02 Sep 2nd September 2024

Weekly Index Movement

S&P500	+0.2%
Nasdaq	-0.7%
Aussie All Ords	+0.8%

Nvidia’s much-anticipated quarterly results may have headlined the week, but inflation from Friday isn’t to be overlooked. ‌

The core Personal Consumption Expenditures index showed July’s prices (excluding volatile food and energy) rose 0.2% from the prior month, in line with expectations. That put annualised core inflation at just 2.6%

Yahoo Finance did a calculation that went like this: Take the last 3 months inflation numbers, extend them out to 12 months and you get inflation at 1.8% which is below the Fed’s 2% target.

Personally I don’t like journalists playing with different ways of calculating economic indicators just to create a picture they want. But the message is clear, inflation is definitely under control which is why Powell is going to walk back interest rates.

But the market is pricing consistent cuts by Powell at just about every meeting. That won’t happen.

Stocks are currently priced for a no-landing economic scenario (GDP was revised up to +3.0% last week), reducing interest rates and rising earnings.

The Bears will say all the good news is priced in and if one of these three does not happen then stocks will fall, so the risk is to the downside.

I say, the only one that won’t happen is the level of interest rate cuts, but the market will realise and adjust to that over coming months and it will no longer be a downside risk.

The path for stocks is higher from here. But September has the reputation of being the worst single month of the year, so we could see more selling in the next few weeks. That would set up a perfect entry to ride the end-of-year rally. I will welcome any opportunity to buy more at lower prices in September.

NVidia Earnings

On that topic of priced for perfection, Nvidia released earnings on Wednesday and they were very impressive.

Revenue increased from $15B last year to $30B this year. Profit margins came in at 75%.

A company with $15B in sales doubling that figure in just 12 months is outstanding. I would not believe it was possible if I hadn’t seen it. Then you add a 75% profit margin to the equation and the question is “is this the most profitable company in the world” – Quite possibly so.

But I’m still not buying it.

The PE has come down to a more respectable 68 from the 250 it was at. But this company is still priced for perfection.

Which is why the stock fell 7% on the news of this massive earnings number. The number was big, but not perfect.

It seems even massive earnings are not enough to convince all investors as a good chunk sent in sell orders on the news.

There were some negatives.

The profit margin of 75% was lower than the previous 78%.

Shipments of it’s new Blackwell chip have been delayed and will impact Q3 numbers.

Neither of which is of a particular concern. But I look at it like this:

Do I think NVDA can go up 10 times in price from here? If I am going to risk my money then that is the potential I want. If that potential isn’t there, neither am I.

Yes maybe it goes up 20% over the next 12 months, but that is not good enough for me to risk my hard earned on. I demand more.

Remember that NVidia provides the chips that other companies buy to build and run their AI models. Yes, other companies are spending billions on chips right now to build these centres, but how long can that last and are they going to 10X their spend on chips from what is happening now?

The answer to that comes down to whether they can create additional revenue from AI. No-one is really doing it yet.

What if these companies can’t make a revenue positive AI model work? How long will they continue to throw money at NVidia chips to build something they don’t make money on?

This is the real risk as I see it. AI does not produce the profits expected and NVidia comes crashing down to earth.

NVDA stock fell more than 50% in the year leading into the announcement of ChatGPT in October 2022. At current prices it is 10x the price it was before ChatGPT.

What could happen to this stock if companies pull back on their AI spend?

At the same time, what is going to cause it to do another 10X from here?

The risk/reward just isn’t there for me on this one.

More on why QQQ is the best investment

Last week I made the claim that the QQQ ETF is the best thing you can buy for your portfolio. I’m going to expand on it a bit this week.

You buy stocks because you either want income from dividends or capital growth. If you want capital growth then you need the company to be growing profits. Companies that grow profits fastest see their share prices grow fastest too.

Hands down, the single best industry for growing profits over the last 20 years has been technology. At present there is no other industry that can come close to their speed of growth or size of profits.

Therefore, a concentration on technology is where you want your portfolio for capital growth.

The US capitalist system is set up to reward growing companies. Therefore, the US is the best place for growing technology companies and is why the majority of them are listed on US markets.

QQQ is packed full of these companies.

But picking which of the many listed tech companies to buy is a hard thing.

Research by Hendrik Bessembinder, finance professor and Francis J. and Mary B. Labriola Endowed Chair in Competitive Business, found that returns from long-term stock investing are positively skewed, meaning that very large returns to a few stocks pull up the average, while most stocks post modest or negative returns.

This academic paper states that virtually all of the stock market growth from 1926 to 2015 can be accounted for by just 4% of those stocks. The other 96% just perform the same as Treasury Bills.

How do you rate your chances of picking the 4% that make all the gains?

The good news is you don’t have to. You just need to buy the index (meaning buy QQQ).

This index is market cap weighted meaning the largest companies have the most weight in the index. Only successful companies get to become large companies. The index calculation is doing the hard work for you. It is automatically assigning more weight to the most successful companies.

You don’t need to work out which companies make up the 4%. The index is doing it for you.

What to Expect in September

September holds the unlucky title of worst month of the year for US large-cap stocks. Over the last 50 years, only 36% of Septembers have been positive.

Of course, it doesn’t mean it will be negative this year, but consider that August is usually the most volatile month and it was in 2024.

Will September be a down month?

I don’t know. But I hope so. I want to buy lots more QQQ and so a dip here would be very nice indeed.

Footnote – if you like the idea of QQQ – then you will probably like QLD even more.

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.