Stocks Had an Epic Week. Why It’s Premature to Call a Santa Rally.

It was a stunning week, but it’s probably best not to get too carried away just yet. As the rally gathered pace into the end of the week, it was beaten-down parts of the market, such as travel stocks and regional banks, that drove the gains. That points toward hedge funds covering bets against companies and doesn’t typically sustain a prolonged rally.

Earnings season, which continues with Disney and Uber among those reporting in the coming days, is also harboring a warning about the months ahead. The fourth quarter isn’t looking good.

In October, Wall Street cut aggregate fourth-quarter S&P 500 earnings estimates by 3.9%, according to FactSet data. The decline is lower than the five-year average of a 1.9% decline in the first month of a quarter. It comes as companies have signaled slowdowns with largely disappointing guidance.

The economy is at a key junction. The much-debated, highly anticipated landing is finally coming into view. But we still don’t know if it’ll be hard or soft.

Data are beginning to consistently come in below expectations—150,000 jobs were added in October, below estimates of 180,000. U.S. manufacturing activity fell to its lowest level since July, also missing expectations.

The economy’s descent is starting and for now, at least, it appears to be a gradual one. If it stays that way, the sherry can be cracked open, but if the data suddenly veer sharply lower, last week’s epic rally will become a distant memory.

—Callum Keown

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Disney Set to Report Earnings Amid Possible Peltz Battle

Walt Disney
is set to report earnings on Wednesday amid questions about losses in its streaming operation, efforts to cut billions of dollars in costs, its intention to buy the rest of Hulu it doesn’t already own, and how its thinking has evolved on potentially selling some of its large media properties.

• Bank of America analysts recently estimated a $24 billion value for Disney’s live sports network ESPN. Sports are the best-performing part of traditional television, and ESPN could contribute between 20% and 25% of Disney’s total segment operating income for the year ending in September.

• At the same time, activist investor Nelson Peltz wants seats on Disney’s board, having launched his second campaign against the company in a year. Former Marvel executive Isaac “Ike” Perlmutter has entrusted his stake to Peltz’s fund, giving the activist a leg up.

• The nomination window opens in December at Disney, which didn’t return a Barron’s request for comment, though it isn’t known how many seats Peltz will seek. He quit his earlier campaign in February after the company made $5.5 billion in budget cuts.

• Other entertainment companies reporting this week include
  Warner Bros. Discovery,

  Lions Gate Entertainment,
  and
  AMC Entertainment,
  giving investors a deeper sense of whether Hollywood is getting back into its groove after a summer of strikes.

What’s Next: Unions representing actors, who are still on strike after 114 days, said they needed time to evaluate an offer from the studio and streaming companies they got on Saturday. They are considering a response in the context of critical issues addressed in their proposals, they said.

—Liz Moyer and Carleton English

Tesla
Raises Pay for German Workers—It’s Not 25%

Tesla is increasing pay for workers in Germany. It’s a reminder that the electric-vehicle manufacturer can’t totally ignore the union pressures that have rocked Detroit car companies.

• Tesla executives disclosed a 4% wage increase for workers at its site near Berlin during CEO Elon Musk’s visit to the factory last week, The Wall Street Journal reported on Sunday, citing people familiar with the matter.

• The promised wage increase is significantly less than the raises won by the United Auto Workers union for U.S. employees at Ford, General Motors, and Stellantis in its recent strike. The tentative deals agreed by the Detroit car manufacturers envisage wage rises of about 25% over the life of the contract.

• Musk told workers that the German assembly plant would build its next-generation vehicle, which is expected to have a price tag of around $25,000.

What’s Next: Tesla has resisted union drives at its sites in the U.S. and Europe but that’s not a guarantee it can avoid wage pressures, which could cut into its margins. UAW President Shawn Fain has signaled the union’s next targets are U.S. sites without union representation.

—Adam Clark

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Elon Musk Unveils His Answer to ChatGPT: Grok

Billionaire Elon Musk rolled out his answer to ChatGPT, the chatbot issued by
Microsoft
-backed OpenAI with great fanfare a year ago. Musk’s new artificial intelligence company xAI announced on his X social-media platform (formerly known as Twitter), that Grok is “modeled after the Hitchhiker’s Guide to the Galaxy.”

• Grok answers questions with a “rebellious streak” and a bit of wit, and xAI said people should avoid it if they hate humor. Grok gets knowledge from X’s platform. The name is a reference to a character in a book by Robert A. Heinlein and means to understand profoundly.

• Grok is also able to answer “spicy” questions rejected by other AI systems, the announcement said. Musk posted a side-by-side comparisonof Grok’s answers with a question about Joe Rogan’s Oct. 31 interview of Musk versus a “typical GPT.” Grok’s answers were shorter.

• xAI said Grok is still an early beta product but is expected to improve rapidly. The chatbot was released to a select group of users on Saturday but will eventually be offered to all premium plus subscribers of X, which costs $16 a month.

• The working theory of AI until now has been that it requires big, powerful computers, driven by hard-to-find graphics processors. PC makers are looking to change that paradigm. They are readying AI personal computers, with the first models set to arrive in the next few months.

What’s Next: It’s no surprise why the PC makers want in on the action. Research firm IDC recently forecast that enterprise AI spending would reach $143 billion by 2027, with a compound annual growth rate of more than 73%.

—Liz Moyer and Eric J. Savitz

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Buffett’s Berkshire Hathaway Amasses Record $157.2 Billion in Cash

Warren Buffett’s
Berkshire Hathaway
ended the third quarter with a record $157.2 billion in cash—its biggest war chest since the third quarter of 2021 amid a difficult environment for deal making. The conglomerate reported a deeper net loss because of stock-market weakness, but said its operating earnings rose.

• Berkshire squirreled away cash amid rising interest rates and fewer deal opportunities. Most of its cash is held in short-term Treasury bills. Berkshire said in a filing that interest and other investment income increased $1.3 billion in the third quarter, mostly because of rising rates.

• Operating earnings, which Buffett prefers as a performance gauge, rose to $10.8 billion, from $7.7 billion last year. But that doesn’t include unrealized gains or losses in Berkshire’s investment portfolio, which it has to report for net income, so a market slide affects its results.

• And investors still follow what happens with that substantial portfolio of stocks.
  Apple,
  Berkshire’s largest stockholding, fell 12% in the quarter, while
  American Express
  shares dropped 14%,
  Coca-Cola
  shares dropped 7%, and
  Bank of America
  shares lost 4.6%. All four stocks have risen in the current quarter.

• Berkshire bought back $1.1 billion of its own shares during the third quarter, after buying back about $1.4 billion in the second quarter. That brings the total for the first nine months of the year to about $7 billion in buybacks.

What’s Next: The cash means Berkshire could buy a business Buffett finds attractive. Berkshire’s vice chairman and Buffett’s business lieutenant Charlie Munger recently told The Wall Street Journal that the odds of their making another big acquisition were “at least 50/50.”

—Janet H. Cho

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Companies Steer Away from Stock Buybacks Amid Uncertainty

Fewer companies are buying back their shares, as more firms are holding on to their cash amid an uncertain economy. Higher borrowing costs from rising interest rates is increasing the focus on company balance sheets, and pressuring companies to preserve cash instead of buying their stock.

• Fewer than 150 companies announced buyback plans with their third-quarter earnings, down from more than 200 in the third-quarter 2022. The four-month moving average of buyback announcements is down from a recent peak of almost 350 companies in late 2021, research firm Wall Street Horizon said.

• There are exceptions. The travel planning site
  Expedia
  unveiled a $5 billion buyback, while oil major
  Shell
  revealed a $3.5 billion buyback. Rival oil company
  BP
  announced a $1.5 billion buyback, and brewer
  Anheuser-Busch InBev
  has a $1 billion buyback.

• Buybacks are attractive when companies are sitting on excess cash because they reduce the number of shares outstanding—thus increasing the profits each remaining shareholder receives. But firms with smaller cash piles tend to tighten their belts, including on returning money to shareholders.

• Companies that need to borrow for their operations and long-term investments are now dealing with higher rates. If their profit doesn’t improve enough, repaying that debt becomes harder, so management would necessarily set aside less money for share repurchases.

What’s Next: Profit outlooks have not brightened. The aggregate 2023 earnings for the
MSCI World Index
are expected to grow less than 1% from a year earlier, according to FactSet. Narrowing profit margins because of the rising cost of other items are pressuring companies’ bottom lines.

—Jacob Sonenshine and Janet H. Cho

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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner