Partially because of the war, inflation is rearing its ugly head. It also looks like the approaching inflation data reports are not going to be benign, so rates could march even higher. Perhaps the most important news of the week was signs of consumer weakness, which showed up at both Target and Walmart. Salesforce stock is down 35% year to date on fears that AI can disrupt traditional software businesses. This was one more nail in the coffin. And finally, Nvidia reported. Just take a step back and consider the fact that the largest company in the United States by market cap grew its revenue by 85%. Amazing. Now, let's get started on the wrap.
Hi, this is Steve Eisman and this is another edition of the weekly wrap. This is for Friday, May 22nd, but recorded Thursday night, May 21st. This will be a relatively short wrap because it was a light week for earnings. However, before we get to the wrap, I am flagging what's coming up on our premium service. On Wednesday, May 27, I will post an interview with Lakshmi Ganopathy of Unicus Research. Lakshmi is a recurring guest. In the interview once again, Lakshmi highlights that people across the country use buy now pay later, which is a form of debt financing to pay for their Uber Eats, DoorDash daily food deliveries. She refers to it as Uber Eats addiction. Lakshmi only does deep dive analysis supported by research. Using bottom-up analysis techniques, she explains the health or lack of health of the consumer, the state of the auto market, the perils of private credit and commercial real estate, and the state of data center financing. Starting today, May 22nd, we have opened up our community board to allow our thriving community to share ideas and listen from each other. If you want to listen, watch, and participate and are not yet a subscriber, please consider joining at premium.realismanplaybook.com.
And now the wrap. In this week's wrap, we will cover one, the war in Iran. Two, why I turned more cautious last week. Three, merger news. Four, signs of consumer weakness at Target and Walmart. Five, negative news in software. Six, Nvidia finally reported. Seven, weak results at Home Depot and Lowe's. And finally, eight, two mailbags. One on private credit, private equity, and the credit worthiness of the United States. And the second mailbag about The Big Short and how my hedge fund actually closed the trades we had placed. Now, let's get started on the wrap. Not much war news other than President Trump threatening to start bombing again. As a result, oil prices soared and the 10-year yield has breached the 4.5% level. Now, last week, I announced that I had lightened up on many positions. I also said that I don't foresee a recession, but that the market was making me nervous. One viewer pointed out that I was recently on CNBC where I was bullish. So, what's changed? A very fair question. With respect to a recession a few weeks ago, I put up a table showing the revenue and earnings results of the S&P 500 relative to expectations. Let me update some of those figures now that the quarter is over. On January 1 and April 1 of this year, the expected revenue growth for the S&P 500 for the first quarter was 7.3% and 9% respectively. As of now, the actual revenue growth was 11.1%. So much better. On January 1 and April 1, expected earnings growth for the S&P 500 for Q1 was 14.4% and also 14.4%. As of now, the actual earnings growth came in at an amazing 28.3%. With growth like this, a recession is just not on the horizon for now. So, why did I become more cautious? What's changed is interest rates. For the last several years, the 10-year Treasury yield has been in a range of 3.9 to 4.5%. And I have felt for quite some time that as long as yields remain in that range, the market is fine. However, partially because of the war, inflation is rearing its ugly head. The recent CPI and PPI data have been much higher than expected. As a result, yields have been climbing. The 10-year yield is now 4.6%. For me, 4.5% is the Rubicon, and that is why I lightened up. It also looks like the approaching inflation data reports are not going to be benign, so rates could march even higher. This keeps pressure on stocks and lightening up makes sense. Moving on, to start the week, there was a large merger. NextEra is buying Dominion Energy in an all-stock deal that unites two leading players in the utility space in a race to meet growing electricity demand from data centers. Dominion is the utility responsible for powering the world's largest data center market in Northern Virginia. NextEra is the biggest renewable energy developer in the United States. The Florida-headquartered power company NextEra is also the largest utility in the S&P 500 at a market cap of more than 190 billion. The deal will create the largest regulated electrical utility in the world. NextEra will control 75% of the combined company. Now utilities have a real growth story as they are a major way electric needs for data centers will be met. However, the utility group has not done much in many months. Why? Despite the electrical growth story, which is powerful, utility stock prices are also very interest rate dependent. They are partially viewed as bond proxies because they pay nice dividends. As a result, when interest rates climb, utility stocks suffer and interest rates have been climbing. Perhaps the most important news of the week was signs of consumer weakness, which showed up at both Target and Walmart. Let's start with Target. Management managed to snatch defeat from the jaws of victory. This has been a problematic retailer for years, but it actually looks like it's turning around. Earnings per share was a beat at $1.71 versus $1.30. So 32% growth and same store sales was an impressive 5.6%. Very strong and the best growth they've had in years. However, on the earnings conference call, management warned of tough comparisons ahead because of the fading benefits of tax refunds and the negative impact of higher oil prices and the stock was down 7% on the print. The earnings report of Walmart was also a warning about the consumer. Walmart's quarterly revenue beat by a bit, but its EPS result of 66 cents only met expectations. Now, Walmart has consistently beat revenue and EPS expectations. So, the fact that it did not beat earnings expectations is a warning sign. More importantly, Walmart issued weak guidance for the next quarter. It issued EPS guidance of 72 to 74 cents, which is lower than the expected 75. Like Target, management blamed the fading benefits of tax refunds and higher oil prices. Moving on, in the software world, most sell-side analysts have defended the public incumbents despite the story that AI is a huge threat. So, it's interesting to see that one sell-side analyst recently has broken from the pack. Bank of America has a new analyst covering the sector and that analyst reinstated coverage on Salesforce with an underperform rating. Unusual. The analyst wrote that quote, "Salesforce remains a deeply entrenched platform, yet we expect a structural reset driven by AI transition that raises three core concerns. Muted net new customer additions, limited upsell potential, and an underwhelming AI monetization pathway. Therefore, we model structurally lower growth." Salesforce stock is down 35% year-to-date on fears that AI can disrupt traditional software businesses. This was one more nail in the coffin. In other software news, Intuit reported and it was not good. EPS beat but the numbers were not impressive. Net income rose 9% which is eh worse. Revenue grew 10% from a year ago which is the slowest rate of expansion since 2024. Given the horrendous narrative surrounding software, this was not, I repeat, not what Intuit investors wanted to see. And to add insult to injury, the company announced that it is laying off 17% of its workforce. The stock was down double digits after hours and is now down 50% for the year. And finally, Nvidia reported. It reported Wednesday night. EPS and revenue beat. EPS of $1.87 was up, get this, 95% versus last year. Margins are also expanding by a lot. In last year's March quarter, the gross margin was 60%. This quarter, it was 75%. Revenue of 81.6 billion was up 85% versus a year ago. A few quarters ago, revenue growth was 65%. So revenue growth is accelerating from a very, very high level. Just take a step back and consider the fact that the largest company in the United States by market cap grew its revenue by 85%. Amazing. However, the stock was little changed after hours. Why? The company guided revenue for the June quarter at 91 billion, which is higher than the consensus, but apparently below some whisper numbers.
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Moving on, let's look at an interest rate sensitive group. Prior to this week, most building product suppliers reported their first quarter results and they were largely better than anticipated. However, the entire group has underperformed the broader market by 1,200 basis points since earnings season kicked off about a month ago with concerns around higher rates and margins. Because of higher rates, residential activity is sluggish and margins are under pressure. The homebuilders have acted similarly for the same reasons. Let's look at two companies that are related. Home Depot and Lowe's. They both reported this week and the results were not great. Home Depot was first. The stock is down 15% just this last month. On the positive side, the company reported $3.43 in earnings versus 3.41 expected. But don't get too excited as that is down 4% versus last year. Also, same store sales were an anemic 0.6% which was lower than the expected 0.8%. So no signs of any pickup in housing related retail. Lowe's also reported the next day with the same lackluster results. Earnings per share of 3.03 beat and was up 4% versus last year but same store sales growth was up the same as Home Depot and anemic 0.6%. Fundamentals are just staying at the bottom with no signs of improvement. Toll Brothers, the luxury home builder, reported it beat on all metrics and raised guidance and the stock was up. But don't get too excited here either. Earnings per share was 2.72 versus 3.50 last year. So down 22%. Here too, fundamentals are staying at the bottom of the channel with little signs of improvement. Higher interest rates have hurt the homebuilders, Home Depot, Lowe's, and the entire building supply group.
Two mailbags this week. Our first mailbag is from YM who says the following. I'm part of a small team at Fitch Ratings that produces high-frequency credit commentary and cross-sector research. Your recent master class on private credit prompted me to reach out with a few observations. By the way, that master class is part of our premium product on the private credit discussion. While no consensus definition exists for the asset class, we generally consider it debt instruments without a readily tradable secondary market. By that definition, And First Brands were not actually private credit, as they were part of the broadly syndicated loan and ABS markets, though I'd agree they're prime examples of deteriorating underwriting standards. On BDCs specifically, one of your guests said, "If you're worried about private credit, you should really be worried about private equity." And I couldn't agree more. The recent BDC redemptions look more like a sentiment, liquidity, and valuation multiple issue than evidence of deteriorating credit quality. There's no clear signal yet of rising defaults in software driven by AI disruption. Not because it won't happen, but because it is too early for AI disruption to convert to credit stress. I believe it will take a few years to play out and the upcoming refinancings for debt maturing in 2028 to 2031 will be the real test. He goes on to say, "A question on a separate topic. You mentioned in my lecture, US treasuries are seen as the risk-free rate and corporate bond spreads have remained historically tight in recent years. This is typically interpreted as reflecting market optimism, but I wonder whether that is starting to also reflect a narrowing creditworthiness gap between the US sovereign and investment grade corporates as corporate balance sheets remain in great shape while federal debt continues to climb. At what point in your view do markets begin to reprice treasuries away from the risk-free benchmark? And if they do, does the spread framework break down? That's a question that hasn't been broadly covered, and I am genuinely curious to hear your thoughts." My answer with respect to software and private equity and private credit. I largely agree. It's still so early in the AI story that the businesses of the software companies have not yet experienced a lot of AI inroads. Despite the recent rally in software stocks, and it's only a rally been going on for about a week or so, these stocks are still down enormously. For example, ServiceNow is still down 50% over the last year. The software companies purchased by private equity are almost certainly not as good as ServiceNow. So, they are down at least 50% in value as well. The debt will need to be refinanced starting in 2027. When that happens, private credit will demand that private equity pony up more equity into their software companies that are worth now less than half. Private equity may choose to do so or hand over the keys. As far as credit spreads are concerned, I do not believe that spreads are tight because of a narrowing of creditworthiness between US sovereign debt and investment grade corporations. Despite all the noise about fiat currency and the level of government debt, the US 10-year has been in a range of 3.9% to 4.5% for several years. The recent rise in Treasury yields has nothing to do with creditworthiness of the US in my view and everything to do with the bad inflation data.
Our second question comes from William who asks, quote, I recently signed up for the premium account. Thank you for doing so, William. And you continue to provide such insightful and informational lessons and points. It's not only the knowledge and experience, but perhaps most of all, your ability to clearly articulate your points in an easily understood manner. Great job and thanks. You're welcome. I recently saw your video from January 1 as you talked through the movie The Big Short. At the end of the movie, you said you knew it was time to cover the paper. Well, I didn't say that. Steve Carell said that, but he was playing me. And your character said in the movie, "Sell it all." Can you explain what exactly happened? You're long CDS, so you're short the mortgage bond, but the bank who is long the bond is covering the paper. In my understanding, the movie makes it all look so dramatic with Steve Carell sitting on a rooftop agonizing over whether to cover the position.
It's now or never. Mark, we got to sell. Okay, sell it all. In real life, it wasn't so dramatic. By the spring of 2008, we began to worry that the government would eventually bail out the system and that would cause our trade to go against us. So after making a great deal of money in the positions we decided to cover. What and how did we cover? We were long credit default swaps on tranches of asset-backed securities and CDOs. We had positions with Goldman Sachs and Deutsche Bank and we called the desks at both firms and asked for prices at which we would cover. They gave us the prices. We found them acceptable and said we would take those prices. What they did on their end is not something I thought about much.
This last Monday, May 18th, we posted an interview with Bob Brackett, the energy and mining analyst at Bernstein, partially because of the war and the resulting increase in the price of oil. There's so much going on in Bob's sector, and we explored it all. It's a great story, so check it out. Next Monday, May 25th, Memorial Day weekend, we will post an interview with Peter Armitage, the defense and aerospace analyst at Baird. Given the war on Iran and the continuing war in Ukraine, Peter's coverage could not be more relevant. We mostly focused on defense companies and which ones are best positioned. So, I hope you tune in. Be sure to check out our website, realismanplaybook.com. If you're enjoying these weekly wraps and our podcast, we kindly ask that you support the channel by subscribing to our YouTube channel and to our audio channels, The Real Eisman Playbook. Subscribing is the best way to help us expand this community to more like-minded individuals such as yourselves, and we greatly appreciate your support. That's the wrap.
This podcast is for informational purposes only and does not constitute investment advice. The hosts and guests may hold positions in stocks discussed. Opinions expressed are their own and not recommendations. Please do your own due diligence and consult a licensed financial adviser before making any investment decisions.
