Tech's Triumph: NVIDIA Surges, Markets Propel, Caution Prevails!
Abraham George Market Musings
If you've been following my musings regularly, it's clear that I've maintained a more bullish stance on the equity markets compared to other market commentators. While my optimism remains intact, I want to draw your attention to the key factors that have been driving the market's upward trajectory.
The recent surge in NVIDIA prices, skyrocketing by 25% in just one day following their exceptional results, caught everyone by surprise. In no time, NVIDIA ascended to the exclusive trillion-dollar club, becoming the ninth company to join this distinguished group. NVIDIA has boldly proclaimed that we are on the cusp of an unparalleled wave of technological advancement.
It's noteworthy that seven out of the nine trillion-dollar companies belong to the technology sector. These include Apple, Microsoft, Alphabet, Amazon, Tesla, Meta, alongside the state-owned oil companies Aramco and PetroChina.
NVIDIA's success story is nothing short of extraordinary. The company went public amidst the dotcom bubble in 1999, with shares priced at a modest $12. Initially renowned for its gaming-focused graphics processors, it struggled to make a significant impact on the market. However, everything changed in 2016 with the emergence of AI, revolutionizing NVIDIA's prospects. The remarkable surge in its share price since 2016 is a testament to this transformation.
It's safe to say that no other sector has witnessed such remarkable technological advancements as we've seen with AI in the last six months alone. This year, NVIDIA's stocks have surged by an impressive 166%, while the Nasdaq index has experienced a 25% increase. However, we must exercise caution, as this rally is primarily fueled by hedge funds and large institutional investors. It's advisable not to be enticed by current levels. Notably, the entire gains of the NASDAQ this year have been driven by eight tech stocks, with NVIDIA making the most significant individual impact. With an enterprise value (EV) to sales ratio of 39, NVIDIA's current valuation is astoundingly high. While I remain extremely bullish on the sector, it's unwise to invest in NVIDIA at its current prices. A substantial correction could occur at any time, and a price below $200 should be considered an attractive medium to long-term buying opportunity.
In the aftermath of NVIDIA's groundbreaking earnings call, the CEO drew a comparison between the launch of ChatGPT in November of last year and the introduction of the iPhone, which marked a pivotal moment in technological advancement.
While a correction in technology stocks should come as no surprise, there are compelling reasons to maintain a bullish outlook on the broader market. The S&P 500 has now surpassed the 4200 level that I've previously alluded to. With the debt ceiling drama behind us, the focus has shifted to the upcoming FOMC meeting on June 14th and what actions the Fed may take.
Last week, three voting members of the Federal Reserve used the word "skip" deliberately in their public speeches, carrying significant implications. Considering the context of 10 consecutive rate hikes, this choice of language holds considerable relevance. The Fed's preferred inflation gauge, core PCE, has already fallen below 5%. Historically, this level has signaled the Fed's confidence in controlling inflation. Notably, the CPI will be released on June 13th and will undoubtedly factor into the Fed's decision during the FOMC meeting on June 14th. As we compare prices against a higher base in June, we should observe a substantial decline in the inflation rate. If interest rates are put on hold, it will provide a much-needed boost to a broad-based rally, particularly benefiting small-cap stocks. While the NASDAQ has dominated the market's strength thus far, recent price increases over the past two days have displayed a more comprehensive, widespread nature.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.