On August 18th, we posted how we were covering over half our shorts and expected a short-term bounce based on the bond market stabilizing. In fact the S&P did bottom on 8/18 at 4370 and 10 year yields peaked the next day at 4.34%. This past week saw a 4 day rally in the S&P through (8/30) after having no consecutive up days in the month of August.
The S&P is up 3% from its close on 8/18 with Nasdaq up 6% while 10 year yields have now dropped by 17 bps from 4.34% at their peak to 4.17%.
Jerome Powell’s speech on Friday 8/25 was marginally positive followed by data of a slowing labor market this past week while PCE readings were inline with expectations
Our favorite large cap technology names with an AI angle to them.
$NVDA beat revs by 10% in their April quarter and guided 53% above the street for their July quarter when they reported on May 24th. This was the fuel for a surge of 8% on the S&P from ~4200 to ~4400 from (5/24-8/23) with NVDA up 54% during that time and Nasdaq up 10%.
The AI optimism remains alive and well as NVDA on August 23rd beat revenue consensus for their April quarter by 21% and guided revenues 27% above the street for their October quarter. Since Nvidia’s latest results, the S&P has gained 2% from ~4400 to ~4500 from (8/23-9/1) with NVDA up 3% during that time and Nasdaq up 2%.
The good news is that Nvidia’s stock on a forward twelve months basis is actually ~15% below its average PE over the past 5-7 years as estimates have gone up faster than the stock. We still think we are in the early innings of the ramp in AI but obviously at some point in 2024, supply will catch up to demand and the double and triple ordering we are seeing from customers today will have to normalize.
But just because every technology company says AI 50 times on their earnings calls does not mean that all companies are going to benefit. “In the year of efficiency” to borrow a term from Mark Zuckerberg, spending on AI is in many cases coming out of spending in other areas. We would note that most big ad agencies have missed their revenue forecasts. Most big networking related companies (such as Juniper, Commscope, Nokia, Ericsson) have missed (with the exception of Arista.) Many big IT services vendors have missed like Accenture, IBM and Infosys. And now even software security seems to be feeling the pinch as seen by Fortinet results. Even in semiconductors, TSMC, the foundry for Nvidia, had to cut their numbers while AMD also saw an estimate cut. Even Microsoft which is a big shareholder in OpenAI which developed ChatGPT saw their Azure estimates get cut slightly. Market multiples are too high for stocks not to feel pressure if this continues.
We think our top AI picks will be able to withstand the economic pressure between now and year-end on discretionary spending
Inflation, the Fed, Bond Yields & Valuation
With solid US GDP growth, higher energy prices and a still solid labor market, inflation & therefore the Fed and 10 year treasury yields may remain higher than investors expect:
19x is the average multiple for the S&P over the past 70 years when headline CPI is between 2-3% vs a 21x multiple today with the CPI at 3%. So valuations are on the higher side.
Dan Niles is founder and portfolio manager for the Satori Fund, a tech-focused hedge fund.