Market Update: Nvidia is still the Tail that wags the Dog

Nvidia is still the Tail that wags the Dog

Nvidia reported last night and the stock shot past its previous high by about 4-5% (as of writing this article). This lifted the S&P 500 to a new high, increasing almost 1% from its previous high a week ago. Before this Nvidia dropped about 10%, dragging down the S&P 500 by around 2% over the same period. News on Nvidia and Canadian rate cuts are hot topics right now.

Topics

Nvidia Earnings

Canadian Inflation and Rate Cuts

Nvidia Earnings

Nvidia reported last night and the stock shot past its previous high by about 4-5% (as of writing this article). This lifted the S&P 500 to a new high, increasing almost 1% from its previous high a week ago. Before this Nvidia dropped about 10%, dragging down the S&P 500 by around 2% over the same period. 

This market and Nvidia seem to be tied at the hip where the direction appears to be driven by what Nvidia does. A $40 stock in 2019 has shot to a $750+ stock in 2024 and is now larger than Alphabet, Meta Platforms, Amazon, and Tesla to become the third largest publicly traded company in the world. 

Their story is truly remarkable, as it does not appear that they can be stopped. The biggest reason why this is impressive is that they are a very profitable company. They made about 10 billion dollars last quarter which is roughly what Tesla was making annually in their 2022 glory days. When Tesla also became one of the largest companies in the world surpassing companies like Meta and Amazon in market cap. Since then, Tesla has lost half its value when their margins began to compress over time. 

Nvidia 5-Year Chart - Today‍

‍Tesla 5-Year Chart - To its peak in 2021

‍Tesla 5-Year Chart - Today

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This is not to say Nvidia will share the same fate because they are a different story, in that they are making a lot of profits on very high profit margins. They can sell their GPUs at very high prices, and everyone will pay it because there is nothing even close in comparison. While it’s not the same story as Tesla, I do remember a time when Tesla could charge whatever they wanted on a car, and everyone would buy it. The story for Nvidia is how long is that runway and how long can they deliver a superior product. On the positive side, they are the clear leaders, and no one is even close.

Canadian Inflation

Canadian inflation dropped to 2.9% in January, a large drop from 3.4% in December. Most of the increase was due to mortgage costs. This is something we have been beating the drum on for a while, the interest rate increases are keeping inflation high. This is a double-edged sword because a fast drop in rates may push inflation higher as it may spur spending, but this is a large component of mortgage costs as they are drastically higher than when real estate was at its peak.

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While the headline was strong the CORE inflation rate (excluding food, energy, and mortgage interest costs) was 2.4%, extremely close to the Bank of Canada’s target. The Bank of Canada is running out of reasons to not cut the interest rates, except to keep parallel with the United States. Rate cuts in Canada are coming very soon.

On another note, Canada has decided to halt quantitative tightening between April and June of 2024. This is an acceleration from the previous target which was the end of 2024. This will lower rates on bonds in the market and stop the reduction of money supply in the market. This is expansionary and shows that the Bank of Canada recognizes the difficult position our economy is in and the urgency needed to stabilize it.

Summary

For the S&P 500, the Nvidia earnings show us that the AI story is not over and the demand for these products is still very strong. The valuations are high and can stay high as long as these companies continue to surprise with better-than-expected earnings. 

On the other side of the border, Canada underperformed the US drastically in 2023 and in this case, investors were correct. Canada’s economy has been hit harder than the US and has been pushed into reducing tightening policies sooner than the United States. This has been reflected in the exchange rate in currencies and performance in stock markets. There is currently better value in the Canadian markets than the US markets as their valuations vs. the rest of the world remain elevated.

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Sincerely,

Justin, Konrad, and Merriel

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