Federal Reserve Rate Cuts: Insights on Financial Markets and Key Earnings Reports

Experts are questioning how the Federal Reserve’s adjustments to interest rates will affect the financial landscape. As the Fed continues its efforts to lower interest rates, it may take time for these changes to impact the broader market.

The complexity of inflation remains a central concern. Inflation can be summarized as “too many dollars chasing too few goods.” Big spending, among other factors, often contributes to rising inflation. The ongoing situation requires close observation, as uncontrolled inflation could significantly influence both the Fed’s and the government’s policies in the years to come.

Dylan Lewis: The recent rate cut was expected, and the market is already considering the possibility of another cut in December. Looking further ahead, we likely find ourselves in uncertain territory. We’ll need to assess how these rate changes affect lending and how the administration’s forthcoming policy plans shape up in January.

Bill Mann: Interest rates may not always be as precise as we think. Economists suggest it takes roughly nine months for a change in Fed policy to take effect in the market. As discussions around the next rate cut unfold, it is crucial to understand that the Federal Reserve is evaluating both current and anticipated impacts.

One notable takeaway from recent reports is the Fed’s acknowledgment that inflation is gradually progressing toward their 2% target, yet remains elevated. The focus now seems to be on stabilizing the economy, even while inflation persists.

Dylan Lewis: With interest rates declining, lenders and consumer-dependent companies stand to benefit. Affirm recently reported earnings and provided insights into the buy-now, pay-later sector. What did their earnings reveal?

Bill Mann: Affirm’s report exceeded expectations. Revenues approached $700 million for the quarter, marking a 41% year-over-year increase. While they experienced a net loss, this is typical for a company at this growth stage, and their free cash flow improved significantly. Their CEO, Max Levchin, expressed optimism, indicating they started strong this quarter.

Dylan Lewis: More on that later.

Bill Mann: Interesting to note about Affirm is their dependence on interest rates. The ongoing decrease provides them with opportunities to offer more competitive rates to valued customers.

Dylan Lewis: After the break, we’ll discuss updates from two standout companies of 2024, including Volunteer. Will their success continue? Stay tuned for more listening to Motley Fool Money.

Dylan Lewis: Welcome back to Motley Fool Money. I’m here with analysts Bill Mann and Jason Moser. Axon is having an exceptional 2024, and Jason, as a shareholder, you must be delighted.

Jason Moser: Absolutely, Dylan. I own shares as well and have endorsed Axon multiple times across our platforms. The results weren’t surprising, but they were still encouraging—a consistent performance as we’ve seen quarter after quarter. Axon resembles the Apple of public safety with their leading hardware and strong software support. This combination generates significant revenue, allowing continual reinvestment into the business to enhance products and services focused on public safety.

Revenue reached $554 million this quarter, up 32% from last year, marking their 11th consecutive quarter of more than 25% revenue growth. Adjusted earnings were $1.45. The Axon Cloud and services division also performed admirably, with a 36% increase to $203 million. The annual recurring revenue is compelling, growing to $885 million, indicating strong customer retention and confidence.

Dylan Lewis: Axon indeed combines robust financials with a solid foundation of government contracts. Palantir, focusing on data, recently reported its earnings as well. Bill, the market responded positively, with shares surging over 30%. What did the earnings show?

Bill Mann: Palantir’s results were impressive, especially considering they depend heavily on government contracts while expanding into commercial sectors. Their sales jumped 30% to $725 million, well above projections. They also announced a record net income of $144 million. CEO Alex Karp boldly stated that given their strong results, he almost felt they could end the meeting early. He confidently claimed that the future of AI will rely on Palantir, distinguishing potential winners from losers in this space.

Dylan Lewis: That’s quite a statement.

Jason Moser: Definitely a bold take.

Bill Mann: Palantir’s stock has high expectations given its current valuation of around $133 billion, with a run rate of approximately $3 billion in revenue. However, they’ve been securing partnerships consistently, including with Meta, AWS, Accenture, the Navy, and even Wendy’s this week.

“`html

Valuations Under Scrutiny as Major Tech Stocks Reach Heights

Dylan Lewis: When you book Big Red, you know you’re onto something significant. Jason touched on fundraising challenges with Axon; you discussed its market cap and earnings, currently sitting at about 280 times earnings for Palantir and roughly 120 times for Axon. Both stocks have had stellar performances, hitting all-time highs but sporting lofty valuations. Jason, are you worried about either of these businesses?

Jason Moser: There are concerns, to some extent. Valuation is vital to consider. Deciphering it can be tricky. Focusing on Axon, it has a clear justification for its premium valuation. In contrast, Palantir feels less accessible due to its complex business model. However, investors must always be cautious about the implications of high valuations when discussing individual stocks.

Dylan Lewis: Bill, what’s your perspective?

Bill Mann: Just before Palantir’s earnings, several analysts called its valuation unsustainable. One remarked that unless there was a significant “beat-and-raise,” that outlook wouldn’t change. Palantir has become a sort of Rorschach test for investors. The stock has risen dramatically. While high valuations can enable growth companies to raise capital, it’s challenging to get enthusiastic about companies trading at these levels. Nevertheless, the bulls had their moment.

Dylan Lewis: Moving to Airbnb, the short-term rental giant dipped approximately 8% after its earnings report. It’s curious to think of Airbnb as a somewhat mature business.

Jason Moser: It truly is. Airbnb has grown into a massive business, similar to what happened with Uber upon its public debut. It has a vast market potential but already stands tall within that space. Their revenue climbed 10% over the past year to $3.7 billion, with gross booking volume also up 10% and nights booked rising by 8%. This platform continues to generate substantial free cash flow—$1.1 billion in just the last quarter and $4.1 billion over the previous year. Additionally, they recorded stronger growth in Latin America and Asia Pacific. Importantly, some prior headwinds are normalizing, suggesting renewed demand for their services, but it’s clear they are already a significant player in the industry.

Dylan Lewis: I can hear your dogs in the background, Jason. Perhaps they’re hoping for more pet-friendly Airbnbs? [laughs]

Bill Mann: Indeed! Airbnb’s CEO, Brian Chesky, mentioned he modeled his strategy after Amazon’s successful expansion into new markets. He aims to introduce one to two new businesses each year that might generate over a billion dollars in revenue, seeking adjacent markets beyond just travel. What are your thoughts on that?

Bill Mann: While it may seem like a quiet time at Airbnb, I would argue there’s a party happening, albeit late at night. The company faces several challenges, such as Hungary’s increased taxes and restrictions from New York City—issues that limit growth potential. Nonetheless, they are also exploring new avenues. It remains to be seen if these efforts will succeed, but Chesky seems determined to overcome the limitations his company faces.

Dylan Lewis: Thank you, Bill and Jason. We’ll revisit you later in the show. Up next, we’re diving back into the archive for one of my favorite interviews ever. Stay with us as you listen to Motley Fool Money.

MALE_2: Introducing the Minute Earth podcast, a deep-dive into captivating science questions that you probably never thought to ask. Why do rivers bend? What’s with T. rex’s tiny arms? Why are more children needing glasses nowadays? Spoiler: it’s not just screen time. Our scientists simplify complex research into fun, bite-sized explanations filled with facts and humor. Subscribe to Minute Earth wherever you listen to podcasts.

Dylan Lewis: Welcome back to Motley Fool Money. I’m Dylan Lewis. After an onslaught of political messages on TV and heated debates on social media, we could all use a breather. This week, I’ve unearthed an interview from our archives featuring Mr. Rogers. Yes, the beloved Fred Rogers visited the original Motley Fool radio show in 2002, providing insights about early relationships with money, the story behind his famous show, and the greatest gift we can give to others.

David Gardner: Fred Rogers, welcome to the Motley Fool Radio Show.

Fred Rogers: Thank you, brothers Gardner.

David Gardner: When did the idea for Mr. Rogers’ Neighborhood come to you?

Fred Rogers: It wasn’t originally my concept. I traveled to Toronto to create a show that involved puppets and music, as that was my background. Dr. Frederick Greensbury proposed translating my interactions with children onto screen, thus the birth of Mr. Rogers’ Neighborhood. I had never been on screen before.

David Gardner: Did you view your work as a business or simply something you loved, which eventually became a career?

Fred Rogers: It’s always felt like a ministry to me. People want to be connected to someone who cares for them and values them. Through our neighborhood, we’ve achieved that with various special guests sharing their talents.

David Gardner: Regarding your new parenting book, what tips would you give? My brother is a good parent, but everyone can improve.

Fred Rogers: One of the best things we can do as parents is to remember what it was like to be a child. Make the effort to understand who your children are and invite them to help with that process.

“““html

Insights from Fred Rogers on Money and Life’s Values

David Gardner: What should parents teach their kids about money?

Fred Rogers: Feelings about money, such as saving or spending, often develop early. People who hoard money may have been forced to give up resources too soon. In contrast, those who share generously are frequently appreciated as children. It’s essential to remember that everyone has something to offer, and everyone needs help at some point. No one is entirely self-sufficient.

David Gardner: You grew up in Latrobe, Pennsylvania, in 1928. That was just before the stock market crash and the Great Depression. Many people today are reassessing their finances. How did your childhood shape your view of money during and after that time?

Fred Rogers: Growing up during the Depression made us cautious with money. My habit of recycling likely began back then. Today, when resources seem scarce, that mindset stays with you, even if you were just a toddler. The attitudes and lessons instilled by those closest to you shape your future behavior.

David Gardner: Mr. Rogers, we grew up watching your show, so we see you as a unique persona. Is Fred Rogers the true person behind the character?

Fred Rogers: My wife sums it up well. When people ask her if I’m really like this, she says, “What you see is what you get.” The most significant gift one can offer is their honest self. You, Dave, and you, Tom, each bring something unique. No one else can offer that.

David Gardner: That’s a profound insight. You exude calmness and create peace in those who hear you. Do you ever feel overwhelmed or angry?

Fred Rogers: Absolutely. I even wrote a song about dealing with anger. I feel upset when I see injustice, especially towards those unable to care for themselves. That’s something that truly frustrates me.

David Gardner: Let’s discuss injustice briefly. You’re an ordained Presbyterian minister. Given your commitment to values, what do you think about recent corporate scandals where companies failed to take care of their employees?

Fred Rogers: What drives people to want excessively more than they need? I believe it’s insecurity. It’s crucial to remind ourselves that life isn’t about material possessions. Throughout my career, I’ve emphasized the importance of simply being yourself, not your belongings. I like you for who you are, not for your clothes or possessions. It’s you I appreciate every part of you, no matter what. It’s a beautiful day in this neighborhood, indeed.

Dylan Lewis: As we transition from election season to the holiday season, remember to give your greatest gift: your honest self. Take care of those around you. We’ll return shortly with market updates and stock conversations. Stay tuned to Motley Fool Money.

Fred Rogers: I have always wanted to live in a neighborhood with you.

Dylan Lewis: As a reminder, participants in this program may hold interests in the stocks discussed, and The Motley Fool may have specific recommendations. Don’t base your investment decisions solely on what you hear. All of our personal finance advice follows Motley Fool’s editorial standards and is not influenced by advertisers. We only recommend products we would suggest to friends like you.

I’m Dylan Lewis, back with Motley Fool Money and joined again by Bill Mann and Jason Moser. In our previous segment, we enjoyed wisdom from Mr. Rogers. This week, we also got updates from Warren Buffett regarding his Berkshire Hathaway earnings. Bill, it seems like Berkshire is maintaining its usual strategy this quarter.

Bill Mann: Correct. Berkshire has profited significantly from its Apple shares, even selling about 60% of its holdings yet retaining nearly $70 billion in Apple stock. Currently, Berkshire has cash reserves over $325 billion, which means if you were the sole owner, your share would equal that amount. That’s substantial.

Dylan Lewis: That’s about one-third of the company’s market value, right?

Bill Mann: Exactly. It’s remarkable that such a large cash reserve has translated into solid returns. Interestingly, they purchased shares of Sirius XM but didn’t buy back any Berkshire shares this quarter. The Class A shares hover just under $700,000 each, suggesting Buffett views them as fairly valued now.

Dylan Lewis: With high cash reserves and no share buybacks, it seems Buffett and Berkshire may be cautious about market valuations. Jason, do you think that signals their strategy going forward?

Jason Moser: Yes, it indicates they likely don’t see significant value in their own shares at this time. Accumulating cash offers them flexibility for future opportunities. It’s a logical approach based on the current market conditions.

“`

Berkshire Hathaway’s Strategy: Planning for Future Growth Amid Valuation Concerns

Understanding the Company’s Financial Position

Valuations appear to be less appealing right now, prompting some speculation. Berkshire Hathaway may be setting aside funds for a significant future acquisition. Given the company’s size, achieving meaningful growth often hinges on such acquisitions, which require substantial capital—a resource Berkshire possesses.

Contemplating legacy is also important. As time passes, leaders may begin reflecting on their impact; this could be a factor in current decisions.

The Timing of Earnings Reports

One fascinating practice of Berkshire Hathaway is their timing for earnings announcements, typically scheduled for late Friday or Saturday morning. This approach isn’t arbitrary. In his 2018 shareholder letter, Warren Buffett explained, “Media reports sometimes highlight figures that unnecessarily frighten or encourage many readers or viewers. We will attempt to alleviate this problem by continuing our practice of publishing financial reports late on Friday, well after the markets close or early on Saturday morning.” This reveals the rationale behind their scheduling choices, which many, including myself, find appealing.

A Commitment to Principles

Dylan Lewis highlighted the company’s long-standing commitment to values, such as never splitting voting shares, demonstrating a dedication to their principles.

Getting Ready for the Holiday Season

Shifting gears, with Halloween and the election behind us, the holiday season is approaching. Advertisements are already gaining traction on television. A trailer for “Red One,” featuring Dwayne Johnson and Chris Evans, showcases a unique holiday adventure when a villain kidnaps Santa Claus. This comedic take on Christmas seems to promise creativity, even if it has received mixed reviews.

Stocks on the Radar

Transitioning back to the stock market, Bill Mann wants to discuss Ferrari, currently the most valuable car company in Europe, surpassing traditional giants like Mercedes and BMW. Recently, Ferrari reported a 29% decline in shipments in China, yet their strong brand presence remains evident through their personalized vehicle options. Nonetheless, analysts have noted the decline in the secondary market, suggesting it may impact Fujiyama’s sales moving forward.

Market Trends and Earnings Growth

In the spirit of earnings discussions, Jason Moser spotlighted The Trade Desk (TTD), which reported revenue of $628 million, marking a 27% growth. Though the market reacted negatively, the company shows promising potential. With around $2.3 billion in annual revenue and a total addressable market of $1 trillion, growth prospects remain strong, especially in the connected TV segment. Partnerships with major names like Disney, Walmart, and Netflix further enhance its market position. Moser believes that significant strides in audio advertising, highlighted during their recent earnings call, will provide further opportunities for expansion.

Final Thoughts and Sign-Off

As we conclude this segment, we’ll return to discussing the unique worlds of luxury cars and digital advertising. Thank you, Bill and Jason, for sharing your insights. I also extend my appreciation to Rick Engdahl for joining the conversation. That’s all for this week’s Motley Fool Money radio show. I’m Dylan Lewis, and I appreciate your time. We’ll see you next week.

The Motley Fool board includes Randi Zuckerberg, a former Facebook director and sister to Meta Platforms CEO Mark Zuckerberg. Other contributors hold various positions in companies like Apple, Disney, and Berkshire Hathaway. The Motley Fool also maintains positions in companies mentioned and has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.