Dear Readers,
Technology stocks and artificial-intelligence hype seemed to take a break from driving the stock market at least for one day on Friday. One impetus may have been quarterly results from Dell, which highlighted how AI hopes, even when they seem logical, can sometimes be misplaced. The company's stock had run up sharply in recent weeks on perceptions that it was selling a lot of servers for AI use. That turned out to be true, but the problem, as Heard columnist Dan Gallagher pointed out, was that it doesn't seem to be making any real profits on them yet. Operating margins for the segment that includes servers fell to 8% from 9.7% in the year-ago period. Dell's stock plummeted 17.9% in response. Of course, Dell is still up 82% so far this year.
The Nasdaq Composite spent most of Friday in the red but benefited from a late market rally in the final minutes of trading, closing down just 0.01%. AI bellwether Nvidia ended down 0.8%. At the same time, there appeared to be a rotation into more mundane sectors. The S&P 500 Consumer Staples sub-index rose 1.5%, outperforming the broad index's 0.8% gain. And there was a sharp relief rally in many health insurers. They had sold off earlier this week on fears that disruptions to Medicaid coverage in many states could cause profitability issues. It was unclear what triggered the rebound, but it may have been comments by the chief executive of insurer Elevance who, according to Stephens analyst Scott Fidel, said at an investor conference that the company is paying close attention to the issue but is still confident in meeting its financial targets this year. Elevance rallied 6.1% and UnitedHealth, the nation's largest health insurer and one of 30 components of the Dow Jones Industrial Average, gained 2.9%. That helped the Dow close higher by 575 points, or 1.5%.
Here’s what else Heard on the Street was watching:
Live Markets Snapshot Crude oil, Bitcoin USD, and gold continuous contract data refresh every time you open this email. Other data are as of market close.
With many countries setting regulatory frameworks to permit the use of digital assets within their financial system, and consumers already having the option to use them for a variety of retail purchases outside of tapping a traditional bank account, credit card or cash, the velocity of blockchain, cryptocurrency, and digital assets is speeding up.
A decade ago it was common to ask if younger Americans were falling out of love with plastic. The reasons offered were many: They had seen their parents deal with card debt; they didn’t care about frequent-flier miles; and they had new alternatives like buy-now-pay-later loans. One company saddled with that baggage was American Express. Fast forward to 2024. Amex shares are now zooming, up over 25% this year. The stock has returned an annualized 17% since the start of 2020, beating the S&P 500’s annualized return by almost 4 percentage points.
New creative leadership looks good on Gap. The company on Thursday reported that companywide comparable-store sales rose 3% in the quarter ended May 4 from a year earlier, higher than the 1.2% growth Wall Street expected. Remarkably, all of Gap’s brands—its namesake, Old Navy, Athleta, and Banana Republic—saw comparable-store sales growth. This was particularly surprising for Athleta and Banana Republic, for which analysts were penciling in declines. There hasn’t been a single quarter over the past decade in which all four brands reported comparable-store sales growth at the same time.
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Companies reporting earnings next week include Lululemon, DocuSign, Campbell Soup, and J.M. Smucker. On Friday, all eyes will turn to the jobs report for the month of May.
Last August, Heard on the Street columnist Jinjoo Lee wrote that long-struggling retailer Gap may have a shot at a comeback, thanks to a new leader and a cheap stock price: Richard Dickson, who is credited for reviving Mattel’s Barbie brand, is picking up that heavy baton this week and sparking some optimism. Gap shares have gained 10% since the announcement in late July, but that did little to move the needle on the company’s bargain-bin valuation. Gap’s enterprise value is about 57% of the revenue it is expected to generate in the next 12 months—about 29% below its already depressed two-decade average. It is 34% and 21% cheaper than American Eagle Outfitters and Abercrombie & Fitch on that measure, respectively. Gap shares had already more than doubled since that prediction, before gaining another 28.6% Friday on the back of strong quarterly results.
Thank you for reading,
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