The Week in Review: February 26, 2024
A Nvidia Rally and the Power of Profits
According to the Wall Street Journal, chipmaker Nvidia (NVDA) reported much better-than-expected quarterly revenue and profits on Wednesday evening. It was a blockbuster report. Nvidia checked all the boxes.
Shares of the maker of semiconductors that support most AI systems soared 16% on Thursday and closed at an all-time high (MarketWatch). Its valuation soared to about $2 trillion (WSJ).
We rarely get this granular on individual companies. But it's worth noting that AI has played a role in driving up tech stocks in the past year. The Santa Clara-based company is no exception.
Moreover, Nvidia’s results helped fuel a sharp rally in stocks on Thursday, as the Dow Jones Industrials and the S&P 500 Index hit fresh highs (WSJ). The Nasdaq Composite closed above 16,000 for the first time since November 2021 (MarketWatch), finishing within 16 points of its closing high of 16,057 (MarketWatch) over two years ago.
That brings us to the broader question about profits and their impact on the market.
90% of S&P 500 companies have posted Q4 2023 earnings, according to LSEG, formerly Refinitiv.
At this juncture, earnings are projected to rise 10.0% for Q4 (a blend of the 90% that has been reported and the forecasts for the remaining 10%).
A double-digit rise would be the first increase since Q1 2022’s 11.4%. It would also be well ahead of the consensus forecast of a more muted 4.7% projected on January 1, when the Q4 earnings season was about to begin.
Interest rates versus profits
Since the beginning of the year, the benchmark 10-year Treasury yield has risen. Talk of a March rate cut by the Federal Reserve has been squashed by stronger-than-expected economic data and a bevy of Fed officials who have been pushing back on talk of an early-year rate cut.
A couple of weeks ago, a hotter-than-expected inflation reading also forced investors to reconsider an aggressive series of rate cuts this year. The inflation number sparked a sharp retreat in stocks that day, but, as it turned out, the one-day selloff was simply a knee-jerk reaction.
Aided primarily by the expanding economy and strong corporate profits, shares quickly recovered.
What can we learn from this? Lower rates coupled with economic growth would likely benefit stocks. But what if it’s a binary choice between rate cuts and rising profits?
Well, it may not be about the number of rate cuts the Federal Reserve might deliver this year.
We don’t want a rise in the rate of inflation that encourages the Fed to resume its rate-hike campaign. But an expanding economy that fuels corporate profit growth has historically underpinned stocks.
Many variables go into the stock market pricing equation. While we advise against reading too much into a few weeks of trading, receding forecasts of aggressive rate cuts this year have been offset by upbeat profits, and the market has hit new highs.
Market Summary
Two for the Road
The S&P 500 is up over 30% since the yield curve inverted back in October 2022. -@charliebilelloAccording | Charlie Biello, Chief Market Strategist @ Creative Planning Investor
“Far more money has been lost by investors preparing for corrections or trying to anticipate them than has been lost in corrections themselves.”-Peter Lynch
Please do not hesitate to contact me with any questions or concerns. I hope you have a wonderful week!
Bill Stordahl, CFP®
Managing Director
Stordahl Capital Management
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