Global Markets at New All-Time Highs | Canada's Big 6 Banks Report

The Week in Review

It was another memorable week in the markets, with most of the major benchmarks ending the week higher, highlighted by the Nasdaq Composite joining the S&P 500 Index in record territory for the first time in over two years. As it stands today, the TSX is still around 2% below its 2022 high.

We also saw the end of February trading this week, highlighted by the S&P 500 marking its strongest first two months of the year since 2019.

For the month of February, the S&P 500 rose 5.2%, which marks the 5th strongest February since 1980. It also extends its winning streak to four months in a row, with the index gaining 21.5% over that time period.

And globally, the German DAX, French CAC and Japan’s Nikkei all hit new all-time highs during the month.

In economic news, the U.S. core PCE price index, the Federal Reserve’s preferred inflation measure, was reported at 2.8% year over year, now the lowest since March 2021.

Just for fun, take a look at the stock market chart above, and its response to this new price data. The week was shaping up to be pretty uneventful, but when the PCE data was released on Thursday, everything headed north.

This latest data appears to have calmed any concerns over the Labor Department’s earlier release that showed the CPI rising by 3.9%, above expectations of 3.7%.

In Canada, this week’s GDP release showed growth rebounding in Q4, coming in at 1% and avoiding what was expected to be confirmation of a technical recession.

In this Edition of The Pulse:

• Big Banks Earnings Breakdown

• Airline Checked Baggage Fees Taking Off

• Elon Musk is Suing OpenAI & Sam Altman

• The Body Shop Files for Bankruptcy Protection

• Wendy’s Plans to Test Surge Pricing

• Market Movers | Winners & Losers

• Other News This Week

THIS WEEK’S POLL QUESTION
(Results in Next Week’s Newsletter)

LAST WEEK’S POLL RESULTS

On June 1, 2024 will the S&P 500 be trading at a higher or lower level than today's 5,088.80?

S&P 500 Weekly Overview

S&P TSX Weekly Overview

Overbought

The Relative Strength Indicator (RSI) can provide a signal that suggest a stock is either overbought or oversold. A stock that has an RSI over 70 is considered to be in “overbought” territory. This might suggest that the stock is due for a pullback, however it is not a recommendation to sell. Always perform your own due diligence.

Oversold

A stock that is trading with an RSI below 30 is considered to be in “oversold” territory. This might suggest that the stock is due for a recovery, however it is not a recommendation to buy. Always perform your own due diligence.

FINANCIALS
Big Bank Breakdown

Despite a bit of trepidation leading up to earnings, Canada’s Big 6 banks all reported Q1 2024 earnings this past week, and I’d say that for the most part it was a pretty decent round of earnings.

As I reported on our YouTube channel this week, analysts have been anticipating earnings drops as much as 12% year-over-year, and they cite higher loan loss reserves and risk associated with commercial real estate as the biggest factors.

After the dust had settled on earnings this week, only the Bank of Montreal missed analysts’ expectations. The Royal Bank, Scotiabank, National Bank, CIBC and TD Bank all beat estimates.

Let’s take a closer look at each of the banks:

Bank of Montreal

• Earnings Q1 2024: $1.29 billion ($1.73 per share)

• Earnings Q1 2023: $133 million ($0.14 per share)

• Adjusted EPS: $2.56 per share

• Analysts’ expectations: $3.02 per share (adjusted)

• Dividend: $1.51 per share

As I noted, Bank of Montreal is the only bank to come in below earnings expectations. The bank booked $627 million in provisions for loan losses, more than expected and up from $217 million in the prior year. Total revenue was up 50% to $7.7 billion, a direct effect of the Bank of the West acquisition.

Scotiabank

• Earnings Q1 2024: $2.2 billion ($1.68 per share)

• Earnings Q1 2023: $1.76 billion ($1.35 per share)

• Adjusted EPS: $1.69 per share

• Analysts’ expectations: $1.61 per share (adjusted)

• Dividend: $1.06 per share

Revenue for the quarter was $8.4 billion, up 6% year over year. In an interesting twist, expenses also grew by the same 6%. BNS set aside $962 million in provisions for credit losses, above expectations and compared to $638 million in the same quarter last year.

Royal Bank

• Earnings Q1 2024: $3.6 billion ($2.50 per share)

• Earnings Q1 2023: $3.2 billion ($2.29 per share)

• Adjusted EPS: $2.85 per share

• Analysts’ expectations: $2.80 per share (adjusted)

• Dividend: $1.38 per share

Royal Bank’s Q1 profits beat expectations, and the bank saw revenue of $13.5 billion, a slim 1% increase year over year.
Provisions for credit losses jumped to $813 million, up from $532 million in Q1 last year.

National Bank

• Earnings Q1 2024: $922 million ($2.59 per share)

• Earnings Q1 2023: $876 million ($2.47 per share)

• Adjusted EPS: $2.59 per share

• Analysts’ expectations: $2.36 per share (adjusted)

• Dividend: $1.06 per share

National Bank beat analyst’s earnings expectations, reporting a boost in Canadian banking and capital markets. The bank set aside $120 million in credit loss provisions, up from the $86 million in the same period last year. Revenue was $2.71 billion, up 6% in the quarter, compared with expenses of $1.45 billion, a 4% increase from Q1 2023.

CIBC

• Earnings Q1 2024: $1.73-billion ($1.77 per share)

• Earnings Q1 2023: $433-million ($0.39 per share)

• Adjusted EPS: $1.81 per share

• Analysts’ expectations: $1.68 per share (adjusted)

• Dividend: $0.90 per share

CIBC also beat expectations, booking revenue of $6.22 billion, a 5% increase year over year. Expenses decreased 22% to $3.47 billion, however on an adjusted bases, grew 3%.
Provisions for credit losses in the quarter were $585 million, higher than anticipated and up from the $295 million booked a year ago.

TD Bank

• Earnings Q1 2024: $2.8-billion ($1.55 per share)

• Earnings Q1 2023: $1.58-billion ($0.82 per share)

• Adjusted EPS: $2.00 per share

• Analysts’ expectations: $1.89 per share (adjusted)

• Dividend: $1.02 per share

Finally for this quarter, the TD Bank beat analysts’ estimates, as the bank recorded record revenue in its capital markets division. The bank expects to book around $400 million in pre-tax savings in 2024 after trimming expenses, including job cuts. TD set aside $1 billion in provisions for credit losses, compared with $690 million in Q1 2023. Revenue was up 12% to $13.7 billion, and expenses fell 1% to $8 billion.

TRANSPORTATION
Airlines Come With More Baggage

Joining in on the trend of nickel and diming passengers to the brink, both Air Canada and WestJet have recently hiked fees for first checked-bags.

After February 27, Air Canada charges $35-$42 for the first checked bag in North America, the Caribbean, and Central America, mirroring WestJet's changes that came into effect February 14th. 💘 Happy Valentines Day.

What a change from the ‘old days’, circa 2014, which was when the era of free checked bags for all domestic flights ended.

McGill University's Karl Moore notes airlines see it as an opportunity to increase revenue, despite potential customer backlash.

An ironic twist in this story is that rising checked-bag fees may only drive more passengers to choose carry-ons, worsening cabin space constraints. While some airlines charge for cabin baggage, Air Canada and Westjet maintain a policy of one free overhead bag.

I’m not sure about you, but every time I’ve flown over the past few years, it seems like there’s a stampede to the front of the boarding line to make sure you get a spot to store your carry-on bags. On more than one occasion I’ve been in that sad group that is too far back and you’re forced to check your carry-on at the gate, which basically wipes out the whole reason to avoid checked bags in the first place.

Beyond baggage fees, other charges are also on the climb. Flair Airlines recently doubled change and cancellation fees, further adding to frustration among passengers.

And in what’s probably the most disingenuous take on this whole issue, airlines argue that ‘unbundled fares’ let customers pay for their specific needs and gives them the option to travel for less if they choose fewer options. Yes folks, they’re only raising these fees because it gives us more options and improves the passenger experience.

Navigating air travel now involves not only choosing destinations but also navigating a maze of fees. As costs escalate, travelers are well advised to weigh their options and budget wisely for smoother journeys.

LEGAL MATTERS
Elon Musk Sues OpenAI

Why does so much drama always shadow Elon Musk?

In the latest installment of Elon’s escapades, he has filed a lawsuit against OpenAI and its CEO, Sam Altman, alleging a breach of contract, claiming that OpenAI has strayed from its original mission of developing AI for the betterment of humanity, instead focusing on profitability since its inception in 2015. Musk seeks to compel OpenAI to make its research and technology accessible to the public and prevent the startup from exploiting its assets for financial gain.

The lawsuit underscores the tensions between Musk and OpenAI, particularly regarding the influence of Microsoft, a major funder of the startup. Musk hasn’t held back in his criticism of Microsoft's involvement with OpenAI and has advocated for AI regulation, leading to his resignation from OpenAI's board in 2018.

Meanwhile, Musk has launched his own AI venture, xAI, aiming to challenge tech giants with innovations like Grok, a ChatGPT competitor focused on truth-seeking.

Often when Musk has something to say, a lot of people listen and take action. However, in this case, despite Musk's concerns about the risks of AI, technologies like ChatGPT have gained widespread adoption, fueling competition among Big Tech companies to develop their own generative AI offerings. I think this is one of those situations where the lure of AI is so powerful that even though some might not like exactly how are playing out, they still can’t bring themselves to actually not use the technology.

My Take: Elon Musk's lawsuit highlights the need for careful ethical stewardship in the development of AI technologies. As someone familiar with navigating complex regulatory landscapes which are prevalent in the financial world, it's clear that ethical considerations must be at the forefront of technological innovation.

If the case does go to trial, witnesses are expected to be a mix of humans and chatbots. Lawyers are particularly excited about questioning the chatbots, hoping “for the first time in history to get a straight answer in court." 😊

RETAIL
Body Shop Foundation Wearing Off

The Body Shop, which of course is celebrated for its commitment to cruelty-free products, is facing some real challenges in Canada and the United States. The company has announced plans to close nearly a third of its Canadian stores and is seeking creditor protection.

The decision impacts 105 Canadian stores and over 700 employees, with 33 stores immediately undergoing liquidation sales and the complete suspension of e-commerce operations. Similarly, the U.S. segment has filed for Chapter 7 bankruptcy, closing all its stores.

These restructuring efforts are throwing a wrench into recent Canadian initiatives, including partnerships with Loblaw Cos. Ltd., and challenging the company’s efforts to diversify.

The Body Shop's troubles underscore the retail industry's volatility amid economic uncertainties. It’s all well and good to focus on commitment to ethics, which resonates with many of its customers, but navigating financial difficulties demands strategic adaptation and stakeholder support.

FOOD INDUSTRY
Wendy’s Baconator Controversy

You’ll soon be able to get a burger for the price of a coffee or a coffee for the price of a burger, depending on the time of day you visit your neighbourhood Wendy’s restaurant. Or will you?

Reports came out this week that the fast-food chain is planning to disrupt the industry with a pilot project introducing "dynamic pricing", a model that adjusts meal costs based on time of day and demand levels, aiming to optimize customer experiences and drive traffic during quieter times.

CEO Kirk Tanner unveiled this initiative as part of a broader $20 million investment in digital menu boards set to launch in 2025. While dynamic pricing isn't entirely new, Wendy's approach represents a significant shift in the fast-food sector.

Despite potential benefits for traffic management, dynamic pricing faces criticism from consumers accustomed to fixed prices. However, this practice is common across sectors like airlines and retail, which suggests its potential as a future norm.

In response to wide-spread interest in this story, Wendy’s issued a statement on Tuesday, aiming to clarify its plans and calm the audience.

Wherever Wendy’s ends up going with this, experts predict dynamic pricing will become widespread, offering flexibility and cost savings for consumers. However, its implementation in fast food may pose challenges, when you consider that the industry's emphasis is on quick service and consistent pricing.

As attractive as the potential benefits of dynamic pricing for businesses are, Wendy's and others have to carefully balance innovation with maintaining consumer trust and loyalty amidst this significant change.

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💳 Are our credit habits putting our economic stability at risk? I strongly suggest everyone read this excellent article by George Athanassako who lays out a sobering view on how society is challenging the system, continuing to spend and rack up debt, just daring the bubble to burst.

🛬 In the midst of ongoing troubles and in a reversal of the decentralization trend, Boeing is in talks to buy Spirit Aerosystems, trying to bring its former subsidiary back in house to get a firmer grip on safety protocols.

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This content is intended for information purposes only. This content has been prepared by Beavis Wealth and represents its assessment at the time of publication. Beavis Wealth is compensated under this arrangement by BMO Exchange Traded Funds. The content contained herein does not necessarily represent the views of BMO Global Asset Management. The views expressed herein by Beavis Wealth are subject to change without notice. The content contained herein is not, and should not be construed as, investment advice to any party. Any securities described herein must be evaluated relative to the individual’s investment objectives and risk tolerance, and professional advice should be obtained with respect to the individual’s particular circumstances.

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