Nvidia Saved the Rally

For those of you who would prefer to listen:

Nvidia saved the rally. The most talked about stock in the world reported earnings Wednesday. As I wrote last week, Nvidia and AI have become more important than the Fed; At least to the Market.

Expectations were sky high. Nvidia delivered, and then some. It was another blowout quarter for the company that’s powering AI. Nvidia had already grown revenue by over 200% and earnings over 400% in a year. Nvidia’s stock has been a rocket ship for the innovation trade. The stock has soared 60% already in this young year. It hit $800 for the first time.

Heading into earnings, Nvidia was on a 4-day losing streak, with the stock down nearly 10%. The S&P 500 was in correction mode too. That trend reversed quickly. With another record quarter, Nvidia turbocharged the S&P to fresh, new highs. Nvidia alone accounts for 25% of the S&P gain in 2024. You read that right; one stock is responsible for 1/4 of the Stock Market gains. It also carried the Tech-heavy NASDAQ to a record high, finally erasing the losses since 2021. Despite the 40% gain for the NAS last year, it was still underwater from the 2022 correction. Volatility moves both ways.

Nvidia increased in value by $275 Billion Thursday. That’s the biggest daily increase in the history of America’s Stock Market. That’s quite a feat, considering the roots of the New York Stock Exchange go back to 1792 in lower Manhattan at the corner of Broad and Wall. There have been many tremendous daily moves by some fantastic American companies over the centuries. Nvidia just did something none other had. To put that Thursday move into perspective, Nvidia increased in value in one day more than the total value of Bank of America or The Coca-Cola Company as a whole. Nvidia cleared $2 Trillion in market cap Friday. It has surpassed Amazon and Alphabet to become America’s 3rd largest company behind just Microsoft and Apple. 

So, you know about the stock. Many might be wondering what exactly the company does. Nvidia is a semiconductor company. A simple way to think about it: Nvidia provides the tools that are driving Artificial Intelligence. The company designs the most advanced GPUs (Graphic Processing Units) required to power generative AI platforms and the large language models being developed by Silicon Valley. Nvidia has captured an estimated 80% share of the market while demand has been growing off the charts. These chips are worth Tens of Thousands of Dollars. Silicon Valley cannot get them up fast enough. Nvidia can’t make them fast enough. With companies possessing wads of cash and seemingly insatiable demand for something in short supply, prices go straight up.

It’s just incredible what this company has accomplished. Born at a Denny’s in San Jose in 1993, Founder Jensen Huang had a vision. Competition has always been fierce in Silicon Valley. Intel owned the 1980s and 90s. You remember the slogan; Intel was inside the vast majority of those computers as the advancement of the internet boomed. But the large chip titan missed the move to mobility and lacked the vision of Artificial Intelligence. It’s desperately trying to catch up. At the dawn of the 21st century, Nvidia emerged as a big player in video game chips. Its founder saw something much bigger ahead. Jensen is now affectionately referred to as the Godfather of AI. That booth at Denny’s is now dedicated to him.

It took 24 years for Nvidia to become a $1 Trillion company. It took just 8 months for $2 Trillion. The thing is, the stock kept going up because it’s gotten cheaper. The explosive revenue and earnings growth has Nvidia actually cheaper now than it was a year ago. It’s been like nothing I’ve ever seen in my professional career. Unlike the high-flyers in the Dot-com days, Nvidia is extremely profitable and is growing those profits at a super-fast rate. Of course, there will come a time when Nvidia’s AI demand will slow. Competition will eventually cut its lead, and the meteoric growth will slow. That time will definitely come. Nvidia made it clear this week that time is clearly not now. 

AI is everywhere. It’s even driving the space race. The first American spacecraft reached the moon’s surface since Apollo 17 in 1972. It was the first for a private company ever. The uncrewed 6-legged spacecraft, called Odysseus, is owned by a Texas company called Intuitive Machines. Odysseus carried a suite of scientific and technological instruments for NASA and other commercial customers that are designed to operate for 7 days on solar energy before the sun sets over the polar landing site. Odysseus was launched by Elon Musk’s SpaceX from NASA’s Kennedy Space Center in Cape Canaveral. Artificial Intelligence is used for the planning of the mission, but perhaps even more importantly, it plays a major role in navigating unanticipated occurrences on the fly. It’s just the beginning for the Age of AI.

AI is proving to be more powerful than the Fed. That’s clearly the message of the Market. But the Fed still matters. Yields rose to the highest levels of the young year. Money got more expensive. The 10-Year Treasury yield jumped back above 4.3%. The minutes from the Fed’s January meeting, released this week, leaned hawkish. That means no cuts imminent. That was expected. Fed officials are acutely aware of the risks of moving too quickly to cut interest rates. You may recall, stocks had been rallying in anticipation of multiple rate cuts in 2024. Those expectations have been curbed quite a bit. Inflation remains quite a concern. The rate of growth has slowed significantly, but prices are still high and rising. That has not slowed the resilient Economy as Consumers keep spending. The Fed minutes affirmed a mid-year rate cut. The Market now sees it happening in June.

Fed officials want to see more evidence that inflation is still moving towards its 2% target. Many have verbally warned about the risks of easing too soon following the hotter-than-expected January inflation reports. They don’t want to make a mistake and cut if inflationary pressures reverse higher. Influential Fed voting member Chris Waller said he needs to see at least another couple more months of inflation data before determining whether January inflation was a “speed bump or a pothole.” The AI Bulls have ignored the rising yields and Bond volatility, not to mention the ever-increasing geopolitical tensions and the inevitable turbulence from our Presidential election ahead. Right now, it just doesn’t seem to matter. 

Money is no longer cheap. 30-Year mortgages are back above 7%. It’s true that the vast majority of existing mortgages are below 5%, as many Americans took advantage of the low rates early in Covid to refinance. But new home purchases are significantly more expensive now, both in price and borrowing costs. The result has been an increase in all-cash home sales. AI is driving that too. Silicon Valley employees and investors have benefitted mightily and have been cashing in their shares and buying properties with the proceeds. The problem: Most Americans can’t do that. First-time home buyers have struggled throughout the 21st century to purchase a home. Prices kept rising at meteoric rates and now the price of money has risen too. These factors haven’t slowed home purchasing yet. But eventually, it will. It’s just a matter of time. 

California is impacted more than anywhere. It’s one of many reasons why people have left the Golden State. Case in point: A 960-square-foot house in Santa Clara just sold for over $1.1 Million. It was built in 1949. No evident upgrades. It was labeled as “Vintage”. That’s always an interesting word. I suppose you could say it had a small yard. It’s 2 miles from Nvidia headquarters. That’s an 8-minute drive. It was listed at $899K. There were multiple bids. It sold in a week. I mean, wow…

Back to the Market:

As mentioned above, the NASDAQ just hit a new, all-time high. It joins both the S&P and Dow, which hit record levels weeks ago. At this stage, every gain is a fresh, all-time high. There’s absolutely nothing negative about that. But there’s this: The NAS surged 3% on Thursday, driven by Nvidia, to hit that high. The last time the NAS saw a 3% daily gain to reach an all-time high was in March of the year 2000. That was the peak of the Dot-com bubble before bursting. It’s just one of many factors out there.

It’s been an absolutely stellar run for stocks since the panic lows last Fall. Tech has been the dominant leader. The Tech Titans are atop that list. The 7 largest companies have grown sales by 15% and earnings by a whopping 58%. The remaining 493 S&P 500 stocks only grew sales by 3%, while earnings fell by 2%. That’s a lot of weight for a few stocks to carry.

Tech is where the growth is. AI is the theme. We’re very much invested there. The theme is secular in nature. It’s core to our long-term investment theme. But near-term we’ve been fading the raging rally in Tech and have been rotating into areas that are showing green shoots for growth, plus healthy dividend payers, which have not participated in the AI run. We plan to stay active in 2024. It’s going to be an active year. It already is.

Have a nice weekend. We’ll be back, dark and early on Monday.


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