Wentz Weekly Insights
A “Tipping Point” For AI

All eyes were on Nvidia’s fourth quarter financial results that were released after the market close on Wednesday. Its results were enough to drive the stock to a new record high after a 16% increase Thursday and a $2 trillion market cap, along with giving the market confidence the momentum behind artificial intelligence (AI) can continue to drive stock prices higher.
The S&P 500 rose for the 15th time out of the past 17 weeks after a 1.7% increase last week, driven by Nvidia’s 9% weekly gain and gains in the other ‘Magnificent 7’ stocks. Meanwhile, in the Treasury market yields moved to three-month highs over Fed comments that it may take more months of data to gain greater confidence inflation is coming down, after hotter than expected inflation readings two weeks ago.
Nvidia’s expectations heading into the quarterly results were very high, which explains why the stock saw some volatility heading into the release with a 7% decline the two days prior to. It reported revenues of $22.1 billion in the quarter, $1.55 billion more than Wall Street had expected, reflecting growth of 265% from the year ago quarter. Its net income was $12.8 billion, about $1.4 billion more than expected. Nvidia’s graphic chips that power AI fall under its data center segment. Revenue in that segment the same quarter a year ago was $3.62 billion. In its last quarter that grew to $18.4 billion, generating a majority of the company’s overall sales.
More importantly, investors were looking for what the company was projecting for the upcoming year. For the next three months the company said it is forecasting its revenues would grow to $24 billion, well ahead of analyst’s estimates of $22 billion. This better than expected forecast for the current quarter was one of the main reasons the stock rose to new highs. To reflect just how substantial the growth has been and its impact on the overall markets, Nvidia’s earnings growth made up 31% of the whole growth in S&P 500 earnings in the last quarter.
Beside the financials, management commentary on the conference call helped push the stock higher. Jensen Huang, co-founder and CEO of Nvidia, said “accelerated computing and generative AI have hit the tipping point. Demand is surging worldwide across companies, industries and nations.” Companies across the globe are using Nvidia’s chips, which crunch an immense amount of data used for AI models, to power their AI services, from chatbots to creating text and graphics based on single prompts, according to Bloomberg.
Huang said demand for its newest products will continue to outpace supply in the year ahead and demand is not showing any signs of slowing. He said the new investment cycle of generative AI represents a market opportunity in the “hundreds of billions.”
While the enthusiasm in AI has generated much of the chatter recently, outside of AI markets are still focused on the economy and the Fed. This week we will see more inflation data for January, the Fed’s favorite inflation reading – the PCE price index. The report comes out Thursday morning where economists have increased estimates slightly after the hotter than expected consumer price index data released two weeks ago.
Since that report, markets have pushed out the expectations on when rate cuts would begin, along with how many rate cuts we would see in 2024. Fed policymakers have tempered the market expectations on rate cuts as well. Many public comments over the past two weeks have reiterated the need for the Fed to see more months of data that provide it greater confidence that inflation is moving back to its 2% target before they find it necessary to cut rates. Several policymakers gave a reminder that there are risks in cutting rates too soon, which could reignite inflation, while keeping rates too high for too long could slow demand enough to cause a recession.
At either rate, the data this week should paint a more clear picture for January. The report includes data on the consumer, with personal income and consumer spending. Outside of a wave of economic data, earnings season rolls on with many smaller cap tech companies and several notable retailers reporting quarterly results.
Week in Review:
Stocks opened the holiday shortened week Tuesday on a lower note in what was a rather quiet day in the markets. Nvidia caught attention with a 4.4% decline ahead of its earnings, while Walmart kicked off the week with earnings that were better than expected while Home Depot struggled due to slower housing market activity. For the day the S&P 500 fell 0.60% with small caps underperforming.
Wednesday saw another move to the downside with tech underperforming after a roughly 30% decline in the cybersecurity firm Palo Alto Networks. The minutes from the January FOMC meeting reiterated the risks of cutting rates too soon and mentioned officials would be prepared to talk about reducing the balance sheet runoff plans at the next meeting. Despite weakness in trading for most of the day, stocks ending at the highs of the day after a small rally in the last 30 minutes of trading. The S&P 500 finished up 0.13% while small caps fell 0.5% and Treasury yields rose slightly.
It was a very strong day for stocks on Thursday with all indexes higher led by the NASDAQ due to a 16% increase in Nvidia after it reported its quarterly earnings, equaling a record $277 billion added to its market cap. That was the talk of the day which led to an outperformance of all AI related stocks. There were many Fed policymakers with public appearances, but the message was consistent that more data is needed before they are comfortable cutting rates. Although the market gained 2.11%, the strength wasn’t as broad as the index gains would suggest with advancing volume just 58% of total volume on the NYSE.
The AI enthusiasm continued into Friday trading, however that faded through the day in what was most likely profit taking, with Nvidia opening about 4.5% higher but finishing roughly flat for the day and the NASDAQ finishing lower while S&P 500 was flat. Additional Fed speak reiterated the need to see more data before making policy moves to lower rates.
Stocks were mostly higher again last week as the enthusiasm over artificial intelligence continued, leading to the 15th weekly gain of the past 17 weeks for the S&P 500, which finished at new record highs. At the same time, Treasury yields were relatively flat after a big rise the first half of February with the 2-year yield at 4.67% and 10-year yield at 4.25%. Gold finished higher by 1.3%, the dollar index fell 0.4%, while oil fell 2.5%. In international markets, Japanese stocks hit a new record high, the first in 32 years. The major U.S. stock indices finished as follows: S&P 500 +1.66%, NASDAQ +1.40%, Dow +1.30%, and Russell 2000 -0.79%.

Recent Economic Data

  • Jobless Claims: The number of jobless claims the week ended February 17 was 201,000, the third lowest level of the past year, down 12k from the prior week with the four-week average down to 215,250. The number of continuing claims was 1.862 million, down 27k from the prior week and the four-week average up slightly to 1.877 million.
  • Existing Home Sales (January): Existing home sales rose 3.1% in January to a seasonally adjusted annualized rate of 4.00 million home sales, right in line with expectations. Compared to a year ago existing home sales are down 2% and still near the worst levels since the aftermath of the Financial Crisis. Recall existing home sales are measured by closings in January, so this reflects houses that went under contract late November and December when rates were still trending downward from 20 year highs. The median sales price rose 5.1% over the past year to $379,100 for the highest ever while inventory remains the issue with just 1.01 million units for sale, equivalent to 3.0 months’ supply at the current sales pace. The average number of days a home was on the market increased to 36 days, up from 32 days a year ago. Also interesting to note, all cash sales made up 32% of all sales, up from 29% last month and the highest portion in over a decade.

Company News

  • Dow Index Shakeup: S&P Dow Jones said it will be adding Amazon to the Dow Jones Industrial index which will replace Walgreens in a change that reflects the “evolving nature of the American economy,” increasing the exposure to consumer retail in the index. This was also prompted from Walmart’s 3-1 stock split which will reduce Walmart’s weighting in the index. It will also add Uber which will replace JetBlue, in a move to gain exposure to the ride sharing industry and due to JetBlue’s low weight in the index which was equivalent to less than 0.5% because of its low share price. For the Dow index, a higher share price gives the stock a higher weighting in the index, versus the S&P 500 where the higher market cap gives it a higher weighting in its index.
  • US Steel Deal in Jeopardy: Bloomberg has reported the Biden Administration is looking deeper into Nippon Steel’s connections with China. Nippon Steel, a Japanese company, last year agreed to acquire U.S. Steel, and additional findings could complicate the deal and lead to regulators blocking the deal.
  • Apple’s New Sports App: Apple released a free new app for the iPhone called Apple Sports, created for its simplicity and speed, that tracks real-time sports data and lets users access scores, stats, betting odds, and more. The app will also link users to the live stream, if applicable on Apple TV.
  • Adobe and AI: Adobe has released an artificial intelligence (AI) assistant in its Reader applications that will assist users in producing summaries and answer questions about the PDFs. Adobe says the tool will help users digest long PDF documents by providing brief overviews of the content and can generate citations allowing users to verify the source of the AI’s answers. The AI assistant is currently in beta mode, and Adobe is planning to release a subscription plan for the tool after its beta.

Other News

  • Fed FOMC Meeting Minutes: The release of the minutes from the FOMC meeting late last month revealed additional details that the Fed is in no hurry to cut rates and highlighted the risks of cutting rates too soon, although they believed rates had peaked for this cycle. As Powell had mentioned and was reiterated in the minutes, the Fed needs to see more evidence that inflation is trending lower. Regarding the balance sheet runoff, reducing the amount of Treasury holdings on its balance sheet, the Fed said it had begun thinking about thinking about a potential slowing of the runoff and will have a discussion on that at the next meeting.
  • Recent Fed policymaker comments: There were several Fed policymakers with public appearances last week and they all have been consistent with the same message – the Fed wants to see more data to be more confident that inflation continues to head lower, but is still on track to cut later this year. Many of them have talked about the risk of cutting rate too soon (which could reignite inflationary pressures) as well as keep rates too high for too long (slows demand too much and economy falls into recession). However, Governor Waller did say he would like to see a couple more months of inflation data to determine if January’s hotter reading was a speed bump or a pothole.
  • China Rate Cut: The People’s Bank of China, the central bank of China, lowered its five-year loan rate by 25 basis points last week in another effort to boost economic activity, the largest cut its ever made to that benchmark rate. The cut would lower rates for homebuyers and shows how China is making moves to prop up its weak real estate market. The cut followed several other moves earlier in the month to prop up its economy.

Did You Know…?

The Economic Impact of Weight Loss Drugs

Goldman Sachs said in a research note that the new class of weight loss drugs could help boost the U.S. GDP (gross domestic product) by 1% in the coming years due to efficiency gains. For reference, U.S. GDP was $22.673 trillion in 2023. The report says academic studies have suggested obese individuals are less likely to work and when they do, they are less productive, resulting in at least a 1% impact to total output. Big players in the obesity drug market include Eli Lilly with Zepbound and Novo Nordisk with Wegovy. It estimates that by 2028, 10 to 70 million people will be taking one of the new weight loss drugs.

Nvidia’s Record Run

Nvidia’s stock rose 16% on Thursday, the day after its reported its fourth quarter financial results, adding $277 billion to its market capitalization, the largest one-day increase of any company ever (beating Meta’s one-day increase of $196 billion earlier in the month). In addition, its market cap surpassed the $2 trillion level, becoming only the third publicly traded company to do so (after Apple and Microsoft). The chart below shows the top 10 largest one-day market cap increases.

The Week Ahead

In the week ahead the economic calendar has many reports but none expected to be potentially market moving until the PCE inflation data Thursday, while the earnings calendar sees more quarterly results from the retail sector and technology. Other economic data releases include updates on the housing sector with new home sales, pending home sales index, and the Case Shiller home price index, along with the second estimate of fourth quarter GDP, durable goods orders, the PMI and ISM manufacturing survey indexes, construction spending, jobless claims, and sentiment surveys with the consumer confidence and consumer sentiment results. Notable companies on this week’s earnings calendar include Workday, Zoom Video, Domino’s Pizza on Monday, Target, Lowe’s, Kroger, AutoZone, eBay on Tuesday, Salesforce, Baidu, Snowflake, Okta on Wednesday, Best Buy, Autodesk, Dell on Thursday, and fuboTV on Friday. Look for political commentary and headlines to gain attention in the media with Washington running up against a March 1 deadline to pass a deal to fund the government for the rest of the year (to avoid a partial government shutdown), with a larger government shutdown to take effect if nothing is still done by March 8.