more data to understand how all these AI bets pay off for big tech.

[Miles Krupa]

Right now we're in the middle of what the companies are calling a big multi year build out in AI. They're spending tens of billions of dollars really to build data centers. And what they're doing is they're building it out ahead of demand that they expect in future years. So people have been watching for a growth in cloud business. Companies outside of Amazon, Microsoft and Google turning to them for cloud services to power AI applications. And we actually got a bit of an uptick in that this earnings period. I think we're still looking for a bit more granular detail from the companies on what these AI businesses actually look like in terms of real revenue. Right now, we're seeing an uptick in the growth rates, but we haven't seen companies like Google break out. For instance, how much revenue are they making from selling access to their AI models like Gemini? How many subscribers do they have? How much money are they making from it? We're more than a year in to Google having this chatbot product, and we still don't know.

[Chip Cutter]

Earnings season draws to a close, with Nvidia slated to release its results later today, plus John Deere, Best Buy and others reporting in the coming days. But for now, that's it for this special bonus episode of what's News and Earnings. If you like what you hear, or even if you don't, let us know, send an email to wnpodsj.com that's w n p o [e-mail] Today's show was produced by Daniel Bach, Anthony Bansi and Pierre Bianame, with supervising producer Michael Kosmides. Later today, we'll have the PM edition of what's News out for you, as usual. Until then, I'm Chip Cutter. Have a great day.