The Health Of The Consumer… And An Old School Options Action On Apple 5/7/26

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1:17Plus a slew of after-hours earnings from semis to crypto, from travel to healthcare. We'll dig into the numbers behind all these moves and bring in the trades. And housing headaches, Whirlpool slashing guidance and homebuilder stock sinking. We'll talk to Zillow's senior economist about what he sees next for the industry and how much longer the pain could last. I'm Melissa Lee, coming to you live from Studio B at the NASDAQ. On the desk tonight, Tim Seymour, Karen Feinerman, Mike Coe in person, day two, and Carter Braxton Wirth. Stocks closing near session lows even after the NASDAQ and S &P hit fresh intraday records early in the day.

1:50And as we look under the surface, a couple of earnings reports paint a mixed picture for the consumer. First, there was McDonald's seeing a pullback in its lower-income consumer, who it expects to face continued pressure from higher gas prices. The fast food giant did beat first-quarter estimates, though, as a gained share among wealthier households. That coming at the expense of chains like Shake Shack, whose shares posted their worst day ever. Earnings, revenues, and margins all contracted in its latest quarter. The company pointed to weather disruptions, plus shrinking tourism in the U.S. and Middle East, with higher beef prices also having an impact.

2:22Consumers also don't seem to be trading burgers for healthier habits. Planet Fitness plunging over 30 percent to close at April 2020 lows. After cutting its full year outlook, the company seeing slower member signups and pausing price hikes for its higher end black card plan. Even man's best friend is feeling the pinch. Animal health company Zoetis hitting levels last seen January 2019 after its report. The CEO flagging growing price sensitivity among pet owners who booked fewer vet visits and opted for lower cost care options. And just yesterday, Kraft Heinz sounded the alarm on the consumer, saying shoppers are running out of money and dipping into savings in the current environment.

3:01So what do all these signs of the consumer mean for the macro picture? Tim, what are your thoughts here? Well, it was two weeks ago we heard that Domino's actually told us that the consumer sentiment was at the lows they had seen in COVID. That sounded shocking, except for when McDonald's says things are not improving and they might be getting worse. You combine that. We got a final Michigan consumer confidence that was effectively record lows back to 78 in the final print. We're back to hearing what, you know, we love these special terms and phrases and metaphors. I mean, the K-shaped economy is very K-shaped and special K probably is next to tell us that.

3:38So, I mean, I think it's real. I think it's real. And I think the companies that have the ability to be resilient like a McDonald's with their, you know, the Super Mario meal you love to go out and buy, you know, I mean, who doesn't? I mean, but in other words, they have ways to get around it and to actually price up a little bit. They're going into beverages, we hear. But there's no question. Add in student debt. You know, we heard from Warby Parker student debt. We've heard about unemployment that's starting to take place in lower income consumers, but also just call it first, second job out of the market.

4:10So there are different dynamics here. And what everybody says and seems to say is they think that their energy costs are going up at least another 50 cents to a dollar in the next year. So they people likely feel what the CEOs in the energy sector are saying, which is that you ain't seen nothing yet. Yeah. I mean, gas prices above 450 a gallon at this point. Insurance costs are also up, which is weighing the consumer here, Mike. Yeah. I mean, and in some areas, of course, gas prices are substantially higher than that. I mean, I'm visiting. I live in California. Premium is more than seven bucks a gallon where I live, or at least it was when I left.

4:43It's probably closing on eight by the time I get back. That's how fast it's going up. Is premium 87, 89, or 90? Are you like a 94 guy? That's 91. They don't have 94 in California because they have special formulations, which is another problem, actually, for them on the energy side. Well, they have proprietary formulations for gasoline. That's one of the reasons why the prices are so much higher there. But it's the most populous state. And it is a state that has a lot of drive-thrus. It is a state that is sort of known for fast food. And, you know, the prices for many of these things had already gone up.

5:12So the consumer was being pressured by higher beef prices and all the rest of it, even before the gas prices hit. And that's the thing that has both the most immediate but also the most visible effect on consumers. It is something that is going to set them back a little bit. They look at it, they have shock. Yeah. Karen? So I think we're going to see more and more. I think it's not getting better, regardless of whether we're in a ceasefire or not. I think we're going to see this oil thing for a while. And I think there's this the real K of it is the top of the K. They're long stocks, so they feel very different than someone who is, you know, really the percentage of their overall spend, which is spent now on gasoline, is relevant and expensive to them, where that same upper end of the K who's in the market, not so focused, not so sensitive.

6:01So I think we're going to see things like we saw, I think for something like a Cava coming up in two weeks, I think that we saw Shake Shack, and I think of those as similar. Right. Sort of the price point is higher. Right. I think we'll probably see some pressure there. And I think, you know, something like tapestry, which traded, I don't know if we'll get to it later. I forget. I'm sorry if it's out of order. But tapestry, I thought, wouldn't be the first time. All right. Well, at least if your phone rings, then I'm totally out. So tapestry, I actually thought it was sort of muted guidance. The quarter actually wasn't bad.

6:39But we haven't seen a quarter that really had a full oil move in it. Right. Only partially. I mean, the real tell to what you're discussing, of course, is that if you look at the equal weight S &P 5R consumer discretionary sector, which, of course, the actual sector, Amazon, Tesla, Home Depot, 50 percent weight. But if you take the equal weight index and look at its relative performance to the actual, it's making five year lows right now, which speaks to under the surface. Obviously, Amazon's holding up well. So it's Tesla generally. There's there are problems that have been going on for a while.

7:11This is not a new thing. Now, when you get these drop and gaps like a shake shack and others, it speaks to something that is not likely over. I mean, what is going on in the market is very much what is going on in the economy in that you have a certain sector that sort of that stays strong and papers over the weaknesses in the other parts of the market or papers over the weaknesses in the other parts of the economy. And so at what point do you start thinking like this is the setup is not healthy and we're going to see it come home to roost? You know, it's great that the top line EPS for the market is going to have one of its best EPS growths after a very strong 25.

7:50And that's exactly, you know, we just come out of the period where you got all the gusto in there. And then I would just get back to parts of discretionary that really are the outer edge of the discretionary dollar and the place where things are tapped. and I go to athleisure and I go to Lulu and I go to Nike and I go to these places that they're brand specific issues, but there's no question. At some point you look in your closet and you've got like 15 pairs of running shoes you don't need anymore. So I think we're in an environment where we are not even beginning to digest the impact of AI job loss.

8:22And I don't know what that means. And I know that's really, again, fed into the younger, call it demographic of people looking at that first and second job. A lot of them seem to be getting pushed out of the market here. We know that there's a dynamic where the Fed is not that worried about inflation because they kind of haven't told you that they think that I might be putting words in the Fed here, but I think that there's some sense that the labor market could be softening. And if we get any sign of that, equities up 26 percent on the Nasdaq in 32 days, that's a little scary. Well, you know what is interesting?

8:56I was looking at this earlier today with respect to the Nasdaq specifically because that's basically the basket of winners. And I was looking basically at the price of 10 % out of the money calls to 10 % out of the money puts. And I was comparing that to how that was two weeks ago, a month ago, two months ago, and back on January 28th, which was the prior high before the February 28th strikes that took place. And what's interesting is that the bullishness in options for the NASDAQ index right now is higher now than it was in January at the prior highs. So, but look, 85 % of the NASDAQ is those top 25 stocks, which is basically all the big trade right now, except for Costco and Walmart, which is also in that basket.

9:35Can I ask Mike a question? Yes. So that skew, that just doesn't seem crazy to me. Is that a sort of historical high? I know it was higher than you're saying January, but over the course of the market in however long timeframe you want to think. Yeah, so there's a couple of different ways to think about when you're looking at options prices, upside calls versus downside puts, and also where volatility is right now. So the way most of us think about concern and complacency, we look at something like the VIX index. And we can see that's come in, it's actually below the historical average for VIX over the longest period of time, probably 19 and a half is what that is.

10:11But that includes a lot of really woolly periods in it. What we have right now is sort of mean volatility at the money, but it's the upside calls relative to the downside puts that are seeing that strength. So this is contextual the way I'm providing it right now, which is to say that we were pretty bullish in January, let's be honest. And it's more bullish now. That's kind of interesting. It's on the back of the earnings. That's the story. Some new data gives more insight into the widening gap between high and low income households. For more on the K-shaped economic divide, let's get to Steve Leisman.

10:42Steve, what are you seeing? Hey, Melissa, you have two studies looking at wealth disparities, One on wages, the other on gas spending, showing the K-shaped economy getting bigger and wider. Bank of America, sorry, the Bank of America Institute, finding the wealthiest Americans enjoy much bigger wage gains than middle and lower income families on a consistent. And you can see their growing basis. That's that orange line there. The report, it comes from actual bank account data, found wage gains of 6 % year on year for the highest income group, 1.5 % for the lowest. B of A economist David Michael Tinsley says gap could relate it to bigger bonuses.

11:20Also, automation could be, you guys were just talking about this, could be undercutting the bargaining power of workers at the bottom end of the wage spectrum. Meanwhile, on the spending side, the surge in gas prices hitting the poorest Americans, as you might expect, the hardest. The New York Fed finding that the wealthiest households, they paid more, but they kept their gas consumption the same. Low-income families, they cut back on their gas consumption to make ends meet. But overall, you can see here real incomes adjusted for inflation have been negative in four of the last six months. Inflation taking a bigger bite from those paychecks.

11:55Meanwhile, you know, Disney, Starbucks, GM, I looked at their reports. They said the consumer still looks healthy. Of course, Whirlpool saying appliance sales have fallen to recession levels. The head of Kraft Heinz saying today consumers are literally running out of money towards the end of the month. So I guess that's why you got the guys around the table, Melissa. They can figure out how to trade it. A walk us through what the thinking is in terms of AI. AI has led to inflation in many different pockets of the economy. We see it in memory prices, for instance. We see it in electricity prices, which consumers are acutely appealing.

12:27And yet AI, in theory, should be deflationary in the long run. I guess there's a handoff period, though, that has to happen. Yeah, there's a transition period. There's two forces of, let's say, inflationary forces that come from AI. One is, I think, the one when it comes to the cost of capital. You're going to spend a trillion dollars. You're going to really push up the demand for capital, and that raises rates. But there's another thing, and that's the equipment that you buy. And I'm looking now at this index we have, which is an index of inflation in equipment. And that's up like 5.7 % in the first quarter on an annualized basis.

13:07And that was either negative or zero for much of the time before the pandemic. It popped up after the pandemic. It kind of came back down, but now it's popping up again. You know, Melissa, there's a calculation I did. If you look at information processing equipment, it's up 33 % year over year. But take that out of overall equipment spending, and it's just 3%. So it's all in the computer side, and that has an inflationary impulse before perhaps the productivity seeps in, and then you have a deflationary impulse. Steve, if we think about the consumer and the inflationary impact, as you said, essentially, you know, negative wage growth.

13:48Are there any readings as the Fed or any of the regional surveys giving us a sense of where this number is going? And I mean, if we're extrapolating here, it's going a lot more negative. And what does the Fed think about that? Well, first of all, it's Melissa's job to pick the winner of the segment, but it was Karen earlier who I would pick and put that on the I would say when she talked about this idea that there's half of the country that owns stock and they're enjoying a wonderful wealth effect and half of the country that doesn't. There's also a part of the folks out there that think somehow you can raise gas prices as much as you raise gas prices and not have any issue when it comes to the consumer.

14:30That stuff doesn't disappear. It's out there. It's going to affect people. And it's going to have a negative effect overall on spending. But it's going to be offset and probably then some when it comes to the upper income. So it's a very complicated situation. What I think the Fed is going to watch, Tim, is they're going to watch the job market. And if the job market keeps on keeping on, relatively low payrolls are needed to keep the unemployment rate unchanged in this immigration world that we live in right now. And so what you were going to get is if you stay and maintain a relatively modest unemployment rate, the Fed's not going to cut, not going anywhere, especially because of the upward push when it comes to gasoline prices and some of the other factors we've already talked about.

15:11All right. Steve, thank you. Steve Leisman. And Steve calling what we always should be calling. Karen's usually the winner. Thank you. Thanks, Steve. That's just the way I wanted you to say it. Thank you. By the way, don't miss Steve's interview with Chicago Fed President Austin Goolsbee tomorrow, 11 a.m. Eastern Time on Money Movers. And of course, the April jobs report is going to be out tomorrow. So everybody's going to be watching that for any sort of evidence that the unemployment rate has budged. That is not expected at this point. No, no, I guess not. I mean, look, we're hearing a lot of grim stories.

15:44You know, it's interesting. One of the things that Steve mentioned, he was talking a little bit about Whirlpool. And I just happened to be looking at that because that one traded a lot of options volume. This is just sort of a cautionary tale for investors in general, because there are a lot of people who screen for stocks on things like P.E. And if you screen for stocks on something like P.E., you would find yourself saying, oh, I want to kick the tires on Whirlpool. I can pick this thing up at eight, nine times. This is really one of those things you have to be very careful of. This is a heavily indebted business.

16:12Things go south and they're not going to have the cash flow. I mean, it's like seven times debt to EBITDA, I think, is what it looks like right now. And that's one of the reasons that you see the options so expensive and so much volume, because the stock itself now has become an option on that capital structure. We have some breaking news out of the Middle East. Let's get to Megan Casella with the details. Megan. Melissa, we've been tracking reports this afternoon in Iranian state media of several explosions heard near a port city in southern Iran and at an oil port near the Strait of Hormuz. And now it appears that the United States was behind those attacks.

16:44That's according to multiple reports. Fox News cited a senior U.S. official who also told them this was not a restarting of the war or an end to the ceasefire. Now, I've gotten no immediate response from the White House on this, but it does come after attacks earlier this week on American forces protecting commercial ships in and around the strait and attacks on the UAE and Oman. Now, U.S. officials had been clear that the ceasefire was intact at the time. They said none of that rose to the level of resuming military operations. But then there was reporting today that U.S. allies in the Gulf weren't so thrilled about that.

17:16They felt like the Pentagon downplayed the strike. So now we see the U.S., according to these reports, returning some fire. Melissa, the question will be whether Iran will look to retaliate, whether they consider this a violation of the ceasefire. And then, of course, what this means for those peace talks. Melissa? And what it'll mean, I mean, it seems like there's a wide band in terms of what can fall under ceasefire time in terms of how many strikes can happen. It's been so fascinating this week to see that. On Monday, we really saw a ramping up of the attacks, including at American forces that were protecting commercial shipping in the Strait of Hormuz, as well as at the UAE that had to activate its air defenses for the first time since the ceasefire had been struck.

17:53But then we saw very clearly on camera, on the record on Tuesday, a number of top Trump officials really downplaying that, saying none of that rose to the level of resuming military operations. So it is interesting now to see the U.S. wading back into this, perhaps trying to find some sort of a line where they say they're not resuming full operations. This isn't an end to the ceasefire, but also potentially satisfying allies in the Gulf who did want to see more action. So how will Iran respond? Do they also consider this doesn't rise to the level of resuming military combat? That's what we'll have to see next, I think.

18:26Megan, thanks. Megan Casella. It's interesting because it seems like the markets will forgive all of this as long as the ceasefire is preserved, even if it's on paper. Then markets have permission to go higher. Yeah, we're kind of semantically describing what falls outside, you know, a bomb that falls or a missile that falls outside of the ceasefire. And by the way, I think everybody wants to. I think both sides want to do that. And I think we're going to continue to do that. Asset manager at TCW sees strong economic activity and is playing a key role in the firm's big bets on energy demand. Eli Horton is the senior portfolio manager of the TCW Transform Systems ETF, which is rated five stars by Morningstar.

19:05Eli, great to have you with us. Great to see you. Thanks for having me. This is interesting because you say we're basically witnessing the largest capital expansion in history, capital spending cycle, whatever you want to call it. But this is it. This is the mother of all of them. how confident are you that every dollar of the cycle will be spent and that we are not spending double dollars on chips or on different various parts? I mean, I think you nailed the punchline. I do believe this is the largest capital cycle the global economy has ever experienced. That being the energy transition, I think there's three drivers of it.

19:42One, energy security. These comments on the trade-off or moves really highlight how important energy security is. Two, rapid growth in electricity and power demand. Three, ongoing efforts to decarbonize our energy system. That's coinciding to be close to$5 trillion of CapEx by the end of this decade. It's close to that already. It's growing. It's structural. It's multi-pronged in its nature. So we're quite confident in the durability of this being multi-decade. Thanks for being here. With all of this money going in, it's hard to see that the return on capital will be good for all of it. Where do you think is the most vulnerable sort of sector of that spending?

20:23Well, I can tell you the most topical piece, right? So energy security, I think we all acknowledge is important. That's an imperative for governments, for corporations. Efforts to decarbonize our energy system have been ongoing, will continue to be ongoing. Only more recently have we seen changes in electricity and power demand. So I think that's the place to start. If you go back from 1950 to the year 2000, energy demand grew, or sorry, electricity city demand grew at about 5 % per year, just under. Two decades after that, from 2020, flat. We're now growing again. Why are we growing? We're bringing manufacturing back to the U.S.

20:58We're electrifying our economy broadly, transportation, buildings, and then of course, AI CapEx. That's the most topical place to raise questions, of course. We see a lot of durability there. You can look at the hyperscalers earnings this last quarter, Microsoft Azure, Google Cloud, cloud AWS revenue accelerated across the board. They're seeing returns. Eli, first of all, congrats on being early on a lot of these trades. I know this isn't just you catching up with the news flow. So that's fantastic. And I know core names have been Caterpillar, which has had a monstrous run, GE Vernova. I look at Caterpillar on a 10-year relative P.

21:34It's trading 100 times its five years, trading 120 years times its 10-year. Have we priced in too much? I mean, I know this is data center play. I saw it in some reports months ago. That makes a lot of sense to me. And I know earning cycle right now is extraordinary, but at some point, isn't this just Caterpillar? I think Caterpillar really epitomizes our thesis here, candidly. So they have essentially three lines of business. One's construction equipment, second is mining equipment, and the third is power generation. Think about the past 15 years, maybe longer, construction equipment. Well, we moved a lot of manufacturing out of this country, so we certainly weren't building those factories.

22:10We went through a mining equipment super cycle that ended in 2012. So there wasn't a lot of demand for mining equipment. And we had that flat period of electricity demand I mentioned. There was a lack of investment in our grid. So Caterpillar faced 15 years of cyclical headwinds. That needs to be addressed. There's a lot of repairs and maintenance that need to be done. And there's structural growth in all of its business lines now. And we're just seeing that for a couple of years. So a 10-year reference PE means almost nothing now. I think you could argue that. Well, that's what I was going to be.

22:37I mean, basically, our historical PEs, historical valuations, you just throw them out the window because it's different this time? I mean, that's basically what the thesis has to be. I mean, you take a look at the gains in GE Vranova, which you own, and a lot of the cooling space. I mean, history doesn't apply here, does it? History always applies. Okay, so at what point then? I wouldn't tell you it doesn't. But you have to be forward-looking. The market's trying to discount the future. We're trying to have a differentiated view on the future of the businesses we own. GE Renova is a wonderful example.

23:09Nobody wanted a natural gas turbine for a decade. They were shipping 50 % of their prior 10-year average. Now they're sold out to 2030. There's three companies in the world that make them. They have a lot of power at the table. It's important to recognize that. Eli, great to have you here. Thank you for coming by. Eli Horton, TCW. What do these charts look like, Carter, to you? Well, I mean, so by Caterpillar, I mean, And just one week ago, all the analysts that covered had a price target of 880. Stock is at 895. Now, of course, they've moved the price target up after it beat. But the sell side doesn't believe it either, meaning taking the view that somehow history, this is too expensive.