Intel’s earnings are significant for two reasons. They suggest the personal-computer market is rebounding, and they signal that investors may not punish AI laggards after all.
In a key week during which some of the big technology companies have updated on earnings, the chip maker reported a surprise second-quarter profit, and impressed with its third-quarter revenue outlook. The stock surged after hours.
While management extolled the potential growth from artificial intelligence, Intel has been slower than some of its peers, most notably Nvidia, in joining the movement.
Fortunately for Intel, a key takeaway from tech earnings season so far is that it’s not all about AI.
The market has remembered it can also judge the performance of businesses by their fundamentals, and near-term outlooks. The AI boom is undoubtedly here, but the serious benefits lie in the future.
The world’s energy giants encountered something similar a few years ago. While pouring billions into renewable energy projects—positioning themselves to dominate the industry’s future—they also had to keep profits going strong in the meantime.
It’s less of an issue for the early AI leaders, such as Microsoft and Nvidia, for which the tangible benefits of the technology are much closer to the present. Although, even Microsoft said growth in its AI services will be weighted toward the second half of the fiscal year that began in July.
The wait will be longer for those companies that have been slightly slower out of the blocks.
That all bodes well for Apple, as well as Qualcomm and AMD, set to report earnings next week.
Apple has been less forthcoming than others on its AI strategy, but investors seem to be reacquainting themselves with fundamentals, which is good for the tech giant. The PC market recovery will also help Apple, and other chip makers.
—Callum Keown
*** Join John Howland, vice president and head of the McCloskey Business Unit at OPIS Energy Insights today at noon when he hosts a panel to look at the role of artisanal cobalt mining in the supply chain for batteries and efforts to address concerns about the working conditions for miners. Sign up here.
Try your hand at the Barron’s crossword puzzle and sudoku games, now running daily along with a weekly digital jigsaw based on the week’s cover story. To see all puzzles, click here.
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Bank of Japan Holds Rates, But Makes Policy Shift
The Bank of Japan held its short-term interest-rate target at -0.1% but a significant tweak to its language is being seen by investors as a sign of tighter monetary policy ahead. It was a surprise and moved markets because the BOJ has long been a global outlier in keeping monetary policy ultra loose.
- The BOJ said it would introduce “greater flexibility” to its yield-curve control, which keeps 10-year Japanese bond yields capped between -0.5% and 0.5%. The central bank said it would treat the upper and lower bounds of the range “as references, not as rigid limits.”
- It will also offer to buy 10-year bonds at 1% every business day through fixed-rate operations, effectively raising the cap.
- While it may not be a rate raise, or even a pledge to hike in the coming months, it’s a significant development for global markets, and one that suggests Japan’s role as the last anchor of low rates may not last.
What’s Next: The potential implication for U.S. assets is that Japanese investors may view the yields on domestic bonds as now being more attractive, and therefore alter their positions in U.S. fixed-income assets.
—Callum Keown
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GDP Rose Faster Than Expected, But Consumers Feel Pinched
The U.S. economy grew at a 2.4% annual rate in the second quarter, faster than anticipated, but economic activity wasn’t quite as robust as the headline number suggests, given decelerating growth in consumer spending. Food and beverage companies are confirming a trend of weakening sales.
- GDP growth was above the first quarter’s 2% growth and much better than the 1.5% expected, confirming the idea that the U.S. economy will have a soft landing. A measure that includes commercial real estate and equipment spending rose 7.7% during the second quarter.
- TruStage chief economist Steve Rick called the positive GDP growth an “encouraging” sign that the Fed’s aggressive rate hikes are working as inflation continues to decline. Consumers are getting a reprieve from the rising costs of core goods, he said.
-
McDonald’s,
which beat expectations, said it is considering whether to add more discounted menu options as lower-income customers trade down to cheaper items and buy fewer combination meals. The burger chain also signaled that second-half sales would slow. - With some customers becoming more price sensitive, McDonald’s might find raising prices, as it has done in recent quarters, more challenging. But it did raise its projection for 2023 operating margin to 46% from 45%.
What’s Next: Ernst & Young’s consulting strategy arm’s chief economist Gregory Daco sees more challenges to consumer spending trends this year, including the resumption of student loan repayments and rising debt. He predicts consumer spending will rise 1.9% in 2023, and show muted growth of 0.8% in 2024.
—Megan Leonhardt, Sabrina Escobar, and Janet H. Cho
***
Southwest to Revise Schedule as Travel Habits Shift
Southwest Airlines
will revise its flight schedule next year amid a sluggish rebound in business travel. It will focus more on longer leisure routes and less on short and early-morning or late-night flights. Shares sank Thursday after it forecast weaker third-quarter revenue per passenger mile.
-
Southwest still expects record revenue for the third quarter, but revenue per seat flown a mile could be as much as 7% lower than last year, when travel demand was surging. Peer
Alaska Air
sees flat to low single-digit revenue growth in the third quarter, suggesting travel demand is slowing. - Bad summer weather hasn’t helped the travel industry. On Thursday afternoon, hundreds of Northeast region flights were canceled and thousands more delayed, according to flight tracker site FlightAware.
-
Royal Caribbean
delivered a strong earnings beat and hiked its full-year guidance 33% amid white hot demand for cruising. Short-notice bookings and onboard revenue are also strong. -
Separately, cruise line stocks have surged this year as the sector’s recovery has accelerated, boosted by pent-up demand for international travel.
Carnival Corp.
shares are up 126%, and
Norwegian Cruise Line Holdings
stock is up 74% so far this year.
What’s Next: Southwest is also negotiating contracts with its flight attendants and pilots, after rival airlines
United,
Delta,
and
American
offered their pilots big pay bumps.
—Callum Keown and Janet H. Cho
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Big Banks Face Higher Capital Requirements Under New Proposal
Banking regulators released long-awaited plans to raise overall capital requirements by about 19% at the largest U.S. banks. The plan would move regional banks such as
Regions Financial
and
KeyCorp
under the stringent requirements that had once been applied just to the biggest banks.
-
Banks with at least $100 billion in assets would have to boost capital by an estimated 16%. The plan also could affect companies such as
American Express
and
Morgan Stanley
that rely on types of fee income that the new rules target, The Wall Street Journal reported. - The proposal aims to make banks around the world measure the riskiness of their assets in comparable, transparent ways. The proposals are part of Basel III, an international regulatory overhaul that started after the 2008 financial crisis but has taken years to implement.
- The exact amounts required will depend on a company’s business activities, but the rules could also affect banks that depend on fees from wealth-management business, which regulators consider a source of potential operational risk.
- Federal Deposit Insurance Corp. Chairman Martin Gruenberg said “stronger capital improves the resilience of our largest banks.” But Greg Baer, CEO of the Bank Policy Institute, said the rules would unnecessarily increase the amount of required capital for banks, the Journal reported.
What’s Next: After the FDIC approved the plan, the Federal Reserve voted to propose the new rules and open them to public comment through the end of November. If regulators vote again to complete the changes, they would be implemented in phases between 2025 and June 2028.
—Janet H. Cho
***
More Turmoil in GameStop’s Executive Ranks as CFO Leaves
There’s more turnover at struggling retailer and meme stock investor favorite
GameStop,
which said CFO Diana Saadeh-Jajeh resigned, effective Aug. 11. The move comes one month after GameStop fired its CEO Matt Furlong as it reported a net loss for its April quarter.
- The company named Daniel Moore its interim principal accounting officer and interim principal financial officer, according to a statement Thursday. The departure wasn’t the result of any disagreement, GameStop said in a filing.
- GameStop has now seen the departure of two CEOs in the past two years and the appointment of a new chief operating officer in May 2022. Saadeh-Jajeh joined one year ago.
- Activist investor Ryan Cohen, who holds a 12% stake in GameStop, became executive chairman in June when Furlong departed after leading the retailer for two years. The shares, a favorite of retail investors playing the meme trade, are up 20% this year.
What’s Next: GameStop, which reports July-quarter results in September, is expected to report another loss roughly in line with the April quarter and revenue of $1.14 billion, which would be about the same as the July quarter last year, according to FactSet.
—Liz Moyer
***
Do you remember this week’s news? Take our quiz below to test your knowledge. Tell us how you did in an email to [email protected].
1. Elon Musk is getting rid of the brand Twitter less than a year after he spent $44 billion to buy the social media platform. He has already replaced the blue bird logo on the platform with what logo?
a. 420
b. X
c. Y
d. None of the above
2. Banc of California made an offer to buy this regional bank for just over $1 billion in a deal that could be a harbinger of a regional bank merger wave as smaller institutions look to combine amid tighter regulation.
a. Western Alliance Bancorp
b. Zions Bancorp
c. Comerica
d. PacWest Bancorp
3. United Parcel Service management reached a tentative agreement with its 340,000 unionized workers represented by the International Brotherhood of Teamsters. What’s in the agreement, which still needs to be ratified?
a. Pay raise of $7.50 an hour over five years
b. Air-conditioned vehicles
c. Martin Luther King Day as a holiday
d. All of the above
4. Gross domestic product rose by a greater than expected amount in the second quarter, fueled by consumer spending, nonresidential fixed investment, state and local government spending, private inventory investment, and federal government spending. How much did GDP rise?
a. 2.4%
b. 2.6%
c. 2.8%
d. 3.0%
5. A group of big auto makers has banded together and plans to spend a collective $1 billion to build out the electric vehicle fast-charging network in North America, to encourage more drivers to buy EVs. How many chargers are they planning to build in urban areas and along major highways?
a. 10,000
b. 20,000
c. 30,000
d. 40,000
Answers: 1(b); 2(d); 3(d); 4(a); 5(c)
—Barron’s Staff
***
—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner
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