The Strange Case of Jekyll and Hyde
Most are familiar with the novel by the Scottish writer Robert Louis Stevenson, “The Strange Case of Dr. Jekyll and Mr. Hyde.” Dr. Jekyll and Mr. Hyde are two alter egos of the same character, exhibiting wildly contradictory behavior. It seems like we have been experiencing a Jekyll and Hyde economy and stock market this year. So far this earnings season, several companies have reported better than expected earnings growth, including Microsoft#, Meta Platforms#, and Google parent Alphabet#. However, the high level of capital spending for AI may be spooking some investors. Others, such as Starbucks# put up more frightful numbers.
Howling at GDP Growth
US GDP growth for the third quarter was reported this week at 2.8%, a bit less than expected but still quite good considering a potentially stressed consumer. Personal consumption expenditures increased 3.7% for the quarter, contributing nearly 2.5 percentage points to the total. An 11.2% jump in imports, which subtract from GDP growth, held back the growth number and offset an 8.9% gain in exports. Another major factor was federal government spending, which exploded higher by 9.7%. Fiscal spending at the federal level contributed 0.6 percentage point to the GDP growth rate. The invisible hand spurring economic spirits may not be so mysterious after all.
Some Earnings Exceptional, Others Eerily Weak
Creative destruction continues to create winners and losers in the economy. Alphabet revenues in Q3 2024 increased 15% year over year reflecting strong momentum across the business while earnings increased 37%. Strength was noted across Google Search, subscriptions, devices, and YouTube ads. Google Cloud revenues increased 35% also, led by accelerated growth across AI Infrastructure, Generative AI Solutions, and core cloud products. Consequently, capex spending has been elevated.
Revenue for Microsoft’s Azure cloud business, which is a core of its AI offering, rose 33% in the September quarter. Overall revenue rose 16% and earnings increased 10% over the prior year, though forward guidance and spending was not as well received. The story was similar for Meta Platforms which reported that revenue increased 19% and earnings increased 37% year over year. However, the company will be spending more on infrastructure, which could crimp future margin and earnings potential.
Visa# posted net revenue and non-GAAP EPS growth of 12% and 16%, respectively, driven by relatively stable growth in payments volume, cross-border volume and processed transactions. Overall, the quarter suggests consumer spending is holding steady. For 2025, Visa expects high single-digit to low double-digit revenue growth based on a stable macro environment.
On the down side, McDonalds# reported that global same-store sales decreased 1.5% in the quarter. The company also had some food safety issues that may cause a blip in traffic near term, but it should be able to get back on track. Meanwhile, Starbucks reported more of a horror story with comparable sales down 7% in the recent quarter driven by declining demand in North America and China, the company’s two largest markets. Starbucks also suspended forward guidance.
The Monster Mash of Mortgages
Mortgage rates rose last week for the fourth time in five weeks, causing another pullback in refinancing. Total mortgage application volume was essentially flat, falling 0.1% compared with the previous week, according to the Mortgage Bankers Association. Applications to refinance a home loan dropped 6% for the week. Applications for a mortgage to purchase a home increased 5% for the week and were 10% higher than the same week one year ago. The average interest rate for 30-year fixed-rate mortgages increased to 6.73% from 6.52%. Some potential buyers may be looking to lock in rates before any market volatility around Election Day while others may choose to wait for the dust to settle.
Haunted Housing?
The latest US housing data came in weaker than expected, including existing home sales falling to a 14-year low, while housing starts and permits continued to fall. Homebuilder DR Horton reported orders below consensus and guided 2025 deliveries below expectations, flagging ongoing affordability challenges and competitive market conditions. It does not help that the median sales price for homes was up 3% over the prior year to $404,500 and mortgage rates have been ticking higher.
The Federal Reserve is poised to lower interest rates further despite the seemingly strong economy and inflation that remains above target. The Fed is meeting two days after the election and the probability of another 25 basis point rate cut is near 97%. A lot of fiscal goodies are also being promised by the two presidential candidates as well. Here is to a Happy Halloween, but without the lingering fiscal or monetary stomach ache!
Actor Rob Schneider turns 61 and Rob Van Winkle (Vanilla Ice) breaks 57.
Christopher Crooks, CFA®, CFP® 610-260-2219