All Eyes on Nvidia Today
Expectations are sky-high for the stock, with some investors seemingly getting nervous
Highlights
• Investors brace for Nvidia’s earnings after the close
• Retailer reports were not constructive for the U.S. consumer
• Disinflation continues with freight rates (and volumes) down in January
• Initial claims are not the same indicator they used to be
While We Were Sleeping
Yesterday seemed to be a classic case of “selling the news” ahead of today’s key market event, which is Nvidia’s earnings release after the close. Add on the poor macro dataflow (U.S. LEI fell for the 23rd straight month) and the continued struggles out of China, and the negative sentiment weighed on all major averages and sectors (except one, Consumer Staples). This has continued this morning as well, with futures for all three key indices down between -0.2% to -0.4%.
As mentioned, this defensive bias comes in anticipation of Nvidia’s earnings report today as market participants looked to have booked profits in the stock that contributed the most to the S&P 500 over the last year (29% of the S&P 500’s move so far in 2024 on top of an 11% contribution in 2023). The near-term direction of the S&P 500 hinges on this one stock (see Meet the Everyday Investors Along for Nvidia’s Wild Stock-Market Ride in today’s WSJ).
Even prior to yesterday’s decline in the major indices, we couldn’t help but notice how much enthusiasm is out there. Nowhere is this more evident than from the classic Wall Street cheerleaders. Strategists are upping their year-end price targets, with UBS outdoing Goldman in how bullish they can be on the S&P 500. Indeed, shortly after the latter raised its price target to 5,200, the former went as high as 5,400 — admitting in their report that the previous forecast of 5,150 was “not bullish enough.” The problem for investors is that too much enthusiasm is a contrarian warning sign. We highlighted these risks yesterday using DoorDash as a recent example and we can now add Nvidia in the lead-up to today’s earnings report… expectations are sky-high for the stock, with some investors seemingly getting nervous.
Back to the here and now, yesterday’s sharp cut in China’s five-year loan prime rate helped property stocks in Hong Kong and China overnight (the Hang Seng Properties Index and the Hang Seng Mainland Properties Index were up +3.0% and +3.8%, respectively). Regulators have also instituted a three-day ban on short selling from large funds, pushing the CSI 300 index up +1.4% and the Hang Seng index up +1.6%. Taking cues from the decline in the major U.S. averages though, the rest of Asia was in red: Singapore (-0.8%), India (-0.5%), Taiwan (-0.4%), Japan’s Nikkei 225 (-0.3%), and Korea (-0.2%). Europe is fractionally in the red, down -0.1%. All market quotes are time-stamped to 4:00 a.m. EST.
Bond markets are waiting for clues on policy direction ahead of the latest FOMC meeting minutes. U.S. 10-year yields are stable overnight (at 4.27%), but core European 10-year yields are up +2 basis points along with the U.K. (+2 basis points to 4.06%). Japanese 10-year yields were modestly lower (-1 basis point to 0.71%), as were Australia (down -1 basis point to 4.17%) and New Zealand (down -3 basis points to 4.77%).
The DXY dollar index is up a smidge (+0.1% to 104.2) as it continues to flirt with its 50-day moving average. The Canadian dollar is flat at 73.9 cents (U.S.), though it remains amongst the biggest losers this week (down -0.4%). The euro and British pound are down -0.1% apiece, while the New Zealand dollar is the biggest gainer overnight (up +0.3% to 61.8 cents (U.S.)). The Japanese yen continues to hug the ¥150 level.
Commodities are mixed this morning. Gold extended its rebound, erasing all losses from its post-CPI plunge (+0.2% to $2,028.5 per ounce) and is on pace for its fifth straight gain. Iron ore (-2.5%) and WTI crude (-2.0% to $76.7 per barrel) were the biggest losers.
Back to Nvidia for a moment. There is a lot riding on earnings today, with derivatives markets implying an 11% move in the share price (approximately $200 billion in value) post-earnings release. With so much at stake on the back of one stock, the Nasdaq volatility index is trading at its highest levels since November 2023.
Nvidia’s exponential increase in the share price has mostly come down to multiple expansion, outpacing earnings upgrades (Nvidia’s share price, at $694, is roughly 5x the start of 2023, while 2024 EPS expectations have gone up by 3.6x). But with so much riding on a single stock, we are extremely wary of polarisation and sentiment in the equity markets.
To further add to the lack of broad strength is the stark contrast between the fundamentals of the Magnificent 7 and the rest of the “S&P 493.” Bloomberg Intelligence’s Q1 2024 EPS estimate for the S&P 500 ex Mag 7, before the start of the current earnings season, was expected to grow +3.0% YoY, but now has been downgraded to a -0.2% YoY decline, while the Magnificent 7’s expectations have been upgraded from +30.9% to +33.5% YoY. Any price growth in the broader market has not been backed by earnings upgrades, but has been a function of multiple expansion alone. If this doesn't sound like a bubble in the making, with the forward P/E over 20x, we are not sure what does!
The international overnight data docket was light, with Japan’s goods trade the only notable release. The headline trade balance fell from a +¥69 billion surplus to a -¥1.7 trillion deficit, the largest since January 2023. But that’s not a seasonally adjusted number. Taking seasonality into account shows the trade balance has improved to its strongest level since January 2021. That’s a positive sign for domestic growth, although the backdrop of a global manufacturing recession does cloud the near-term outlook for Japan (we remain bullish in the long run).
More on this in today’s Breakfast with Dave, but don’t write off that -0.4 percentage point surprise drop in Canadian inflation as a northern idiosyncrasy. There has been an 89% correlation between U.S. and Canadian inflation since 2000. That gives us a little hint that the surprisingly hot January U.S. CPI number may well be due for a reversal, especially since the decline in Canada came from core goods and services (not unique local factors such as shelter).
And while we’re on the topic of inflation, the WSJ and NYT have come out with dualling takes on food prices. The WSJ runs with It’s Been 30 Years Since Food Ate Up This Much of Your Income, pointing out that retailers and restaurants are unlikely to reduce prices, and “shrinkflation” is here to stay. But as the NYT correctly points out in their article Will Food Prices Stop Rising Quickly? Many Companies Say Yes, it is change at the margin that matters, and food companies are planning a return to more normal price increases this year.
A Tale of Two Retailers
Retailer earnings season is officially underway, with the likes of Home Depot and Walmart reporting yesterday. Unfortunately, the details were far from constructive as it becomes clear that the U.S. consumer is getting defensive.
Keep reading with a 7-day free trial
Subscribe to Early Morning with Dave to keep reading this post and get 7 days of free access to the full post archives.