“There are no shortcuts to any place worth going.” ~ Beverly Sills

Good evening,

Nvidia (NVDA 0.94% ), which had been consolidating since February, soared this week after once again reporting stellar quarterly results and releasing ebullient guidance. The dominant producer of AI chips has grown to a nearly $2.7 trillion market cap – larger than the respective GDPs of all but seven countries. Consequently, although much of the rest of the market saw choppy trading this week, Nvidia's outsized weight in the S&P 500 helped the market to end largely flat.  

Before Nvidia’s earnings release, Fundstrat Head of Research Tom Lee had noted that “investors tend to be ‘top callers’ when stocks consolidate, but after consolidations, NVDA 0.94%  tends to make a parabolic rise higher (see late 2022 and late 2023).” We saw this again after Nvidia’s latest report. 

Responding to those asserting that Nvidia is at or near a peak, Lee drew on his days as a telecom analyst, near the beginning of his career. Cisco and its router played a key role in the rise of the Internet age, just as Nvidia and its chips are proving to be critical as the AI era takes off. “Cisco stock ultimately got to 100 P/E,” Lee pointed out, while Nvidia’s P/E is currently around 30. This is an imperfect comparison, but sufficiently similar for Lee to assert that, in his view, “this tells us that there’s still a lot of upside left, both on earnings and multiples.”

Head of Technical Strategy Mark Newton agreed with the logic. “My sense is that Nvidia is likely going to be a leader for a long time, and that makes it tough to fade. It’s Nvidia’s world, and everybody else can rent,” he quipped at our weekly research huddle, before sounding a more grounded note. 

“Because of Nvidia’s success, it’s a bit of a mirage to look at the indices and conclude that everything's great,” Newton said. “Yes, Technology is great. It has recovered, but the rest of the market still has some work to do. The S&P looks very good – we’ve had a big breakout and we've completely recouped all this minor weakness from late March now. But, you know, Tech has such a huge influence now on our indices that you really want to look under the hood and examine the nuts and bolts. Most of the other sectors, when we look at them on an equal-weighted basis, are lower over the last week.”

Lee believes that Nvidia can change this. “Both institutions and retail have been raising cash for the last three weeks,” Lee pointed out. Based on anecdotal data from his conversations with clients and major investors, “we get the sense that investors were cautious ahead of NVDA results, because of the size and importance of the company to the broader technology thesis,” he told us. If that’s the case, “a strong report from Nvidia could pull money off the sidelines,” in Lee’s view.

Newton suggested an alternative catalyst. “In my view, it will be important to see whether the key data in the weeks to come shows any real softness that would justify all these rate cuts that have been built in, and/or if we get a real growth slowdown.”

“Bad news in the short run will be good news because it's not ‘true bad news’. Unemployment is still at great levels, for example. But even just the beginning of some softening that gets rates lower would be positive for the stock market,” he added. “My thinking is the economy is going to continue to weaken in the near term. Regardless, for whatever reason, I suspect that the data in the weeks to come is going to allow for a bigger breakdown. Rates are really starting to tail off and pull back.”

There was scant new macroeconomic data this week, but there was information to be gleaned from the release of the minutes from the last FOMC meeting (May 1). Investors showed concern, as the minutes showed some FOMC members expressing “a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.” 

However, Lee pointed out that the views expressed in the minutes were based on “backward-looking data,” while more recent data shows that the two most stubborn components of inflation, auto insurance and shelter, are already cooling. “The data to watch are next week’s April PCE data and May CPI,” he said. 

Looking forward, Lee is constructive into June, citing historical patterns. In past bull or flat markets, when the S&P 500 had been positive in the first quarter (as we were this year) and April was down, June has been an up month 100% of the time. Lee said, “To me, that’s another reason why stocks are looking pretty good for the next six weeks or so.”

Elsewhere 

Dutch semiconductor-equipment manufacturer ASML can reportedly activate a remote “kill switch” on its bleeding-edge ultra-lithography machines. ASML is the only source of such machines, needed to make the most advanced semiconductors, and the West had expressed concerns about China getting its hands on the technology by invading Taiwan. (ASML is barred from selling the machines to China by Dutch law.)

President Biden welcomed Kenyan President William Ruto to Washington, D.C., designating Ruto’s country as a major ally as part of an effort to counter growing Russian and Chinese influence in Africa. Microsoft announced it would invest $1 billion in a new data center in Kenya during the visit. 

The National Oceanic and Atmospheric Administration (NOAA) has warned that the North Atlantic is in for an “extraordinary” hurricane season, with more than double the average number of major hurricanes (Category 3 or higher) this year. NOAA said we could see as many as seven major hurricanes, compared to the average of three per season, matching records seen in 2005 and 2020.

The Department of Justice has filed an antitrust lawsuit against Live Nation, alleging illegal monopolistic tactics that hurt customers, and calling for a breakup of the company. Concert promoter Live Nation, parent company of Ticketmaster, described the allegations as “absurd.” Thirty state attorneys general joined the lawsuit. At least one consumer class-action lawsuit making similar allegations has been filed against the company, seeking $5 billion in damages on behalf of ticket purchasers. 

China reported a decline in its youth unemployment in April, from 15.3% in March to 14.7%. The statistic measures joblessness in the 16-24-year-old age group, excluding those enrolled in school. Overall unemployment also fell slightly in April, from 5.2% to 5.0%.

FDIC Chairman Martin Gruenberg will step down after an independent report partially faulted his leadership for a toxic workplace culture at the agency. The report covered more than 500 complaints that included stalking of staffers by colleagues, homophobic comments in the workplace, and one incident in which a female employee received an explicit photo of a higher-ranked colleague’s privates. 

China has released a chatbot trained on the words of Xi Jinping. The generative AI, which one news source whimsically dubbed “Chat Xi PT”, is intended to generate content consistent with the philosophy known as “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era,” or “Xi Jinping Thought.” Chinese law requires tech companies to ensure that their generative AIs only generate content that “embodies core socialist values” and does not “subvert state power.”

Headline inflation in the UK slowed to 2.3% in April on a YoY basis, down from 3.2% in March. Much of the decline was attributed to lower household energy bills and lower food prices. Though an improvement, the number came in worse than the expected 2.1%.

The White House announced plans to release 1 million barrels of gasoline from the Northeast reserves to help ease prices between Memorial Day and Independence Day (July 4).

And finally: Ivan Boesky, one of the most infamous Wall Street figures of the 1980s, has died at age 87. Boesky, who served two years in prison after his conviction for insider trading, was the inspiration for the fictional Gordon Gekko.    

Notice

U.S. markets and Fundstrat offices will be closed on Monday, May 27, 2024 in observance of Memorial Day. Fundstrat will not publish on Sunday or Monday.