A Referendum on the Market

Nvidia beats expectations... A referendum on the market... Some stocks matter more at certain times... More earnings reports... Walmart buys a TV maker... Fed watch... Setting up for more disappointment...

The latest on 'market darling' Nvidia...

I (Corey McLaughlin) don't usually do this, but I want to start today's Digest with an after-hours earnings report.

Chipmaker Nvidia (NVDA) just announced its latest quarterly financials...

In short, the results were strong. The company reported revenue of $22.1 billion in the fourth quarter and earnings of $5.16 per share, above Wall Street expectations of $20.4 billion in revenue and earnings of $4.20 per share.

Nvidia also projected revenue of $24 billion in the current quarter, and company co-founder and CEO Jensen Huang said "demand is surging worldwide across companies, industries, and nations" for its chips and artificial intelligence ("AI")-related products and services.

As we go to press this evening, the market's knee-jerk reaction to this "beat" and outlook in after-hours trading was to push Nvidia shares more than 7% higher. Other chip- and AI-related stocks got a bump too.

Early returns suggest a turning point...

Going into the earnings report, Nvidia shares were down roughly 9% since their most recent (all-time) high on February 14. The major U.S. stock indexes have also seen weakness over the same span, including today.

This should strike anyone who has been following our Ten Stock Trader editor Greg Diamond's work as interesting, to say the least. For months, Greg had been saying that February 14 would be an important turning point for the markets.

And the behavior of Nvidia's share price could give us a clue which direction the overall market may go from here...

But before we get to that, you might think we're overstating the importance of a single quarterly earnings report. Yes, there's a mosaic of information to think about outside of one report from one company... but let's consider why Nvidia's financials are worth a closer look today.

First, the AI buzz in the market over the past year has been loud and influential. You could argue it has been the catalyst for a 20%-plus move higher in the benchmark S&P 500 Index and a 30%-plus gain in the tech-heavy Nasdaq Composite Index over the past 12 months.

And Nvidia, a chipmaker Stansberry Venture Technology editor Dave Lashmet recommended way back in 2016 before it was a household name, has become the biggest ticker symbol associated with AI.

Plus, before its recent pullback, Nvidia was the third-largest publicly traded U.S. company by market cap, passing Alphabet (GOOGL) and Amazon (AMZN). Nvidia shares are up about 490% since their October 2022 low.

Why Nvidia matters in the short term...

Some stocks can matter more to the markets – in both price action and sentiment. Practically, when a stock like Nvidia weighs heavier in the S&P 500 Index, as it does, it influences what's referred to in the mainstream as the "market" or "U.S. stocks." Apart from that, when a stock like Nvidia is part of a popular sector or trend, any positive or negative reporting can be amplified… and color things in other parts of the market as well.

As we'll also talk about later in today's Digest, ongoing economic data and Federal Reserve speculation may matter more for the market over the next few months. But for today and perhaps the next few weeks, the reaction to Nvidia's quarterly results could influence the short-term direction of the market and sentiment around U.S. stocks.

I look at this earnings report as a referendum on the AI buzz and, by extension, the entire stock market. Market commentator Josh Brown, who spoke at our annual Stansberry Research conference last October in Las Vegas, described the scenario well earlier this week in his new blog...

You're hearing it from a long-term investor: I think the biggest risk for the Nasdaq right now is a great report from NVDA that only results in a single-digit pop in the price. If that's all we get, psychologically we'll be in trouble. The air will come out of everything tech-related in response. In this particular moment, I believe the reaction to Nvidia's quarter [this] week will tell us whether or not we've topped out for the time being. I think it's more important than any inflation reading, economic data point or Fed speech.

Now, Josh didn't say anything about if Nvidia shares rose after a great report, but the same idea applies. If shares continue to move higher, we could see more air coming into AI and tech-related stocks in the short term. But we'll watch the action over the next few days.

Elsewhere in earnings reports...

A few other notable quarterly reports also published this week... They tell a story of an economy that isn't in a recession, and we have another example of how earnings season can quickly go wrong for a company...

Yesterday, Walmart (WMT) – the nation's largest retailer (and grocery-store chain) – announced overall positive earnings.

First off, it beat Wall Street earnings estimates for the fourth quarter. The retail giant reported that online sales grew 23% compared with the same period a year ago, same-store sales grew 4%, and quarterly revenue grew 6%.

On top of all that, Walmart also announced that it's raising its dividend by 9% this year, its largest annual increase in more than 10 years – something a long-term, compounding-minded investor loves to hear.

CEO Doug McMillon also sounded more optimistic about the economy overall than he did three months ago. In a CNBC interview after Walmart's earnings report, he backed away from his prediction last quarter that the company would soon be staring down a deflationary environment. McMillon said...

The possibility overall [of deflation] still remains, but prices are more stable than where they were three months ago.

Plus, Walmart made headlines by announcing that it is buying smart-TV maker Vizio (VZIO) in a $2.3 billion deal. The purchase is intended to boost Walmart's ability to serve up advertising and grow its subscription Walmart+ membership business to create a kind of rival to Amazon, which owns the third-largest ad platform in the U.S. and has more than 230 million Prime members worldwide.

Vizio has more than 18 million active accounts using its smart-TV operating system, and Walmart could offer ads through the TVs. It could also offer other brands advertising space to its massive customer base. And it could leverage TV viewership data to create high-margin revenue streams outside its retail business.

Similarly, home retailer Home Depot (HD) announced fourth-quarter 2023 sales numbers that beat expectations yesterday. While the company is continuing to see a slowdown from the pandemic boom, it said customers have returned to more typical spending patterns. So Home Depot expects sales to grow by 1% in 2024.

The company also raised its quarterly dividend by 7.7%. Home Depot shares drifted slightly higher yesterday and today on the news.

But it wasn't all good news... Cybersecurity giant Palo Alto Networks (PANW) saw its shares plummet 28% today, from all-time highs, after it said that it's starting to see "spending fatigue" from clients and trimmed its full-year revenue forecast by about $200 million.

Fed watch...

Meanwhile, the Federal Reserve published the minutes of its January meeting this afternoon.

The words reflected what Fed Chair Jerome Powell said at a press conference (and later on 60 Minutes) following the Fed's meeting... that the Fed wants "greater confidence" that the annual inflation rate is moving toward 2% before cutting interest rates.

The minutes state that members of the policy-setting Federal Open Market Committee "judged that some of the recent improvement in inflation reflected idiosyncratic movements in a few series," meaning that recent price-growth decreases could be attributed to certain one-off behavior in parts of the economy and might not indicate a long-term trend.

High(er) inflation numbers...

The minutes come on the heels of another government report that suggests high(er) inflation is sticking around for longer...

On Friday, Uncle Sam reported that producer prices in the U.S. came in hotter than expected.

The producer price index ("PPI") for January rose 0.3% month over month, significantly higher than the expected 0.1%. PPI climbed 0.9% annually compared with the initial 0.6% estimate.

The rises were fueled by increases in the services sector, which jumped 0.6% and marked the largest increase since July 2023. Additionally, prices paid to producers for goods declined for the fourth consecutive month, falling 0.2%.

Core PPI, which excludes volatile sectors like food and energy, climbed higher than expected, up 0.5% from December. Core PPI rose on an annual basis as well, increasing 2% year over year.

This data echoes Mr. Market's current expectation that the Fed will hold rates steady in its upcoming March meeting. The CME Group's FedWatch Tool now has 93.5% odds of a continued Fed "pause." That's a sizable increase from last week's 65% odds following the release of persistent consumer price index ("CPI") numbers.

As we explained last week, the Fed will have a few more pieces of the puzzle to analyze before making its next policy decisions on March 20. The committee will have access to fresh unemployment data, the Personal Consumption Expenditures report, and another CPI report.

But it's becoming increasingly clear that the Federal Reserve will maintain the current rate until it observes "more good data" that suggests the annual inflation rate is on pace for 2%. It's not yet.

As we've been saying, the high inflation story is not done yet.

A setup for some more possible disappointment...

Bond yields have risen over the past few weeks, as more and more investors have realized higher-than-expected inflation. For example, the 10-year Treasury today yielded around 4.3% compared with 3.9% at the start of the month, a 40-basis-point difference...

As Stansberry Research analyst Mike Barrett wrote in Select Value Opportunities today (available to Stansberry Alliance members here), this is setting the stage for some more potential disappointment in the stock market.

As Mike put it, stocks have limited upside unless interest rates decline...

Never forget this rule... When stock prices rise, as they've done for 14 of the past 16 weeks (through February 16), so do the expectations baked into those prices. And the higher the expectations, the greater the potential for disappointment.

If interest rates are now poised to climb in the weeks and months ahead, rather than decline, stock investors will downgrade their rosy outlooks for revenue growth and profit margins... This will likely push stock prices lower.

As Mike pointed out, earnings season is now coming to an end. The next one won't start again until mid-April.

That means investors and traders will rely on upcoming economic reports and the ensuing Fed speculation they generate to make decisions, instead of the quarterly financials of Nvidia or anyone else.

And if the reality of higher inflation and a continued Fed "pause" becomes more entrenched in the market, the major U.S. indexes could be due for a breather – or pullback – until the story changes.

New 52-week highs (as of 2/20/24): ABB (ABBNY), Abbott Laboratories (ABT), Berkshire Hathaway (BRK-B), CBOE Global Markets (CBOE), Costco Wholesale (COST), iShares MSCI Emerging Markets ex China Fund (EMXC), Franklin FTSE Japan Fund (FLJP), Linde (LIN), Sprouts Farmers Market (SFM), Travelers (TRV), Waste Management (WM), and Walmart (WMT).

In today's mailbag, a subscriber argues against buying into China, an idea we talked about in yesterday's edition... and we have feedback on Ten Stock Trader editor Greg Diamond's new Diamond's Edge market analysis videos. These free, short videos are published first each week in the Digest and are available for subscribers to watch at StansberryResearch.com here... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"There is no doubt that China is a 'bargain' currently. But we've seen this movie before. The fundamental rule is that China is a 'command and control' situation and you have seen the runup and the instant drop when the government takes control of the economy, country, or market. When we send them our dollars, we are feeding a philosophical and military enemy. In addition, it is certain to become an economic basket case as they reap the reward of having a one-child policy for 40 years. How do you build an economy off of a shrinking population? Look at the demographics of the past three years if you want to see the future." – Stansberry Alliance member John D.

"Hey Greg. I'm not sure how long Diamond's Edge has been active but again love the technical analysis and the time you put into your information for us subscribers.

"I'm doing so much better because I'm able to trade in line with your analysis and overall information. Thank you." – Subscriber Marc D.

All the best,

Corey McLaughlin with Tyler Jarman
Baltimore, Maryland
February 21, 2024