Adobe, Toyota, the Fed, and U.S. Treasury Ownership

Editor’s Note: Well, today’s Fed announcement was a real surprise… not!

Oh well.

Let’s get to it!


Adobe’s Disappointing Forecast

Shares of Adobe (NSDQ: ADBE) plunged on Friday after the software company announced weak guidance for the current quarter.

Adobe said that it’s expecting to see earnings per share (EPS) of $4.35 to $4.40 this quarter. Analysts had been looking for $4.38 per share.

In addition, the company estimated quarterly revenue of between $5.25 billion and $5.30 billion. That’s lower than the $5.31 billion Wall Street had forecast.

That was enough to send shares sliding by more than 10% in morning trading.

However, Adobe also reported fiscal first-quarter results that beat the consensus expectations.

The company posted adjusted earnings of $4.48 per share. Analysts had been expecting $4.38 per share, according to LSEG.

Adobe’s quarterly revenue came in at $5.18 billion — again, higher than the $5.14 billion analysts had been expecting. However, it was an 11% increase on a year-over-year basis.

But net income dropped from $.25 billion, or $2.71 per share, in the year-ago quarter to $620 million, or $1.36 per share.

During the fiscal first quarter, Adobe called off its plans to acquire design software company Figma for $20 billion, citing regulatory concerns. As part of the agreement between the two companies, Adobe paid Figma a $1 billion termination fee.

Several Wall Street prognosticators lowered their price targets for Adobe’s stock — largely because the company’s artificial intelligence (AI) products, such as the generative AI image creation software Firefly, have been slow to haul in profits.

Bank of America (NYSE: BAC) analysts lowered their price target for ADBE from $700 to $640 per share, writing that there’s still “No change to our view that Adobe is a major AI beneficiary.

“While the monetization ramp is slower than expected, Firefly is one of the [most] widely used generative AI offerings, with potential for multiple paths to monetization.”

In addition, Barclay’s (NYSE: BCS) also trimmed its price target, from $700 to $630 per share.

Adobe has other AI projects in the pipeline, including an AI-powered assistant for its PDF reading apps. Adobe is also working with OpenAI on a generative AI video application, Sora.

David Wadhwani, general manager of Adobe’s Digital Media unit, addressed the Sora project on last week’s earnings call.

“You’re going to see us obviously developing our own model,” he said. “You’re going to see others developing a model. All that creates a tailwind, because the more people generate video clips, the more they need to edit that content.”

So far this year, Adobe’s stock has lagged the S&P 500, losing more than 16% of its value as of Friday. By comparison, the S&P 500 has risen by more than 8%.


Hybrid vs. EV Sales

In the last several years, Toyota (NYSE: TM) has taken a lot of flak for hesitating to go all-out with battery-powered cars.

The Japanese company is one of the largest carmakers in the world. Yet when it comes to fully electric vehicles (EVs), Toyota has noticeably lagged behind its competitors. In fact, Toyota currently sells only one all-electric car, the BZ4X. By comparison, Ford (NYSE: F) already sells three.

Instead, Toyota has focused on hybrid vehicles, which have both a traditional gasoline-powered engine, as well as an electric one.

Toyota’s reluctance to plunge into EVs — despite several countries pledging to ban the sale of non-all-electric vehicles in coming years — contributed to the resignation of Toyota’s long-time CEO, Akio Toyoda.

But maybe there was something “to” Toyota’s strategy all along.

At any rate, it would appear to be finally paying off as sales of hybrid vehicles are on the rise while sales of EVs are plunging.

According to a report from J.D. Power, battery EV sales dropped by 1.6 percentage points in January from 9.2% in December.

“Further, upper-funnel EV shopper interest declined for a fourth consecutive month,” J.D. Power’s Elizabeth Krear said. “New-vehicle shoppers who are ‘very likely’ to consider purchasing an EV for their next vehicle dropped to 25.6%, a full percentage point lower than in December.

“Shoppers cite a lack of charging station availability as the main reason for rejecting EVs.”

But last month, Toyota reported that it had seen sales of hybrids and EVs surge by 84%. Sales of the Prius hybrid model rose by an incredible 363%.

Ford also enjoyed a serious uptick in hybrid deliveries in February, with 32% growth.

“Hybrids are just rockin’,” Toyota’s vice president and general manager of North American operations said. “Now that we actually have cars on the lot — even though we don’t have a ton — customers are able to drive a gas product and [an EV] when we have both powertrains in the same car.”


Latest Fed Survey Results…

According to the CNBC Fed Survey — which collects the thoughts that the country’s top economists and money managers have regarding the Federal Reserve — the pros are growing confident that the central bank can pull off a soft landing.

In fact, the most recent survey showed that the experts believe the U.S. gross domestic product (GDP) will show little to no sign of slowing growth.

According to the survey, the market experts believe there’s now a 52% chance that the Federal Reserve will achieve its “soft landing” — that is, bring inflation back down to the central bank’s 2% target while avoiding a recession. That’s higher than the 47% probability recorded in January.

In addition, the survey showed only a 32% probability of recession in the next 12 months. That’s the most optimistic response to this question since February 2022. By comparison, November’s survey found a 63% probability.

“The U.S. economy continues to move toward a modest growth and modest inflation environment,” Wells Fargo’s (NYSE: WFC) Scott Wren said.

“This may take longer than initial expectations, but the trend is favorable.”

Survey respondents are also expecting the central bank’s Federal Open Market Committee (FOMC) to announce three interest rate cuts this year. These cuts would bring the benchmark fed funds rate down to 4.6%.

The survey also showed that the experts are forecasting GDP growth of 1.6% this year. Although that’s lower than the 2.5% growth recorded last year, it’s higher than the prediction of 0.7% made last summer.


Who Owns Treasurys?

This week, Japan’s central bank raised interest rates for the first time since 2007. This brought an end to the world’s only regime of negative rates, which has been in place since 2016.

Unlike the U.S., Japan has been trying to drive prices upward to a 2% target.

This battle against deflation has obviously not been great for many Japanese investors. So many have tried their luck with investing in U.S. Treasury bonds.

At the end of 2023, Japan was the largest foreign owner of U.S. Treasuries. Banks, insurance companies, pension funds, and other institutional investors held a total of $1.138 trillion.

Take a look:

Infographic: Japan Is the Largest Foreign Holder of U.S. Treasuries | Statista You will find more infographics at Statista

Although the Bank of Japan has abandoned its negative interest rate policy, it’s likely Japanese investments in U.S. T-bonds will continue. After all, the current yield for a Japanese 10-year government bond is only 0.73%.

Contrast that to the 4.3% yield seen among U.S. 10-year Treasury bonds.


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