Chief Investment Strategist
Sometimes a picture says more than a thousand words and that is exactly what yesterday’s performance heat map of S&P 500 stocks did (see below). In a sea of red as US stocks reacted negatively to strong PMI figures, which lowers the probability of a rate cuts, Nvidia shares pulled in the opposite direction gaining 9.3%.
Nvidia rose strongly yesterday as its earnings results published after the US market close on Wednesday showed a strong beat on both revenue and earnings. Revenue was up 262% YoY and EPS was up 585% YoY. But it was its revenue outlook for the current quarter of $28bn plus or minus 2% that beat estimates of $26.8bn that really got investors excited. The excitement continued on the earnings call when the founder and CEO Jensen painted a wild picture of the future with Nvidia powering it all. As the slide below shows, Nvidia has significantly pushed the computing power to new levels and Jensen said more was to expected and that it would drive significant innovation in self-driving cars technology and drug discovery (Nvidia is building a supercomputer for that purpose with Novo) just mention a few things.
Ahead of Nvidia’s earnings we published the first in our new weekly series where we every Wednesday covers a high quality company. Read the fascinating story behind Nvidia and how it became a high quality company, but importantly whether it can remain a high quality company in the future as Google, Meta, and Microsoft are collaborating to break down the competitive walls protecting Nvidia’s business.
The two big themes this year have big defence and AI. All waves end at some point and a new one will come. We believe that the next wave in investment themes will be electrification due to the massive demand for datacentres filled with GPUs to train AI models and compute inferences from these models. Bloomberg recently did a podcast with Brian Janous, the former Head of Energy at Microsoft, in which he explains that electric utilities have gone in one year from projecting zero growth in electricity demand over the next 10 years to a doubling. The message is that this increase in electricity production will create a big investment boom in new power plants and renewable energy projects, but also buildout of new electricity grid infrastructure. From an investment angle our view is that grid technology is the sweet spot.
The biggest players in the US and European grid technology industry (power lines and transformer stations etc.) are GE Vernova, Siemens Energy, ABB, Schneider Electric, Eaton, Nexans, and Prysmian. As the chart shows below, the total return for these companies has been quite good over the past five years and the AI boom has extended the momentum even more. This year these stocks excluding GE Vernova that was IPO’ed in April are up 31.2% on an equal-weighted basis beating the MSCI World by a big margin. One could argue that the electricity grid theme is already running, but in the minds of investors and in terms of media headlines it has not rose to attention yet. For investors that want to diversify their portfolio’s exposure to AI considering these companies in electricity grid technology might be a good idea. When we look across last week’s performance we can see that the information technology sector is the only sector that is up while interest rate sensitive sectors such as consumer discretionary, utilities, and real estate have been under pressure. Across regions things have been muted, but as we highlighted in last week’s equity update, US equities are back to all-time highs and it begs the question of whether we have a bubble again.
Looking at our valuation model on US equities there are signs that US equities are getting too expensive again and that investors should consider reducing exposure to US equities. In last week’s update we flagged European equities as the most interesting alternative right now to US equities and that is still the case. Based on our valuation chart we can say that we have had three bubbles in US equities since 1992. The first came during the 2000 dot-com period, the second was the technology bubble during the pandemic reopening in 2021, and now this AI fuelled bubble with Nvidia shares spearheading the move.
Next week’s key earnings to watch starts on Tuesday with Salesforce reporting FY25 Q1 earnings (ending 30 April). Analysts expect 11% YoY growth and EBITDA of $3.8bn up from $2.8bn a year ago as Salesforce continues to focus on improving profitability. Investors will also focus what Salesforce is doing to implement AI workloads on their Salesforce platform. Costco reports FY24 Q3 earnings (ending 31 May) on Thursday with analysts expecting revenue and EPS growth of 8% YoY as Costco continues to take market share in the US retailing industry due to its strategic positioning on high value which fits well in an inflationary environment. Dell Technologies reports FY25 Q1 results (ending 30 April) on Thursday with analysts expecting revenue growth of 3.5% YoY and flat operating profit growth. Dell Technologies has been one of the big winners since ChatGPT was launched in late 2022 as the market has repriced the company’s shares, but it remains to be seen whether its partnership with Nvidia on AI and demand for AI workloads are filtering through to Dell’s business.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
