Debt Deal Optimism, AI Rally Can’t Mask Market Fears Ahead of the Weekend

Things don’t look as bad going into the long Memorial Day weekend. It’s encouraging that concrete details of a possible debt-ceiling deal have emerged, even if it’s not a sure thing that any agreement will make it through both houses of Congress before the federal government runs out of money.

The tensions with China have been overshadowed by euphoria over artificial intelligence. It’s been an excellent week for Nvidia, which could become the first $1 trillion chip company.

On the other hand, there are still plenty of ominous signs out there for investors. Stocks haven’t done that well overall this week, even with a company the size of Nvidia jumping 24% in a day. And spare a thought for Cathie Wood and her flagship ARK Innovation ETF, which is designed to capitalize on high-growth technology stocks. It offloaded Nvidia last November, before a surge of more than $500 billion in the chipmaker’s market capitalization.

Even a deal for a debt-ceiling limit could contain as much dark cloud as silver lining. Getting to an agreement, while averting short-term disaster, opens up using the debt ceiling as leverage in future debates—raising the risk of higher borrowing costs for the government down the line.

Interest rates are probably still heading higher. Friday’s New PCE inflation figures will add color and might encourage the Federal Reserve to pause in June, but the big picture is still that inflation remains too hot.

It’s possible to feel good for the weekend, but things could change quickly again next week.

—Brian Swint

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Nvidia Could Become the First $1 Trillion Chip Stock

Nvidia might become the world’s first trillion-dollar chip stock. When it will reach that exalted level, though, is unclear.

• Shares of the chip maker surged 24% on Thursday, and were flat in the early Friday premarket, following an earnings-and-guidance release that has been described as “incredible,” “unfathomable,” and the “greatest beat of all time.”

• That’s not hyperbole. Nvidia reported a first-quarter profit of $1.09 a share, ahead of forecasts for 92 cents, while offering second-quarter revenue guidance of $11 billion, nearly $4 billion more than the $7.15 billion consensus.

• The recent gains in both the stock and the business give Nvidia a chance to do something no chip company has done—cross $1 trillion in market capitalization.

What’s Next: But how much higher can Nvidia really go? In the short term, perhaps not very far. Katie Stockton, founder of Fairlead Strategies, notes the stock’s move higher on Thursday will generate weekly and daily sell signals. “This suggests a short-term peak is likely in the long-term uptrend,” she writes.

—Ben Levisohn

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Marvell Joins Other Tech Firms Embracing AI Opportunity

Marvell Technology
is the latest firm to outline its opportunities in artificial intelligence, forecasting its AI revenue to double in fiscal 2024 and continue to increase rapidly in the next few years. CEO Matt Murphy said AI is now a “key growth driver” for the firm.

• Marvell sells chips and hardware products for the data center, 5G infrastructure, networking, and storage markets. Shares jumped as much as 20% in after-hours trading. Management cited the evolution in cloud computing as a benefit for Marvell’s product line.

• After beating profit estimates for the April quarter, with revenue of $1.32 billion, Marvell forecast a range of potential revenue for the current quarter with a midpoint of $1.33 billion. That is also above the current consensus estimate.

• A surprisingly strong revenue forecast from
  Nvidia
  on Wednesday ignited a rally in stocks of companies that stand to benefit from AI demand.
  Palantir Technologies
  shares rose 5% on Thursday and
  Arista Networks
  surged 10.6%.

What’s Next: Commerce Secretary Gina Raimondo and her Chinese counterpart met Thursday in Washington to help restart dialogue between the two nations as pressure builds on the Biden administration to respond to China’s blacklisting of American chip maker
Micron Technology,
The Wall Street Journal reported.

—Tae Kim and Liz Moyer

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Memorial Day Weekend Kicks Off With High Hopes for Air Travel

Memorial Day weekend kicks off today with high hopes for a surge in airline travel and lower gasoline prices encouraging holiday excursions. The flip side is higher costs for backyard barbecue food compared with last year, putting shoppers on the hunt for bargains.

• United Airlines
  is preparing for its busiest Memorial Day holiday in more than a decade, estimating 2.9 million passengers from Thursday to Tuesday.
  American Airlines
  expects to fly 2.9 million people.

• United CEO Scott Kirby said this week it has 10% more pilots on standby and 25% more spare aircraft this year. A United spokeswoman told Barron’s the airline has hired 7,000 new employees so far in 2023, after hiring 15,000 last year.

• Separately, up to 82% of consumers want bargains, MarketWatch reported, citing Numerator data. Barbecue hosts will find that ground beef prices are 1.5% lower than last year, but the price of bone-in chicken is up 4.3%, and steak costs 2.8% more, according to the Bureau of Labor Statistics.

• Datasembly found that barbecue staples are more expensive than last year. A 32-ounce bottle of ketchup costs 27.94% more, and a 20-ounce mustard container is up 13.04%. An eight-pack of hot dogs is 3% more, and buns are 7% more.

What’s Next: Online travel agency Hopper predicts the most expensive Memorial Day weekend for international travel in more than five years, with airfares to Europe up 50% from last year. That could benefit United, American, and
Delta Air Lines,
which are more exposed to international travel.

—Callum Keown and Janet H. Cho

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Illumina CEO Survives in Split Decision for Carl Icahn

Activist investor Carl Icahn failed to topple CEO Francis deSouza of gene-sequencing giant
Illumina
in a proxy battle that culminated on Thursday. He did succeed in getting one of his three nominees onto the company’s board, and knocking out its chairman. Illumina shares fell 9% on Thursday.

• Icahn sought to replace deSouza as CEO, but one influential proxy advisor recommended investors vote against his director nominee. Instead, deSouza was re-elected, though shareholders didn’t approve compensation for deSouza and other top executives in a nonbinding vote.

• Icahn’s nominee and employee Andrew Teno will take the board seat once held by Chairman John Thompson, who was voted out. A new chairman will be named later. DeSouza and Thompson offered Icahn one board seat and approval of a second, but Icahn’s refusal set off a proxy war.

• What comes next is uncertain. Illumina shares are down more than 60% since August 2021, when it closed its $7 billion acquisition of the cancer-detection company Grail without waiting for antitrust approval. Icahn wanted Illumina to quickly sell Grail. It isn’t clear if Illumina can accelerate that process.

• Icahn is facing criticism of his publicly traded
  Icahn Enterprises
  from a short-selling firm named Hindenburg Research. Activist investor Bill Ackman has sided with Hindenburg’s allegations. But Icahn called the allegations self-serving and vowed to fight back against Hindenburg.

What’s Next: The Federal Trade Commission and the European Commission both want to block the Grail merger; Illumina is contesting both orders in U.S. and European courts. If it loses either case, Illumina will need to divest Grail and pay $458 million in fines in Europe, plus an expected significant tax bill.

—Josh Nathan-Kazis and Janet H. Cho

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American Eagle, Gap, Ralph Lauren Offer Mixed Consumer Trends

Retail earnings reports show a divergence, with affluent consumers maintaining their spending, while lower-income consumers are holding off on nonessential purchases. Mall retailer
American Eagle Outfitters
confirmed this trend, cutting its revenue outlook. It now sees sales flat to slightly down this year.

• American Eagle stock sank 11.9% on Thursday. An earlier forecast had sales trending flat to slightly higher this year. CEO Jay Schottenstein said spending by mid- to low-income customers seems volatile.

• Fellow clothing retailer
  Gap
  posted a surprise first-quarter adjusted profit, though revenue fell 6%, and same-store sales fell 3%. Shares jumped 16%. Gap, which has been a turnaround story, expects second-quarter net sales to drop in the mid- to high-single digits from a year ago.

• Despite a forecast drop in sales, Gap believes its margins will expand in both the second quarter and the remainder of fiscal 2023. First-quarter adjusted gross margins increased 5.7 percentage points compared with the previous year.

• Luxury apparel maker
  Ralph Lauren
  beat expectations for fourth-quarter results, benefiting from a 13% surge in revenue from Asia that offset slight drops in North America and Europe. Ralph Lauren expects first-quarter revenue to be “down slightly.” Its stock rallied 5.3%.

What’s Next: Beauty products chain
Ulta Beauty
fell 8.2% late Thursday after missing same-store sales expectations and keeping its full-year same-store sales outlook, citing an “evolving” consumer backdrop. Same-store sales rose 9% in the first quarter and are seen rising 4% to 5% for the full year.

—Janet H. Cho

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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner