May 23, 2024
Good morning,
When I said quiet week in Monday’s Morning Note, I didn’t expect the markets to be this quiet. The S&P 500 Index (SPX – cash market NY) and its 24-hr sibling, the S&P 500 Futures contract (SPA – commodities market Chicago), have traded within a few points of last week’s close for three straight full days – maybe a record, I don’t know. I do know that the VIX (known as the volatility index and is designed to be an up-to-the-minute market estimate of the expected volatility of the S&P 500 Index) set a new 5-yr low this week. I suspect that the unusually calm market behavior fits well with the smooth sailing ahead (wks/mos) short-term market message we’ve been getting.
The quiet was interrupted last night after the close of the cash market when Nvidia released its quarterly earnings report with future projections. The market asked, and once again, Nvidia delivered. The exuberant messaging from the company is just what AI bulls wanted to hear. As recently as two years ago, NVDA earned $3.34/shr. This year’s forecast is for $26. An indication of just how much the AI theme has flowed into the company’s bottom line. As the company on the front end of the AI assembly line, it is the first to harvest bottom-line results. To put its growth in perspective, that magnitude of total profit growth would be more than Cisco Systems enjoyed between 1994 and 2000 when EPS rose from 6.6c per share to 39c. If NVDA traded at Cisco’s multiple today, it would be 3x more expensive. That’s not a projection, just a comparison. It may also suggest that bubble valuations are a long way off.
It is becoming clearer by the week: AI is likely to be the largest transformational technology ever, it is still early innings, and as such should push overall market valuations higher than historical norms as the productivity gains flow through to many, if not every, industry under the sun.
Have a great Memorial Day weekend.
Be well,
Mike
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