3 in 3: Profit Squeeze, Data Center YIMBYs, and the Era of Home Renovation

Warning sign on profit margins, unexpected winners from the data center backlash, and a diverging trend between home sales and home improvement. I'm Jim Lydotes, and these are our three points in three minutes. So let's flip over the timer and let's go. 

First, companies are getting the sales, but they're just not getting the earnings. 

We just finished earnings season, and one thing that stood out to me is that companies are beating revenue estimates a lot more often than they're beating earnings expectations. And that's true at least outside of of tech and communication services. That's been a trend that we've seen every quarter for the last four years. And the gap over the last two quarters has been the widest that we've seen this cycle. 

Consumer staples is a great example of that. More than 85% of consumer staples companies this past quarter beat revenue expectations, but fewer than half of them beat on earnings. 

So why is all this happening? Companies are still finding customers, but they're having a harder time converting those sales into profits. 

There's a lot of things working against them right now, whether it's tariffs, higher promotions, rising input costs. A lot of these things are putting a lot of pressure on margins. And while the market may not be cracking, corporate margins just might start to be. And if management teams feel increased pressure to deliver on earnings growth, the second half of this year could see a greater focus on cost control, which ultimately could mean more job cuts than we've seen so far. 

Depending on how this unfolds, this could be another emerging risk to consumer stocks as we head into the seasonably most important time of the year. 

Second, the data center backlash is heating up. We're now less than 100 days away from the midterms, and giant data centers that consume a ton of electricity are pretty easy targets for political jawboning. Whether you're Pennsylvania's Democratic governor or Texas's Republican governor, calling for tighter controls and closer scrutiny of new data center projects is a pretty easy win. 

Is that a bad thing for the AI trade? Maybe. But if some states become more restrictive, that demand doesn't just disappear. All that happens is ultimately it just moves. What that could do is it could create an unexpected group of winners, which are utilities serving regions that are much more accommodating to data center builders. The next decade of utility growth may be driven by data center demand, and the biggest beneficiaries may not be the utilities that investors are focused on today. 

Finally, the housing market isn't recovering, but housing spending just might be. 

One of the stranger consumer trends that we're seeing right now is that housing-related spending is improving, even though the housing market itself remains pretty stuck. Mortgage rates remain elevated, housing turnover remains subdued, but Wayfair is gaining customers. William Sonoma continues to execute well. TJX just reported earnings. Their home business is doing really well. And Home Depot also just reported their best US same source sales that they've seen in four years. 

Historically, housing turnover and housing spending move together, but this time looks like it might be a little bit different. If consumers can't move, what they do is they invest in the house they already own. they're remodeling, they're redecorating, and upgrading what they already have. The housing market may still be frozen, but housing related spending is starting to thaw. 

That's our three points in three minutes with a little sand left in the bottle. Have a great week and we'll see you back here next time.\

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