S&P 500’s Worst Day of the Year & GLP-1s Are Costing Retailers in Returns

0:01Neal Freyman:Whether you're hitting the road this summer or just parking for some peace of mind, AT &T Connected Car turns your vehicle into a Wi-Fi hotspot with fast, reliable, and secure internet access. You can connect multiple devices to stream, browse, play games, or get a little work done, all inside or in proximity outside of your vehicle. To learn more, head to att.com slash morningbrew. That's att.com slash morningbrew. Brew. Requires eligible vehicle, service, and coverage not available everywhere. Good Morning Brew Daily Show. I'm Neil Freiman. And I'm Toby Howell. Today, the stock market's blistering rally came to a screeching halt.

0:40Neal Freyman:Then, GLP-1 drugs are leading to returnflation, much to retailers' chagrin. It's Monday, June 8th. Let's ride.

0:53Good morning. It's great to be back and huge thanks to our team for holding down the fort while we were out late last week. Folks, I'm hurting. Don't go to a Toby Howell bachelor party if you haven't been through Marine Corps basic training. Got gashes on my hands and knees, a severe sunburn on my neck, and a demoralized ego. Overall, the nine of us competed across 18 events, including basketball, beer mile, punt pass kick, paddle boarding, home run derby, push-ups. And I came in last place. Thought I was mildly athletic, but then again, I've never competed against a bunch of D1 soccer players.

1:27Toby, don't know about you. I'm excited to just sit for a while. But did you have fun, Neil? I did have a lot of fun.

1:33Neal Freyman:Okay, good. Yeah, we definitely went extremely hard. My brother Vibe coded a website to keep track of all the points totals. And I think some audits are in order because I did finish first. My brother finished second. My brother-in-law finished third. So very suspicious there. I think my favorite was taking portions of the LSAT, G-R-E, S-A-T, and MCAT. Shout out to doctors because the MCAT, that was the hardest test I've ever seen in my entire life. And again, that doesn't sound like fun to most people to do those tests during your bachelor party. But again, we needed something academic to balance out all the physical stuff.

2:10Neal Freyman:But an extremely fun weekend. We're wearing hats themed for a minute. I want to do a bachelor party every single weekend. And now a word from our sponsor, Sage. Neil, how trusting are you when it comes to new tech? I barely trust people. So new tech, I can sometimes be a bit iffy on. And that, ladies and gentlemen, is why I still don't have Neil's phone number. The point is, if you're like Neil when it comes to AI, Sage has a little something for you. They introduced the AI Trust label to show you how AI is used across their finance, payroll, and HR software products for businesses of all sizes.

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2:53Neal Freyman:To learn more, head to sage.com slash morningbrew. That's sage.com slash morningbrew. Like me waking up the final morning of Toby's bachelor party, the stock market partied too hard and is paying for it. Stocks suffered their worst day of the year on Friday to halt a historic winning streak due to a surprisingly strong jobs report and more worries over an AI bubble that might pop. First, the numbers, the S &P 500, which was trying to complete a 10-week winning streak, tumbled 2.6 % to cap off its worst weekly performance in over a year. The Nasdaq, which focuses on tech companies, dropped 4.2%, its worst day since Liberation Day tariff announcements last April.

3:31Tech really was the main culprit for the sell-off. The nine tech companies worth at least$1 trillion averaged a loss of 5.3 % on Friday, evaporating$1.1 trillion in market value. So what matadors tame this bull market? One is increasing jitters that companies' AI investments won't translate to meaningful revenue. A warning sign sparked by the chipmaker Broadcom's tame earnings earlier in the week. But a bigger catalyst was the jobs report that dropped Friday morning, a great report that showed the U.S. economy adding 172 ,000 jobs in May, more than double projections. But it was one of those unusual cases of good news means bad news because a hot job market means the Fed is unlikely to cut interest rates anytime soon.

4:12And in fact, May hike rates by the end of the year. Toby, glad we weren't checking our portfolio on Friday.

4:17Neal Freyman:Me too. We were doing lots of other things. But yes, this was the AI trade getting its first real stress test. The concern is that expectations got a little ahead of reality. Ray Dalio called it classic bubble stuff. And he argued that gains have become overly dependent on a small group of AI stocks. And honestly, he's not really wrong there. Only 25 % of stocks beat the index in May. That was down from 59 % at the start of the year. And you just go down the list of all the names that fell on Friday. NVIDIA, Broadcom, Micron, Intel, Sandisk, Cisco, even Caterpillar is part of the AI trade at this point.

4:57Neal Freyman:Those are all the names that were propping up the market. So when they disappoint, even if it's a small disappointment, because you mentioned Broadcom's earnings, they still had great earnings, but they just weren't as blowout, especially with their forecast as people wanted. And that has massive ripple effects because of how concentrated the rally became. Right. So the S &P 500 rose more than 11 % this year through the end of May. But exclude AI-related stocks, and the gains were just 2.4%. So when Ray Dalio and other big investors say, whoa, the market's really narrow, it's really concentrated among a few names, then that's where you get these concerns.

5:34And I know we talk about various monikers for the stock market, but there's a new one that's come to the fore to describe this new cohort of AI winners. It's called the Parabolic 7, AMD, Broadcom, Dell, Intel, Marvel, Micron, and Sandisk. So those go up, and it's going to bring up the S &P 500 all the way, and the NASDAQ as well. But those go down, as they did on Friday, over some jitters from Broadcom earnings and also Google raising$80 billion from the equity market to fund AI plans. then you're going to see a big wipeout like we saw last week.

6:07Neal Freyman:Yeah, and I mean, you mentioned Google's equity raise, but you also have these massive stock sales coming down the pipeline. SpaceX's IPO is coming. OpenAI's IPO is potentially coming. Anthropic filed confidentially for an IPO. That is a lot of stock sales that the market has to absorb. So the market's just not used to this amount of supply really coming online, because tech companies over the last decade or so have been buying back shares, kind of supporting their stock prices that way. The fact that Google turned around and is now issuing shares, that is a big paradigm shift. And now people are wondering, can we keep supporting these insanely high or very high AI valuations while also funding this massive wave of AI-related companies coming online as well?

6:53Neal Freyman:That is in the back of a lot of people's minds. And you can't discount the job market numbers because that was another catalyst, maybe even a bigger catalyst for the sell-off on Friday. As I mentioned, we got a huge blowout number. I mean, 172 ,000 jobs in May. There were 80 ,000 that were forecast. So more than double. Job market seems very strong. The unemployment rate held at 4.3%. But, yes, it was a case of good news equals bad news because when you get a strong jobs number like we got, and also revisions for high upward revisions for the previous few months. Then the Fed under new Fed chair Kevin Warsh is thinking, well, I don't really have any reason to cut rates.

7:33And in fact, swaps, investors are now fully pricing in a rate increase by the end of 2026 because inflation is more of a concern than a weaker jobs report or the weaker jobs numbers. So that was a huge catalyst for the sell off.

7:46Neal Freyman:And what's going on this morning in the market? Last evening, U.S. stock futures were trending deeply towards red, but then totally reversed on news that Trump said Israel has no choice but to accept an Iran deal. But then Israel retaliated to Iran strikes, stoking concerns that the war is now reigniting for a lot and futures slipped again. Also over in Korea, Korea's stock market had almost like a Black Monday type performance where the KOSPI index tumbled as much as 10%, triggered a bunch of circuit breakers. It did eventually recover a little bit. So I don't really know what's going on this morning because a lot of ups and downs were happening overnight.

8:26Neal Freyman:We'll just see what happens when the market finally does open for real on Monday. Moving on, GLP-1s are doing such a good job helping people lose weight that it's forcing them to give their closets a makeover, which is actually eliciting groans, not a goldmine for retailers. Unfortunately, people's pants don't magically change sides like the Hulk's indestructible purple shorts. So when someone rapidly goes down clothing sizes, that leads to a surge in clothing returns and exchanges, according to data seen by the Wall Street Journal. One brand, FlexSuits, says returns are up over 50 % in the past year.

9:00Neal Freyman:And between 2020 and 2025, the total value of merchandise returns doubled per Capital One's shopping research. You might think that weight loss-induced shopping sprees should be good for retailers, but returns are actually a drag on profits. Stores can't always resell what they get back, and they have to eat the extra shipping and labor costs. Plus, most shoppers now are unsure of what size they actually are, so they order multiple of the same item and send back the ones that don't fit, leading to more returns. Neil, this is one of the biggest unseen second-order effects of the rise of GLP-1s that impacts inventory planning, product design, and the amount of Amazon packages piling up on your neighbor's stoop.

9:41Neal Freyman:Returnflation is real. I mean, think about how annoying it is to order T-shirts for a small event you're putting on. How many smalls do I get? How many mediums? How many larges? And then you're running a large retail operation, and all of a sudden, everybody's sizes are changing. And what's really happening is sizes are going down. The share of apparel exchanges where shoppers size down has risen each of the last three calendar years, hitting a high of 14.6 % in 2025. That's according to Navarre, which manages returns for retailers. And yeah, it can be super expensive. expensive. The retail industry spent$890 billion in 2024 just on returns.

10:18And Prashan Argywal is the CEO of Impact Analytics, which analyzes returns, just kind of shows how much returns are costly. So say you're a$1 billion company, you see about 20 % of your items returned that are bought, a 5 % to 10 % percentage point increase in returns. That can slash your gross margins by$20 million. So he sees he's forecasting a$5 trillion hit to margins should return stay at this increased level because of GLP one drugs and retailers need to figure out how to respond and change their inventory like a complete wholesale change.

10:51Neal Freyman:Because the fashion industry is built for static bodies. Retail inventory is planned, assuming people stay the same size. I mean, most people do, you know, stay within a very narrow size range. So if a customer is changing sizers faster than retailers can actually adjust their inventory to that, then you are left with, you know, too many larges when you really needed more mediums and smalls. The other thing that I mentioned is that people are ordering multiple of the same option. This is not a new phenomenon in, you know, online shopping. Like most people do that if they are responsible shoppers.

11:27Neal Freyman:But one person told the Wall Street Journal that she now has, she went from a size 22 to a size four and she still orders multiple sizes because she struggles to believe that she'll fit in these smaller sizes. So I think that's a thing that is happening for GLP One users is like, the weight loss happens so rapidly, they cannot trust the label that they're seeing back at them. And so that's why you're seeing, you know, multiple packages show up on the stoop. So fascinating to see how retailers are going to adapt to what is clearly a new paradigm for them. Let's head to our winners of the weekend, the segment where we pick two stories that had a better weekend than me and anil at my bachelor party i won the pre-show game of golf beer pong hot dog eating contest putt putt push-ups world cup home run derby and beer mile so i'm up first and my winner of the weekend is indiana because they already have caitlin clark the national championship winning hoosiers and now they might get the bears the bears board just voted to advance a stadium project in hammond indiana a major step towards selecting the team's next home.

12:30Neal Freyman:Why are the Bears potentially ditching Illinois for their neighbor? The Bears play at Soldier Field, the oldest stadium in the NFL, and have been looking for a sight change for years at this point. The team has been eyeing the Chicago suburb of Arlington Heights, but has tussled with Illinois lawmakers over the amount of public funding it would require to build a new stadium. Enter Indiana. They saw that the Bears wanted the subsidies and approved a financing package worth more than$1 billion. Plus, sports economist Mark Rosentraub says that the Hammond site gives the Bears room to put in retail, restaurants, housing, and entertainment districts, which leads to steadier year-round revenue.

13:08Neal Freyman:Neil, nothing is set in stone yet, and Hammond is still only 25 miles away from downtown Chicago, but the symbolism of the Bears lumbering over the state border is a big deal. This vote makes Hammond the frontrunner as of now. Yeah, this is weird. I mean, I mean, the Bears are synonymous with Chicago. They've been playing in Chicago since 1921. That's over 100 years ago. I did not know the Chicago Bears were around, but they were a founding member of the National Football League. They played actually in 1921 at Wrigley Field, where the Cubs now play. But the thing to know about Soldier Field is it's not only the oldest stadium in the NFL, inaugurated in the early 1970s, but it's also the smallest with a capacity of 61 ,500 fans per home game.

13:53And then another thing to know about Soldier Field, it's outside. And if you're building a new stadium, if you are a franchise that wants to maximize revenue out of your arena, you are going to build a bigger dome. And that's where everyone is moving to. Buffalo's getting a dome. Kansas City, all these new stadiums are domes because you can use them throughout the year for things other than eight home football games. You can put concerts there. You can have a Final Four. You can put on a World Cup, things like that. So that's where everybody's moving to. Soldier Field is just sort of antiquated at this point.

14:25And the Bears have been wishy-washy. They've been trying to get concessions from Illinois. They've been trying to get concessions from Indiana. Looks like Indiana is now in the lead.

14:33Neal Freyman:Yeah, who is going to win this race for the Bears? probably the Bears are going to win here because they have all the leverage in this situation. Illinois and Indiana are bidding against each other because the leverage that the team has is not just financial. It's actually more emotional because no politician in Illinois wants to be remembered as the people who lost the Bears. So that emotional side of things can often lead to bigger and bigger subsidies being offered from both state lawmakers' bodies. Right now, Indiana was way more gung-ho to say, yeah, we will roll out the red carpet for you.

15:09Neal Freyman:We will give you that billion dollars in public money that you were looking for. And that's kind of the paradox here because if Indiana wins the Bears, technically it's worse for the taxpayers because now they're on the hook for$1 billion. So short term, it's a big political loss, but it could end up being a long-term financial win for Chicago and Illinois taxpayers if they actually do end up losing the Bears across the state border. Yeah, there's a long debate about whether governments should subsidize the new arenas of billionaire or very wealthy team ownership. And so Illinois is kind of dragging its feet a little.

15:44They're saying we have to do what we want that's best for taxpayer money. And there has been growing backlash to using public subsidies to build these stadiums. Indiana seems to have fewer reservations than using taxpayer money to do that. While Illinois lawmakers went, you know, they just left for their recess. They ended their legislation, their legislative session without approving some of the some of the stuff that the Bears wanted. So would be wild to see the Bears go to Indiana. It's a big win for Indiana. I mean, think about this. Indiana would have two NFL stadiums. That's more than New York.

16:20And it's just as many as California. They just won the NCAA championship. So it is a football state. But then again, Hammond, Indiana is actually closer to the current side of Soldier Field than Arlington Heights is in the northwest suburbs. So it'd be a very similar situation to the Giants and Jets playing in New Jersey at MetLife Stadium.

16:38Neal Freyman:By the way, if they do go to Indiana, they still wouldn't change their name. Like the Indiana Bears, it does not sound right. It's not going to happen. Let's take a quick break and come back with Neil's winner of the weekend. Neil, let me tell you something about bond markets. I'm all ears. They are confusing. Insightful as ever. But yes, capturing value in fixed income is not easy. Thankfully, Vanguard bonds are institutional quality. That means top grade products across the board. Vanguard is able to invest across all kinds of sectors, maturities and geographies, which means they can spot and act on opportunities that others might miss.

17:14So check out Vanguard dot com slash audio. That's Vanguard dot com slash audio. All investing is subject to risk. Vanguard Marketing Corporation Distributor. toby did you know employees who are financially stressed are way more likely to be distracted

17:28Neal Freyman:while at work what was that sorry i'm really distracted i've got some questions about this hit to my bank account here see this missed work is estimated to cost employers big bucks annually and lost productivity that's why aflac pays claims fast accurately and fairly their plans can help employees focus on getting better and getting back to work to learn more just head to aflac.com slash morningbrewdaily. That's A-F-L-A-C dot com slash morningbrewdaily. Neil, have you ever wanted to create a meaningful project beloved by millions of people? You mean like a daily podcast with your friend? No, something way cooler than a podcast with your coworker.

18:09Neal Freyman:For those with real vision to create, there's Minimax. It's a full stack AI lab building frontier foundation models across text, voice, video, and music. From indie developers to global enterprises, Minimax models are available via API and ready to build with today. To get started, just head to Minimax.io. That's Minimax.io. My winner is Broadway, which celebrated a record-breaking season at the Tony Awards last night. The most coveted award of the night, Best New Musical, went to Schmigadoon, a parody of Golden Age musicals. Arthur Miller's classic play, Death of a Salesman, won the most Tonys of all with six.

18:48and Ragtime won Best Musical Revival. Pink hosted and tried successfully to show off her singing, dancing, and acting chops, despite not having a Broadway credit. New York's theater industry had plenty of reasons to throw jazz hands, 1.9 billion of them, actually. In the season that just wrapped up, Broadway shows brought in almost$1.91 billion in ticket sales, a new all-time high, according to the Broadway League. Compared to the prior season, ticket grosses were up 3.5%, Attendance ticked 1.8 % higher and average prices increased 1.7%. Strong demand for Broadway is not just heartening for those who love theater and want to see it thrive, but also a positive sign for the American economy, indicating that consumers are continuing to spend on experiences and discretionary purchases, like watching Joshua Henry shake Lincoln Center with his voice.

19:34Toby, not exactly a lot of Broadway talk this past weekend, but theater seems to be fully back after facing an existential crisis during the pandemic.

19:41Neal Freyman:Although there is some nuance to Broadway's great year because Helen Shaw, the theater critic for the New York Times, called it a year of shrinkflation because there were just fewer musicals in general. Of the 35 productions that opened the season, 12 were musicals. That is down from 21 last year. And only six of those 12 were considered original musicals. So it just is not as robust of a season anymore because what we're seeing happen in Broadway is actually kind of what we saw happen with Hollywood over the last decade. They are realizing that recognizable titles with existing fan bases and celebrity casting is a way to make money.

20:20Neal Freyman:That sounds exactly like, you know, the Marvelification of the movie industry. And a lot of these shows relied on celebrity names to become profitable at all. one revival of Every Brilliant Thing. That's a one-man play that was starring Daniel Radcliffe. It was one of the most successful shows of the season because these people putting on these productions are like, obviously people are going to come out to see Daniel Radcliffe. Why would we take a risk on a big upfront investment in spinning up an original musical when we can just use an established name in the industry to fill seats? Yeah, the big shift we're seeing right now is more plays and fewer musicals.

20:56Plays are cheaper, and you can throw a bunch of celebrities in there like Jake Gyllenhaal and Denzel Washington last season in Othello or Daniel Radcliffe. And it's an impressive performance. They're just cheaper and the economics work out much better. And people are going to plays more than musicals. This season, attendance at plays was up 14%. Attendance at musicals was down 5%. So what you typically associate Broadway with is musicals. But it's really plays that are driving much of the revenue growth for the industry right now. I mean, and it's just basic economics. It's Economics 101. The there's been only one musical since 2022 that has managed to recoup its investment, and that's the outsiders.