Higher interest rates and Nvidia test the market
This week we examine Nvidia's strong share price performance ahead of the company's interim report later this evening. The OMX index has been showing strong momentum of late, which is hard to explain by fundamental factors other than a catch-up rally visavi US indices.
Case of the week: Rally in Nvidia shares faces imminent test
Expectations are high for Nvidia's Q4 2023 report later today (Wednesday 21 February). The company has seen impressive growth. However, the share chart gives some reasons to take a step back, reminding us of Tesla in 2021.
US Equity markets are close to all-time highs, with the S&P500 above 5,000. Arguably, the poster child for the strong performance in the US stock market is chipmaker Nvidia. Of all S&P500 stocks, Nvidia gained the most in 2023 (+239 %). The reason is extraordinarily strong growth due to its dominant position in, e.g. graphics data processing units (GPUs) used in data centres for AI applications.
The Q4 2023 earnings report on February 21 after the US market close will likely be another showcase of extremely high growth, with sales expected to more than triple to USD 20.5bn (5.9). While this kind of growth is hardly sustainable, Nivida has beaten analysts’ sales expectations by a wide margin in the last year.
At first glance, the valuation looks stretched at an EV/Sales multiple of some 19x (2025E). However, the gross margin is increasing on the back of higher pricing for newly introduced chips. In our view, the current earnings multiple of 35x (2025E) is not unreasonable given that expected growth in 2025 is above 50%.
As you can see in the chart below, Nvidia shares have also performed strongly in 2024, up an impressive 46% year to date. However, it appears the shares have now gone parabolic (see below). Typically, a blowout move forebodes a correction. Tesla in 2021 provided a cautionary tale. Tesla went parabolic twice back then when it was the market leader. Both times it ended with a huge setback. Note that the MA200 helped both times.
In a nutshell, even a better-than-expected report might fail to push Nvidia shares markedly higher. In the short-term, some investors might instead opt for profit-taking and “sell on the news”.
Nvidia (USD), one-year daily chart
Nvidia (USD), five-year weekly chart
Macro comments
As of Friday 9 February 2024, around 395 S&P500 companies have reported their fourth quarter results. 75% of S&P companies have reported a positive EPS surprise and 65% have reported a positive revenue surprise.
For the fourth quarter of 2023, earnings growth for S&P500 companies has risen to 3.2%, up from 2.9% a week ago and 1.6% two weeks ago.
For Q1 2024, 59 S&P500 companies have issued negative EPS guidance and 26 S&P500 companies have issued positive earnings guidance.
The top three S&P500 sectors in terms of EPS versus estimates are Information Technology, Energy and Industrials with 89%, 87% and 83%, respectively, beating estimates. Materials, Financials and Real Estate were the worst performers, with only 67%, 61% and 55% of Q4 2023 results beating expectations.
S&P500 actual and expected revenue and EPS growth Q4 2023-Q4 2024
The two-year US Treasury yield has risen by eleven basis points since 12th February to 4.55%. This was mainly due to higher than expected US inflation in January 2024 (3.3% vs. 3.1%).
Carlsquare has compiled the results, revenues and order intake compared to expectations for 86 OMX companies that have submitted their Q4 2023 reports since 18 January 2024. Only 51% of the Q4 results were better than expected, while 49% of the Q4 revenues were better than expected. Technically, however, the OMX has shown strength (see further in this article).
Today, Wednesday 21 February, we have interim reports from Nvidia, Analog Devices, Suncore and Synopsis. On Thursday the 22nd February, Bookings Holdings, EOG Resources and Intuit are due to report. We finish the week with Berkshire Hathaway's interim report on Friday 23rd February.
S&P 5,000
S&P 500 is currently trading close to the psychologically important 5,000 level. Based on positive but falling momentum, a trigger may be needed for the rally to continue. The first resistance on the downside is made up by MA20, currently at 4,950. In case of a break to the downside, 4,830 may be next
S&P 500 (in USD), one-year daily chart
S&P 500 (in USD), weekly five-year chart
The Nasdaq 100 is approaching its MA20, currently at 17,593. A break below and levels between 17,000 to 17,140 could be next.
Nasdaq 100 (in USD), one-year daily chart
Nasdaq 100 (in USD), weekly five-year chart
It is an interesting setup in the Swedish OMXS30. This as momentum is recovering from slightly positive levels while the index is struck at resistance just above 2,400. A break above and OMXS30 may start to catch up on the US indices, as 2,500 may be next.
OMXS30 (in SEK), one-year daily chart
OMXS30 (in SEK), weekly five-year chart
Maybe OMXS30 can catch up on the German DAX as well that is currently consolidating in a narrow slightly upwards sloping trend.
DAX (in EUR), one-year daily chart
DAX (in EUR), weekly five-year chart
The full name for abbreviations used in the previous text:
EMA 9: 9-day exponential moving average
Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence in which each successive number is the sum of the two previous numbers.
MA20: 20-day moving average
MA50: 50-day moving average
MA100: 100-day moving average
MA200: 200-day moving average
MACD: Moving average convergence divergence
Risks
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The value of the products can fall significantly below the purchase price due to changes in market factors, especially if the value of the underlying asset falls. The products are not capital-protected
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