Weekly Wisdom – November 9, 2023

By Hightower Great Lakes on November 9, 2023

EV Worries 

Electric vehicles (EVs) have seen strong demand and investment, but for the first time that’s changing. There is a continued demand for electrification and decarbonization, but still 85% of car sales are fossil fuel engines and the pace of change for consumer preference appears not as robust as what many may have predicted.

A number of EV manufacturers have cut prices. Tesla (TSLA), for example, cut prices as much as 30% to help bolster its volumes.[1] Multiple original equipment manufacturers (OEMs) are delaying further EV investments.

One example on this front is that Ford (F) announced it will postpone its previously announced ~$12 billion in EV investments which were set to go towards expanding production. The company cited that customers are not as willing to pay the extra money to buy an EV over a cheaper internal combustion or hybrid vehicle.[2]

We are also seeing some inklings of doubt on the raw material side as well. Lithium is one of the key materials within an electric vehicle battery. One lithium producer and distributor, Livent (LTHM), noted in their earnings call that “On the demand side, we can see that customer buying activity for lithium in the third quarter was weaker than what end market demand indicators would imply”.[3]

These aforementioned factors that may be harbingers of a pause in EV demand have much to do with the higher interest rate environment. Elevated rates are making it more expensive to finance a vehicle, with average car loan interest rates currently sitting at 9%.[4] Despite the softer EV volumes the industry has expanded 6% sequentially in the third quarter.

Electric vehicle sales are also up 50% for the first nine months of the year compared to the year earlier.[5] Automotive manufacturers have placed big bets, which now look more uncertain given the difficult rate environment and raw material challenges. Now it is up to the consumer to determine the future of EVs.

Chart 1 Global EV Sales 2016-2023[6]:

UAW Strike

On Monday October 30, General Motors (GM) and the United Auto Workers (UAW) struck a tentative deal, ending the six-week campaign of auto assembly strikes. The UAW was able to win record pay increases for the workers at the Detroit three automakers, the main economic gain is providing a 25% base wage increase for full-time workers, with some reaching 33% in total increases.

In addition to the pay increases, General Motors (GM) has agreed to invest $4 billion at its Orion, Michigan, plant for future EVs and $2 billion at the plant in Spring Hill, Tennessee.[7]

Chrysler parent company, Stellantis (STLAM), agreed to a 25% base pay hike, better retirement benefits and improvements in employee compensation. In addition, they agreed to build a $3.2 billion battery plant and invest $1.5 billion in a mid-size truck factory in Illinois under this new agreement.[8]

Deutsche Bank recently estimated the overall cost increase of the agreement at Ford (F) to be $6.2 billion over the terms of the agreement, $7.2 billion at General Motors (GM) and $6.4 billion at Stellantis (STLAM).[9]

To recap, this strike began on September 15 and nearly 50,000 workers eventually joined. Shawn Fain, the UAW president, doesn’t seem to be finished yet, as he called on more workers across the U.S. to organize, “Auto workers at Toyota, Honda, Volkswagen, Hyundai, and Tesla deserves contracts too.”

From airlines to trucking to auto assembly workers, we have seen unions thrive in 2023 as employees demand better compensation and benefits, and it may not be finished just yet and will likely be a headwind for inflation doves.

Earnings Update

So far, we have seen 424 out of the 500 (~85%) S&P 500 companies report earnings this quarter. Earnings growth is better than what many had expected, rising 2.5% y/y versus the negative mid-single digit expectations.

Sales growth is at 2% y/y. Both figures show an improvement in both categories from the prior season. In fact, during the second quarter reporting season, we saw a sequential earnings contraction of nearly -6% and sales growth of under 1%.

Consumer Discretionary is the earnings growth leader so far this season, with the group growing earnings at over 52% sequentially. Consumer Discretionary has continued the conversation of services versus goods, with services driving the sector’s outperformance, mainly from the travel industry.

Industrials, Consumer Staples, Financials, Information Technology, Communication Services, Utilities and Real Estate all continue to grow earnings, as well. Energy is the earnings growth laggard with the group’s earnings shrinking over -36% compared to the prior quarter as they face tough comparisons. Along with Energy, Healthcare and Materials are also facing earnings contractions.

When it comes to results versus expectations Consumer Discretionary stands out, beating earnings estimates by over 21%. Every other sector managed to exceed analysts’ earnings expectations besides one. That sector is Energy, who is the sole loser in this regard, missing consensus earnings estimates by over 1%.[10]

Chart 2 S&P 500 Change in Forward 12-Month EPS vs Change in Price 10 years[11]:

Click here to read last week’s Weekly Wisdom (11/3).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Bloomberg As Of November 4, 2023

[2] CNBC As Of October 26, 2023

[3] Yahoo Finance As Of November 6, 2023

[4] Market Watch As Of October 4, 2023

[5] The Japan Times As Of November 5, 2023

[6] IEA As Of April 26, 2023

[7] Source: Reuters. As of November 4^th, 2023.

[8] Source: Reuters. As of November 7^th, 2023.

[9] Source: CNBC. As of October 30^th, 2023.

[10] Bloomberg As Of November 7, 2023

[11] Factset As Of November 3, 2023