Balancing Weak Consumer Trends and Potential Rate Cuts

Current Consumer Spending and Sentiment

Consumer spending is currently characterized by weak sentiment, with a notable trend towards deal-seeking, particularly in China (MCD). Spending patterns are normalizing, with a shift back to services and entertainment (TGT). Inflationary pressures are causing conscious product switching (WMT), and overall sentiment remains soft amid broader economic headwinds (SBUX).

"Consumer sentiment in China is quite weak, and you're seeing both in our industry and across a broad range of consumer industries, the consumer being very, very much deal seeking. In fact, we're seeing a lot of" --- (MCD, earning call, 2024/Q2)

"In addition, business trends continue to reflect a normalization in spending patterns that first emerged more than 2 years ago, a pattern where consumers are remixing their spending back into services and entertainment outside of their homes after curtailing those activities during the pandemic." --- (TGT, earning call, 2025/Q1)

"Starbucks results for the third quarter of fiscal 2024 reflect progress against our action plans to drive traffic to our stores and realized in-store and out-of-store efficiencies, which helped partially offset the impact of continued broader headwinds in a challenging global operating environment, including softening consumer sentiment, a pervasive inflationary environment, and disruptions due to multiple international conflicts." --- (SBUX, sec filing, 2024/Q3)

"Certainly, has been some inflation and put pressure on consumers. And what we've really noticed, this started in early 2022, was some conscious switching amongst products and you can see that pronounced suddenly in the store, but based on what people are having delivered and our flexibility, convenience and other things that we have improved over the last few years have made a difference on our ability to serve more of our existing customers more often with more units and then meet some new customers as well, which is great." --- (WMT, conference, 2024/06/11)

"Trial rates of the deal are highest amongst lower-income consumers and sentiment towards the brand around value and affordability has begun to shift positively. To date, 93% of our restaurants in the US have committed to extending the offer even further into the summer." --- (MCD, earning call, 2024/Q2)

Economic Outlook and Its Influence

Concerns about geopolitical tensions, central bank policies, and economic outlooks could negatively impact asset prices and market activities (GS). However, increased manufacturing in the US and China has boosted metal prices despite uncertainties (C). Anticipated Fed rate cuts and declining inflation are expected to drive positive momentum (WFC), while investor optimism persists despite economic uncertainties (MS).

"If uncertainty and concerns about geopolitical tensions and the economic outlook remain elevated or grow, including those about central bank policy, inflation, the commercial real estate sector, and potential increases in regulatory capital requirements, it may lead to a decline in asset prices, a decline in market-making activity levels, or a decline in investment banking activity levels, and net revenues and provision for credit losses would likely be negatively impacted." --- (GS, sec filing, 2024/Q1)

"A rise in manufacturing activity in America and China have led to the advance in metal prices, outweighing uncertainty caused by geopolitical tensions and the monetary policy outlook." --- (C, press release, 2024/04/22)

"The WFII 2024 Midyear Outlook highlights economic and market forecasts, favored sectors, top portfolio ideas for the next 18 months Wells Fargo Investment Institute (WFII) today released its '2024 Midyear Outlook: Approaching the Economy's Pivot Point,' which explores WFII's belief that the pivot to positive momentum at the start of 2024 was driven by the combined forces of artificial intelligence, anticipated Federal Reserve (Fed) rate cuts, declining inflation, and the resumption of durable earnings growth." --- (WFC, press release, 2024/06/12)

"So my sense is that internationally at least there'll be a decent low level of activity through the quarter and then we'll see what the next set of either interest rate outlook or geopolitical tensions give on that." --- (BAC, conference, 2024/05/08)

""Yet despite economic uncertainty amid the revised pace of rate cuts for the year, along with uncertainty around the 2024 election, investors remain optimistic about the market." The survey explored investor views on sector opportunities for the second quarter of 2024: IT – Amid continued interest in chipmakers and AI, technology remained the top choice for investors this quarter." --- (MS, press release, 2024/04/18)

Impact of Potential Rate Cuts on Sectors

Potential rate cuts could impact various sectors differently. For Tesla, macroeconomic trends influence vehicle pricing and order rates, affecting margins. Johnson & Johnson's income benefits from higher interest rates on cash balances, suggesting rate cuts might reduce this advantage. ExxonMobil's refinery expansion helps mitigate price pressures, indirectly influenced by economic conditions tied to rate changes.

"These macroeconomic and industry trends have had, and will likely continue to have, an impact on the pricing of, and order rate for our vehicles, and in turn our operating margin." --- (TSLA, sec filing, 2024/Q2)

"The increase in income was driven by a lower average debt balance and higher interest rates earned on cash balances." --- (JNJ, earning call, 2024/Q1)

"And we completed the last largest refinery expansion in the U. S. Since 2012, adding 250,000 barrels per day of refining capacity in Beaumont, Texas in early 2023. This growth in supply helps reduce rising price pressure, easing the impact on consumers and businesses." --- (XOM, event transcript, 2024/05/29)

"The increases were primarily due to higher interest earned on our cash and cash equivalents and short-term investments compared to the prior periods due to rising interest rates and increases in our portfolio balance." --- (TSLA, sec filing, 2024/Q2)

Strategic Responses to Weak Consumer Trends

Companies are responding to weak consumer trends through strategic shifts, including leadership changes, investment in consumer-facing activities, focusing on strategic plans, monitoring spending, managing costs, adjusting capital expenditures, and enhancing service value.

"Over the past year, we've highlighted the strategic shifts we're taking as a company, including leadership and organization changes, kick-starting a multi-year innovation cycle, and creating capacity to invest in consumer-facing activities." --- (NKE, earning call, 2024/Q4)

"As we look to the rest of the year, we are focused on our strategic plan and priorities, while being mindful about the state of the consumer." --- (BBY, earning call, 2025/Q1)

"While we are actively monitoring attendance and guest spending and aggressively managing our cost base, we expect Q4 Experiences segment operating income to decline by mid single digits versus the prior year, reflecting these underlying dynamics as well as impacts at Disneyland Paris from a reduction in normal consumer travel due to the Olympics, and some cyclical softening in China." --- (DIS, press release, 2024/08/07)

"However, we may adjust our capital expenditures to support the operations of the business, to enhance long-term strategic positioning, or in response to the economic environment, as necessary or appropriate." --- (HD, sec filing, 2024/Q1)

"And that's why we're seeing those strong acquisition retention trends because it's testament to the strength of our slate, the overall improvement in the value of our service." --- (NFLX, earning call, 2024/Q1)

Financial Management and Cost-Cutting Measures

Ford is on track to cut costs by $2 billion this year. Caterpillar's restructuring efforts are reflected in their adjusted financial results. IBM's use of AI/Automation has reduced breach costs by $1.88 million.

"So, starting with Ford Blue, you indicated that you the company is on track to cut costs by $2,000,000,000 for the year." --- (Ford, conference, 2024/06/11)

"Reconciliations of adjusted results to the most directly comparable GAAP measure are as follows: (Dollars in millions except per share data) Operating Profit Operating Profit Margin Profit Before Taxes Provision (Benefit) for Income Taxes Profit Profit per Share Three Months Ended June 30, 2024 - U.S. GAAP 3,482 20.9% 3,500 836 2,681 5.48 Restructuring costs - divestiture of two non-U.S. entities 228 1.3% 228 — 228 0.47 Other restructuring (income) costs 30 0.2% 30 6 24 0.04 Three Months Ended June 30, 2024 - Adjusted 3,740 22.4% 3,758 842 2,933 5.99" --- (Caterpillar, press release, 2024/08/06)

"Intellectual property theft spiked; More than one-third of breaches involved shadow data Yet use of AI/Automation cut breach costs by $1.88 million CAMBRIDGE, Mass., July 30, 2024 /PRNewswire/ -- IBM (NYSE:IBM) today released its annual Cost of a Data Breach Report revealing the global average cost of a data breach reached $4.88 million in 2024, as breaches grow more disruptive and further expand demands on cyber teams." --- (IBM, press release, 2024/07/30)

"GM Financial continues to perform well with Q1 EBT adjusted of $700 million, in line with last year and tracking well within the full year $2.5 billion to $3 billion guidance range." --- (GM, earning call, 2024/Q1)

"Turning to the next page, I'll cover cash and debt. On cash and marketable securities, we ended the quarter at $7.5 billion, reflecting the debt repayment activity and use of free cash in the quarter." --- (Boeing, earning call, 2024/Q1)

Sector-Specific Consumer Behavior

Consumers are becoming more cautious and selective, yet willing to spend on perceived value (PEP). Balanced behavior is observed, with advertising crucial to justify price increases and drive trade-up (CL). Performance drives brand choice in less discretionary categories (PG). Different segments exhibit varied behaviors (KO). Innovation and meeting unmet needs are key (KMB).

"So do you see different behaviors happening everywhere, I think the connecting line it would be, the consumer is more cautious, the consumer is more choiceful, but the consumer is willing to spend in areas where they see value and we see it in our category, right, the more -- the parts of the category there I was referring to." --- (PEP, earning call, 2024/Q2)

"But overall, we’re seeing, I think, a balanced consumer. The key is making sure that we’re providing the reasons to use our products, and the advertising that we’re executing across the market is very, very important to, one, justify the price increases that came through the category last year, but really to drive trade-up in the categories to ensure consumers see the real value and science-driven benefits of our products in our portfolio." --- (CL, earning call, 2024/Q1)

"Now, certainly there are some consumers that are, I’m sure, under increased pressure and are probably modifying their behavior and purchases correspondingly, but in our categories--and remember, of course, these are less discretionary categories, these are daily use categories where performance drives brand choice." --- (PG, earning call, 2024/Q4)

"Like the consumer is it means a lot. So underneath the consumer, there are different segments with different behaviors driven by different dynamics." --- (KO, conference, 2024/06/06)

"To harness our strengths, we will sharpen our strategic focus to accelerate pioneering innovation to capture the significant growth available in our categories by solving big unmet consumer needs, optimize our margin structure to deliver superior consumer propositions at every rung of the good, better, best ladder and wire our organization for growth to make our enterprise stronger and faster." --- (KMB, conference, 2024/05/30)

Future Adaptations and Strategies

Amazon, Tesla, Google, and Microsoft are adapting to weak consumer trends and potential rate cuts by accelerating AI solutions, launching new models earlier, redirecting resources efficiently, and evolving commercial models with AI tools. These strategies aim to drive growth, efficiency, and resilience in a dynamic market.

"We are confident in our plans to drive sequential growth throughout the year as we accelerate our AI solutions and maintain our relentless focus on execution, operational discipline and shareholder value creation in a dynamic market. With the advent of Hala Point, Intel aims to support research for future brain-inspired AI, and to tackle challenges related to efficiency and sustainability in today’s AI rollouts." --- (AMZN, press release, 2024/05/02)

"We've updated our future vehicle lineup to accelerate the launch of new models ahead, previously mentioned startup production in the second half of 2025, so we expect it to be more like the early 2025, if not late this year." --- (TSLA, earning call, 2024/Q1)

"In terms of the challenges, I think making sure, I think we are constantly, I think it's been a mindset shift which we've been driving across the company to make sure that we are embracing this opportunity, but being very efficient in how we are approaching it, making sure we are redirecting our people to the highest priorities across the company, building on our 20 years of experience and driving machine efficiencies year-on-year so that we can put our dollars to work as efficiently as possible." --- (GOOG, earning call, 2024/Q1)

"I think there's a lot of opportunity for us to expand our TAM there. And then a little bit like I alluded to before, I do think there's going to be an evolution in commercial models, which is if we can create these AI recruiting tools to be as productive as I know they can be, the decision may moving forward maybe as if you're a CHRO, hey, I maybe I used to say I needed to add another 50 additional recruiters every year to my company." --- (MSFT, conference, 2024/06/06)

"And at the end of it, we'll be much stronger and much more resilient to deal with the future because the future is really bright." --- (TSLA, earning call, 2024/Q1)