🎙️ There Goes Nvidia

📈 Like clockwork, Nvidia did it again. The chipmaker crushed earnings, sending the stock higher after hours, roughly 12 months year since its stunning results during the same period last year.

Nvidia reported a 262% jump in sales and said it would split its stock 10-to-1.

“We are poised for our next wave of growth,” CEO Jensen Huang said.

More on Nvidia, the Magnificent 7, and higher valuations below.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• The Nvidia, Mag 7 rally victory lap is complete

• Why economists were wrong about recession forecasts

This, and more, in just 5 minutes to read.

Chart(s) of the Day

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In The News

🔥 As Nvidia Goes, So Does Valuation of U.S. Stocks

Folks, it’s Nvidia’s market, still. 

The chip-making giant reported its quarterly results on Wednesday, marking the climax of a robust earnings season for major tech companies. And boy, did it deliver again, beating expectations on sales and earnings.

If the past year is any indication, its latest stellar earnings will influence market sentiment for the year's second half. 

Market dictator: In the past 12 months, Nvidia shares have surged by roughly 215%, adding over $1.5 trillion in market value. This surge has elevated Nvidia's market capitalization to $2.3 trillion, making up more than 5% of the S&P 500 from 2.2% a year ago. Nvidia's performance will be crucial in confirming the sustained demand for AI and potentially setting the tone for other tech stocks.

• One equity strategist wrote: "It is the leader, and if the demand remains strong…that will dictate not only the next leg in the AI-deemed stocks in the semiconductor space, but it could dictate the market."

Stayin’ magnificent: Nvidia's earnings report followed strong performances from other major tech companies. An index tracking seven of the largest U.S. tech stocks reached a record high this week, bolstered by solid earnings from Microsoft, Alphabet (Google's parent), and Amazon. In short, they’re all on fire, especially if you zoom out since the mid-October 2022 lows. 

• Alphabet's shares have climbed 13% since surpassing first-quarter sales estimates and initiating a dividend. Meanwhile, Apple is nearing all-time highs again after a slow start to 2024.
  

• As one chief investment officer remarked, "The market has gotten a lot of what it’s wanted this earnings season. Nvidia is sort of icing on the cake."

Why it matters:

Investors had high expectations for Nvidia, given its history of outperforming Wall Street estimates for four consecutive quarters. 

Supply and demand: Another analyst noted that demand for Nvidia’s chips “is still outstripping the supply. You can always have an overreaction to the upside and downside in the short term, but fundamentals for the business have not changed."

• Nvidia said its data center category rose 427% from the year-ago quarter to $22.6 billion in revenue.
  

• Nvidia also bought back $7.7 billion worth of its shares and paid $98 million in dividends last quarter. It will also increase its quarterly cash dividend.

When will the run end? Stocks can go up and up for years, but eventually, they run into trouble, at least in the short term. Even the world’s most valuable companies, including Amazon and Berkshire Hathaway, have had rough periods. The question is, when? 

Another chief investment officer cautioned about the semiconductor industry's cyclical nature, stating, "There’s going to be that day where we hit an air pocket. I don’t know if it’s this quarter, next quarter, next year, or 10 years from now, but I know that these sales, you know, you tend to build ahead of things, and then you pause."

For now, that pause has yet to come.

Read more

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🤔 Most Americans falsely think the U.S. is in a recession

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😃 The best cities to live in the U.S. based on jobs, value, and quality of life

🤯 NYC rents are so high that only 5% of apartments are affordable

🤔 Why Economists Get Forecasts So Wrong

Superinvestors like Warren Buffett, Howard Marks, and Charlie Munger have famously advised investors to pay “zero” attention to macroeconomics and spend all their time and resources evaluating businesses. 

“We do not have, never have had, and never will have an opinion about where the stock market, interest rates, or business activity will be a year from now,” Buffett has written.

It’s advice worth heeding. Yet many investors love forecasts, whether it’s an analyst’s price target or an economist’s dire economic prediction. 

It's crucial to understand that these predictions aren’t just misleading or inaccurate—often, they’re significantly off the mark. As Ed Yardeni writes in the Financial Times this week, the unpredictability should serve as a reminder of the risks involved in relying solely on economic forecasts. 

• Groupthink may also be a barrier. Professional forecasters feel more secure aligning with the majority rather than risking a bold prediction.

Rewind: Over the past two years, economists have widely predicted a U.S. recession that never materialized. Initially, many believed the Federal Reserve would raise interest rates, slowing the economy to a screeching halt and prompting a recession.

• The rate hikes since March 2022 also led many economists to believe we’d get a recession because of indicators like the inverted yield curve, a declining Index of Leading Economic Indicators, and negative growth in real M2 money supply.
  

• Instead, unemployment remains near record lows, the stock market is at all-time highs, and the economy has (by most accounts) remained healthy. 

History doesn’t always rhyme: Economists are reminded that historical patterns only sometimes repeat, and their models have too many moving parts. 

• As Yardeni writes in the FT, “Economists need to recall that history doesn’t always repeat itself and doesn’t always rhyme. They should rely less on leading indicators and other simplistic models and more on common sense.”

Why it matters:

Here we are about two years since the Fed began aggressively raising rates, and virtually every asset class is around all-time highs. 

Several factors explain why economists were so wrong. Historically, recessions stem from credit crunches, oil price spikes, or bursting speculative bubbles. Yes, there was a brief banking crisis in March 2023 and oil price fluctuations due to geopolitical events, but those factors didn’t trigger a recession. 

Resilience: Plus, the economy showed unexpected resilience, driven by robust consumer spending, especially by the baby boomer generation, which is retiring with record wealth. The services sector expanded, particularly in areas like travel and healthcare, boosting employment and wages. 

• Federal government spending on infrastructure and incentives for onshoring provided significant fiscal stimulus, offsetting tight monetary policy. Corporate profits and capital spending also remained strong due to earlier refinancing at low rates and investments in technology and onshoring.

Bottom line(s): There's a good reason Buffett likes to read the news and stay up to date on current events. But there’s also a good reason he doesn’t let any of it factor into his investment decisions. 

As famed economist Paul Samuelson quipped in 1966, “Macroeconomists have successfully predicted nine of the last five recessions.” Some things never change. 

Read more

Quick Poll

On Monday, we asked: What is the most effective way to improve work conditions on Wall Street?

— Answers varied. One reader noted, “Cultural change is the only way to change. Unfortunately, top management profits from overworking their employees. Change will not happen.”

— Another respondent said, “In investment banking and other fields, this has been commonplace for decades. I am no fan of government enforcement. Each individual must understand what he can and cannot do. I used to work insane hours, but I value my health too much today. I will do a hard day's work, but 90-100 hour weeks are no longer in my realm of possibility.”

See you next time!

That's it for today on We Study Markets!

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