The stock market is starting to struggle.
All three major indexes have slipped back from record highs, and 445 companies in the S&P 500 fell Wednesday. For the
Jones Industrial Average, it’s slightly more serious. The index has fallen 3.9% since reaching its record 40,003 close less than two weeks ago. With Dow constituent Salesforce tumbling early Thursday, the index’s slump is likely to get worse.
May has been a strong month for stocks but it’s ending in an anticlimax. Investors are anxiously looking for the next positive catalyst.
With earnings season all but over, it looks like the artificial intelligence revolution isn’t coming to save the day. There’s a widening gap between hardware and software companies when it comes to enjoying the benefits of the AI boom right now. Salesforce and UiPath’s disappointing earnings Wednesday further highlighted that.
Unfortunately there are more negative catalysts around. Bond yields are proving to be a thorn in the side for stocks as rate-cut expectations slip toward November. Jamie Dimon reiterated his warning that valuations are too high to justify share buybacks in a speech Wednesday.
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There is one last hope for the market rally, though—falling inflation. Much of the recent pressure on stocks has come amid fears that inflation will remain stubborn, concerns that have been shared by several Fed officials.
But if inflation does start to trend lower again then the end-of-May malaise will ultimately just be a blip for the market. The key question is when the data will reflect that—it may not come with Friday’s core PCE reading, it may be weeks, or even months.
Until inflation begins to cool, the stock market’s struggles are likely to continue.
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ConocoPhillips Joins the Oil Merger Frenzy
Punctuating a string of big mergers in the energy sector as companies enjoy record profit and recovering commodity prices,
unveiled a $22.5 billion deal Wednesday to acquire Houston producer
including $5.4 billion of net debt. Several big transactions have defied the Biden administration’s antitrust crackdown.
- Marathon, with operations in North Dakota, New Mexico, Texas, Oklahoma, and Equatorial New Guinea, isn’t growing as fast as other oil companies, but its cash flow will help Conoco boost its dividend. Conoco plans to buy back more than $7 billion in shares the first year after closing the deal.
- The deal price is a 14.7% premium to Marathon’s closing price on Tuesday. Conoco, the third-largest U.S. energy company, has a market value less than half that of rivals
or
Chevron
.Exxon closed its deal for Pioneer Natural Resources, and Chevron has a deal for
Hess
. - ConocoPhillips’ CEO Ryan Lance said acquiring Marathon deepens its portfolio and fits within its financial framework, adding high-quality, low cost-of-supply inventory. Conoco expects to achieve at least $500 million of run-rate cost and capital savings within the first full year after closing.
- Exxon shareholders re-elected its 12-member board by a wide margin at its annual meeting Wednesday despite an activist campaign against them. Some large shareholders, including the California Public Employees’ Retirement System, voted against all 12 nominees and protested Exxon’s decision to sue two climate-focused funds.
What’s Next: On Sunday, the oil market expects the Organization of the Petroleum Exporting Countries and its allies, OPEC+, to extend its current output cuts of 2.2 million barrels a day through the third quarter, or the end of 2024. U.S. weekly oil production is near record highs.
—Avi Salzman, Adam Clark, and Janet H. Cho
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Salesforce Cuts Forecast While AI Drives Results at HP, C3.ai
While artificial intelligence has had explosive growth, the software sector has struggled to keep pace. Results from
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highlighted that trend as the maker of cloud-based software cut its forecast for subscription and support revenue and gave a downbeat revenue outlook for the current quarter.
- Salesforce expects subscription and support revenue, which makes up most of its business, to rise just below 10% in the current fiscal year, falling short of its previous forecast. It sees current-quarter revenue of $9.2 billion to $9.25 billion, short of analysts’ expectations.
- Chief Operating Officer Brian Millham told analysts that the momentum it saw in the fourth quarter moderated in the first quarter, and it observed longer deal cycles, deal compression, and high levels of budget scrutiny. April-quarter revenue fell short of expectations but profit beat forecasts.
- Separately
got a boost from businesses that are starting to upgrade their personal computers, helping it beat second-quarter expectations. CEO Enrique Lores estimates 10% of second-half PC shipments will be AI-enabled, and he expects AI to make a bigger splash for sales in 2025 and 2026.
- HP’s commercial PC sales rose 6% from a year ago and 3% from the January quarter, to $6.2 billion. Unit sales rose 12% from last year. HP says it won significant deals across multiple industries. Guidance for adjusted earnings in this fiscal year ending January 2025 were unchanged.
What’s Next:
C3.ai
’s
April quarter revenue jumped 20% from last year, far more than expected, notching its fifth consecutive quarter of accelerating revenue growth. Revenue for the July quarter is expected to be around $84 million to $89 million, in line with expectations.
—Liz Moyer and Bill Alpert
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American Airlines Plans Reset After Losing Customers to Rivals
CEO Robert Isom acknowledged that decisions to cut sales staff, promote travel booking on its own website, and cater less to travel agencies backfired and drove away corporate travel business. The carrier will slash capacity growth in the second half of the year and modify its strategy.
- American Airlines was already under pressure after it slashed second-quarter guidance it set only a month ago. It now expects adjusted earnings of $1 to $1.15 a share, and revenue per seat mile to drop between 5% and 6%. Shares fell nearly 14% on Wednesday, the worst in the S&P 500.
- The carrier is parting ways with its chief commercial officer and two-decade employee Vasu Raja, who was part of the team that decided against spending millions on travel agency commissions to woo business travelers. Isom called Raja an innovator but said: “Sometimes we need a reset.”
- American’s moves drove corporate fliers to other carriers, Isom said, promising investors at the Bernstein Strategic Decisions conference that American would try to win those travelers back. It will make booking less punishing for travel agencies and add incentives to encourage the use of newer booking technology.
-
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quickly reaffirmed its second-quarter guidance for earnings of $3.75 to $4.25 a share. American’s struggles may not be reflected in results industrywide. It said it sees softness in bookings and weaker pricing for domestic flights because of discounting activity.
What’s Next: Stephen Johnson, American’s vice chair and chief strategy officer, will oversee the commercial business and lead a search for Raja’s replacement. TD Cowen analyst Helane Becker expects it will take at least a year for American to get back on track, amid
Boeing
’s
delayed 737 MAX deliveries.
—Janet H. Cho and Callum Keown
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Fed’s Latest Beige Book Reports Modest Growth, Increased Employment
Most of the Federal Reserve’s districts reported slight or modest growth, with retail spending flat to slightly improved and heightened price sensitivity, according to the latest Beige Book through May 20. Consumers are pushing back against higher prices, and retailers are discounting, cutting into profit margins.
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- Employment increased, with most districts reporting more available workers, especially for entry-level jobs, and decreasing employee turnover. Wage growth remains moderate, with some districts reporting that wage growth is at or approaching averages seen before the Covid-19 pandemic.
- Travel and tourism strengthened across many regions, including in Atlanta and Seattle, with more areas seeing higher leisure and business travel, but summer outlooks are mixed. Kansas City and Philadelphia reported more hotel stays, while Massachusetts restaurants reported strong Mother’s Day sales.
- Housing demand improved, especially in Minneapolis, and single-family construction increased despite rising mortgage rates. Commercial real estate conditions softened amid tight credit conditions and higher borrowing costs. April home sales were robust in New Hampshire and Maine.
- Elsewhere, Richmond reported increased import activity as one channel in the Port of Baltimore reopened. Cleveland said a slowdown in business activity is because interest rates are staying higher for longer. Chicago said prospects for 2024 farm income increased slightly.
What’s Next: Former longtime
executive Beth Hammack will succeed retiring Cleveland Fed President Loretta Mester, after she steps down on June 30. Hammock won’t start until Aug. 21, giving Chicago Fed President Austan Goolsbee a vote at the July 30-31 Federal Open Market Committee meeting.
—Janet H. Cho and Nicholas Jasinski
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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Callum Keown
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