🎙️ Sweet Spot

🌎 This year, the U.S. will account for 26.3% of the global gross domestic product, the highest in almost two decades.

Put another way, by this admittedly far-too-simple measure, the United States is outperforming its economic peers despite trade disputes, the pandemic, persistent inflation, and societal division.

The big-picture landscape? Solid growth, big deficits, and a strong dollar. Our Chart of the Day says more.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Breaking down Microsoft, Meta, and Alphabet earnings

• Why Cathie Wood’s ARK Funds keep sinking

This, and more, in just 5 minutes to read.

Chart of the Day

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In The News

🤓 Breaking Down Microsoft, Meta, and Alphabet Earnings

Strong earnings from big tech giants Alphabet and Microsoft buoyed markets higher Friday. Here’s what you need to know:

Microsoft

It’s another good day for long-term Microsoft shareholders. 

Microsoft reported a 17% increase in revenue to $61.9 billion and a 20% rise in net income to $21.9 billion in the last quarter, thanks largely to growing demand for its software and cloud services fueled by artificial intelligence (AI). 

• Microsoft's Azure cloud services saw a 31% increase, with seven percentage points of growth coming from its AI services. Its close relationship with OpenAI has allowed it to integrate AI technology into products like Copilot.
  

• Microsoft's spending on data centers and infrastructure to accommodate the rising demand for AI has increased, with capital expenditures reaching $14 billion last quarter. Microsoft’s AI dominance has propelled its market value above $3 trillion, surpassing Apple's, making it the world's most valuable company. 

Microsoft shares are up 10% this year, 33% in the past year, and 215% in the past five years.

Alphabet

The sun is shining bright for Google’s parent company. Shares surged about 10% Friday after it announced stellar earnings, the approval of its first-ever dividend, and a $70 billion stock buyback. 

• Alphabet reported revenue of $80.54 billion, a 15% increase from the previous year. Earnings per share also exceeded Wall Street estimates. Alphabet's board authorized a dividend of 20 cents per share and approved the repurchase of $70 billion in stock. 

Sweet spot: The company outperformed in YouTube advertising revenue and Google Cloud revenue. Analysts praised Alphabet's balanced approach to investment, efficiency, and capital returns, with many raising their price targets for the stock. 

• YouTube's yearly advertising growth jumped 21%. The video platform raked in $8.1 billion from ad sales, and Google executives have emphasized YouTube’s growing subscription business to keep the flywheel in motion.
  

• One analyst noted, “Google is in the sweet spot of accelerating growth, expanding margins while shipping products faster, and returning capital — proving the naysayers wrong. The momentum should stay strong for a while here.”

Alphabet shares have risen 24% in 2024, 66% in the past year, and 173% over the past five years. 

Meta

The Facebook parent remains focused on long-term investments in AI and the metaverse, even at the expense of short-term profit. 

• Despite reporting better-than-expected profits and revenue for the first quarter, Mark Zuckerberg's emphasis on future investments and losses unnerved investors, leading to a ~10% drop this week. “We’ve historically seen a lot of volatility in our stock during this phase of our product playbook,” he said.
  

• Meta's Reality Labs unit continues to bleed cash, but “Zuck” is confident in Meta's long-term prospects, emphasizing the importance of investing in AI despite the anticipated multi-year investment cycle before profitability.
  

• “Historically, investing in building these new scaled experiences in our apps has been a very good long-term investment for us and investors who stuck with us, and the initial signs are quite positive here, too,” Zuckerberg said. “But building a leading AI will also be a larger undertaking than the other experiences we’ve added to our apps and this is likely going to take several years.”

Meta shares are still up 28% this year and 112% over the past year.

Read more

More Headlines

😞 U.S. economy grows a disappointing 1.6% in the first quarter

💪 The salary it takes to be considered “rich” in every state

🏠 Warren Buffet’s real estate brokerage reaches $250 million settlement

🌯 Chipotle blows by earnings estimates, delivers another quarter of growth

📉 The U.S. birth rate drops to a record low, ending pandemic uptick

💊 McKinsey under U.S. criminal investigation over opioid industry work

📉 Cathie Wood’s Popular ARK Funds Are Sinking Fast

Cathie Wood's fund is hitting an iceberg. Investors have jumped ship left and right. 

They’ve been fleeing amid significant losses since 2021 when the fund peaked during pandemic-era exuberance over unprofitable tech stocks with sky-high valuations. Now, virtually everything Wood has touched has come back down to Earth. 

Zoom out: Wood gained fame during the pandemic for her bold investments in “disruptive technology” like Tesla, Zoom, and Roku, which attracted massive inflows to her ARK Investment Management funds. 

• But the Federal Reserve raised interest rates, and the funds' fortunes reversed, so investors began withdrawing their money. In 2024 alone, investors have pulled $2.2 billion from ARK's six actively managed exchange-traded funds, leading to a 30% drop in total assets to $11.1 billion from a peak of $59 billion in early 2021.

Losing money: Three years ago, analysts were comparing Woods’ funds to Warren Buffett’s Berkshire Hathaway. Wood had earned millions of followers on social media; some nicknamed her “Mamma Cathie” or sold T-shirts with her picture in the style of the Barack Obama “Hope” poster.

• Said one investor who exited the fund: “It had a lot of promise, I thought. But the funds were just losing money. A lot of money. And I could get 5% on the cash in my Schwab account.”
  

• Wood's funds are heavily concentrated in a few stocks—Tesla, Roku, and Unity Software are among the top holdings that have experienced big declines.
  

• Nvidia’s absence from ARK’s flagship is equally frustrating for Ark investors. Wood sold off its position in Nvidia in January 2023, just before the stock’s monster run began. Its shares have roughly quadrupled since.

Bold bets: Not all of Wood’s investments have turned south. Her bet on cryptocurrency exchange Coinbase has paid off big time, and ARK attracted over $2.5 billion to its bitcoin-tracking ETF. Wood also has said she expects bitcoin to reach millions of dollars per coin by 2030. 

Why it matters:

By the end of 2023, ARK had lost investors a collective $14.3 billion. 

Analysts criticize ARK's reliance on Wood's intuition, especially after missing opportunities like Nvidia's stock surge. Morningstar questioned ARK's ability to analyze early-stage companies effectively, citing high personnel turnover. 

Why speculative tech stocks often struggle in higher interest rate environments:

• When interest rates rise, borrowing becomes more expensive for companies. Many tech companies rely heavily on debt financing to fuel their growth, particularly in the early stages when they may not be profitable.
  

• Higher interest rates can lead to higher discount rates in discounted cash flow (DCF) valuations. DCF analysis is a common method used to estimate a company's value by discounting its future cash flows back to the present. When interest rates increase, the discount rate applied to future cash flows also rises, leading to lower present values for those cash flows.

Also at play: Investors may rotate out of high-growth, speculative stocks like those in the tech sector and into safer investments such as bonds or dividend-paying stocks.

Plus, speculative tech stocks are often valued based on their future earnings potential rather than their current profitability. Higher interest rates can dampen expectations for future earnings growth as borrowing becomes more expensive and economic conditions may weaken. 

Read more

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Quick Poll

On Wednesday, we asked: Do you think Tesla has peaked, or is there more growth ahead?

— Most readers are bullish on the most valuable car company. For those who believe Tesla’s best days are yet to come, respondents said: “I would never bet against Elon Musk. Period.” Another: “I own two Teslas. They are the best vehicles I’ve ever owned. I ignore the hype roller coaster and just appreciate the ease of ownership and ever-improving car. The pendulum will swing back.”

— And: “Tesla's reduced sales are a direct result of where interest rates are at. The robotaxi service and the fact that Musk also runs Space X, X, and other companies will bleed into the tech for Tesla. Don't bet against Elon.”

— As for those who say Tesla already peaked? “I’ve been doubting Tesla’s rise since the beginning and it’s only been going up... but this time it’s different.” Another reader doesn’t agree that Musk’s bold ideas will come to fruition: “The company may survive with a new leader, but the stock will do poorly over the next 20 years.”

See you next time!

That's it for today on We Study Markets!

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