Nicolet Wealth Management Monthly Newsletter 3.5.24
NVIDIA’s Market Dominance
NVIDIA’s stock market and industry exceptionalism has been on full display this year, returning about 60% in two months after a 239% advance last year. Putting this return into context, over the last two years, NVIDIA has contributed about 20% of returns to the market. The performance of NVIDIA’s stock has come alongside a rapid increase of revenue, rising 265% from a year ago on strong sales for artificial intelligence (AI) chips. Investors believe NVIDIA is uniquely positioned to take advantage of the recent surge in technology hardware spending because its chips are better suited to crunch data necessary for AI programs. Over half of demand for its AI chips has come from large cloud providers.
Q4 2023 Earnings Season Nearing an End
By the end of February, almost every company in the S&P 500 index reported fourth quarter, 2023 earnings. Last quarter’s reporting season confirmed the notable improvement in the economy. After bottoming in early 2023, revenue growth has advanced to a level of 3.9% from 0.9% in the second quarter of 2023. The catalyst remains centered around the select magnificent 7 stocks exhibiting a revenue growth rate of 15% in the quarter, led by Nvidia, Amazon, Meta and Microsoft all announcing revenue growth exceeding 15%. It is worth noting that earnings growth has been negative without the magnificent 7 stocks, underlying the importance of the highest weighted stocks.
Inflation Growth Persistence
The much-anticipated indicator on inflation added to near-term interest rate uncertainty. The January Consumer Price Index (CPI) from the Bureau of Labor Statistics (BLS) increased 0.3% month-over-month, topping the consensus estimate and December’s downwardly revised advance of 0.2%. When excluding food and energy from the headline CPI number, inflation rose 0.4% month-over-month and 3.9% year-over-year, exceeding expectations.
Signs of moderating can be seen in goods prices, but there are pockets of persistent inflation, particularly in services. Core services inflation advanced 0.7% in January, compared to a 0.4% increase in December with non-housing sectors accounting for much of the expansion. There were three notable categories that led to higher services inflation: transportation services (airfare), vehicle insurance and repairs, and medical-care services. Most notably, these segments are closely followed by the Federal Reserve (Fed) because of its link to resilient wage growth.
Rates Spike on Higher for Longer Monetary Policy
Market expectations for a Fed policy rate cut in the first half of 2024 was tempered following commentary from Fed chair Jay Powell at the last FOMC meeting and a stubborn inflation print. Long-term interest rates, benchmarked by the 10-year Treasury yield, increased 0.34%, while shorter-term interest rates (commonly a guide for the Fed’s policy rate) rose 0.41%. Two months into the year, investors expect three 0.25% rate cuts in 2024 to a target rate of 4.425%, a significant change from six rate cuts at the end of 2023 and slightly less than the Fed’s projection of 4.625%. Inflation returning to the Fed’s preferred level of 2% and the employment trajectory are two indicators that will determine the path of policy rates as we progress through 2024.
Global Equity Markets Rally
The U.S. stock market returned 5.34% in February, only marginally outperforming Emerging Market stocks. Unlike last year, China’s stock market turned into a contributor of positive returns last month, advancing nearly 8.55%. Support for a weakening real estate sector and an emphasis on technology innovation is expected to be communicated by China’s much anticipated “Two Sessions” policy meeting. Other strong performing international stock markets include Japan’s Nikkei 225 index, which reached an all-time high after surpassing its last peak 34 years ago. The Nikkei 225 Index is also benefiting from a surge in AI technology spend.
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