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The Federal Reserve kicked off its long-awaited easing campaign with a bang this week, cutting the federal funds by hefty 50 basis points.
Investors viewed the aggressive reduction — the first in four years — as largely positive, with the three averages all finishing in the black. The S&P 500
advanced 1.36%, while the Dow Jones Industrial Average climbed 1.62% to a new all-time high, and the tech-heavy Nasdaq Composite
increased 1.49%.
That’s not to say it’s easy sailing from here. We still have a possible government shutdown, a hotly contested presidential election, and growing tensions in the Middle East. All could impact the global economy and markets.
But monetary policy is at least now moving back into the bulls’ favor. Speaking to reporters Wednesday after the rate cut announcement, Chair Jerome Powell said:
“Our monetary policy actions are guided by our dual mandate to promote maximum employment and stable prices for the American people. For much of the past three years, inflation ran well above our 2 percent goal, and labor market conditions were extremely tight. Our primary focus had been on bringing down inflation, and appropriately so. … Inflation is now much closer to our objective, and we have gained greater confidence that inflation is moving sustainably toward 2 percent. As inflation has declined and the labor market has cooled, the upside risks to inflation have diminished and the downside risks to employment have increased. We now see the risks to achieving our employment and inflation goals as roughly in balance, and we are attentive to the risks to both sides of our dual mandate. … In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”
The statement serves as an important update on two fronts. First, it indicates that labor market dynamics are going to again be more heavily weighted in the Fed’s approach to monetary policy. Previously the Fed was far more focused on inflation, taking comfort in the labor market’s resiliency over the course of the rate hiking cycle. Second, it demonstrates the committee’s willingness to be a bit more predictive in how they think about the data, rather than waiting to see every update of delayed data.
New data this week showed the U.S. economy remained strong in August. That included better-than-expected retail sales, strong industrial production results, and more housing starts than expected. Existing home sales came up short of expectations, but with rates now moving lower, improvement is likely on the way. After all, we did see weekly mortgage demand jump 14% on Wednesday as interest rates fell to a two-year low.
Looking under the hood of the S&P 500, the energy sector was the best performer, followed by communication services and financials. Consumer staples led to the downside, followed by real estate and healthcare.
Here’s what we’re paying most attention to in the week ahead:
1. Fed’s favorite inflation measure. It’s the last full week of September already and with that comes a look at August’s personal spending and income numbers on Thursday. Within this report is the core personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation. Given the 50-basis point cut this week by the FOMC, it would be good to get a result that is more or less in line with expectations. A tick below expectations probably wouldn’t hurt, so as to increase confidence that the Fed made the right choice in easing policy a bit more aggressively right out of the gate. Current expectations are for a 2.7% year-over-year increase in the core index, which if realized would be slighly higher than the 2.6% rate over the past three months.
2. Revised GDP. The third and final update on second-quarter GDP is released Wednesday. Economists aren’t expecting much change here versus the previous report. And while it is noteworthy, understand it is extremely backward looking. We’re already just about through the third quarter.
3. Housing. Two updates on the state of the housing market, with the August pending home sales report out on Thursday, and the August new home sales report out Wednesday. While inflation is trending lower, the rate of increase in shelter costs remains stubbornly high. So, any signs that supply is picking up to a level that will help slow the rate of price appreciation is welcome.
4. The best-run retailer reports. The sales numbers won’t be the primary focus when Costco
reports earnings Thursday because management releases them monthly. We will be keyed more into management’s foot traffic and buyer preferences, which provide a good picture of the consumer and economy more broadly. As we’ve stated in the past, roughly two-thirds of U.S. GDP is tied to private consumption. So when a company with the reach that Costco reports, it’s important to listen to what management has to say about the operating environment. Also important: management’s comments on how Costco club members are responding to the membership fee increase and how management plans to reinvest those extra dollars.
Monday, September 23
After the bell: AAR Corp (AIR)
Tuesday, September 24
Before the bell: AutoZone (AZO), THOR Industries
After the bell: KB Home (KBH), Progress Software (PRGS), Stitch Fix (SFIX)
Wednesday, September 25
10:00 a.m. ET: New Home Sales
Before the bell: Cintas (CTAS)
After the bell: Micron (MU), Concentrix (CNCX), HB Fuller (FUL), Jefferies Financial (JEF), Worthington Steel (WS)
Thursday, September 26
8:30 a.m. ET: Initial Jobless Claims
8:30 a.m. ET: Gross Domestic Product
10:00 a.m. ET: Pending Home Sales
Before the bell: Accenture (CAN), TD SYNNEX (SNX), CarMax (KMX), Jabil (JBL)
After the bell: Costco (COST), BlackBerry (BB), Vail Resorts (MTN), Scholastic (SCHL)
Friday, September 27
8:30 a.m. ET: Personal Spending & Income
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Every weekday, the CNBC Investing Club with Jim Cramer releases the Homestretch — an actionable afternoon update, just in time for the last hour of trading on Wall Street.
Stocks keep sliding: September is proving to be the rough month we thought it would be. A bruising first week of trading continued Friday after the weaker-than-expected August jobs report kept alive questions about the health of the U.S. economy. The S&P 500
is down about 1.7% Friday and on pace for its fourth consecutive day of declines. Still, it’s worth keeping in mind that the index is still trading well above its Aug. 5 close of 5,186, the day the popular yen carry trade blew up and caused a forced liquidation of equities. The Nasdaq Composite, meanwhile, is lower by roughly 2.5% as technology stocks, especially semiconductor firms, continue to see heavy selling pressure. Club holding Broadcom
’s earnings report late Thursday added to the pain, pushing its stock down more than 9% Friday — though Jim Cramer said earlier that weakness is worth buying. A popular exchange-traded fund for chip stocks is down more than 11% over the past four sessions and is tracking for its worst week since January 2022.
Constellation follow up: The August jobs report contained some relevant news for Club holding Constellation Brands, our colleague Brandon Gomez, who covers the company for CNBC TV, reported:
While we learned Friday that the broader unemployment rate ticked lower, for Hispanic and Latino workers it actually rose to 5.5%, up from 5.3% in July and 4.9% in June. The Modelo brewer self-reports that more than half of its customer base are Hispanic Americans, and earlier this week it lowered its beer net sales guidance, citing in part an uptick in unemployment. Friday’s jobs report confirms that trend is intensifying for Constellation’s key customer demographic.
Recall that shares of Constellation surprisingly climbed 2.5% during Tuesday’s market sell-off despite issuing its more subdued sales outlook that day. We described that move as partially a “buy the confession” reaction because investors had sensed some weakness along with a broader move into defensive stocks such as consumer staples.
The latter force seems to be at play again Friday, with shares of Constellation and its consumer staples sector holding up much better than the overall market. Defensive stocks like staples tend to hold up much better when the market is concerned about economic growth. We’ll continue to keep an eye on Hispanic employment trends and the potential implications for Constellation. For now, we remain believers that Constellation is gaining overall market share and should see a free cash flow inflection once its current investment cycle in manufacturing capacity is completed.
Up next: We hit an earnings lull next week with only three companies in the S&P 500
scheduled to report earnings: Oracle, Kroger and Adobe. The three economic reports we’ll be focused on are the consumer price index Wednesday, followed by the producer price index and initial jobless claims Thursday. Also on Thursday is our September Monthly Meeting, which is set to start at our usual time of noon ET.
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Meta shows aggressive spending on AI is already paying off in big earnings beat
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It was another tough week for the S&P 500 and Nasdaq
despite Friday’s rally, which helped blunt some of the pain.
The Dow
and small-cap Russell 2000
were again the big winners as the rotation from market darlings to down-and-out names due for a catch-up trade continued. By sector, in this wild trading week, the S&P 500 health care index led to the upside, followed by materials, and utilities. Communication services led to the downside, followed by consumer discretionary and information technology.
Looking back on the week, we got a stronger-than-expected read on second-quarter U.S. economic growth on Thursday, followed Friday by a largely inline June personal consumption expenditures price index. The print on PCE. It’s the Federal Reserve’s favorite inflation gauge, bolstered the case for three central bank interest rate cuts, starting in September. Weakness in this past week’s housing data also went Fed Chairman Jerome Powell’s way. Existing home sales for June, out Tuesday, were softer than expected. June new home sales, released Wednesday, were also short. Because shelter has been one of the stickiest areas of inflation, a cooling housing market also feeds into the “sooner rather than later” case of rate cuts.
As for Club earnings, we got positive results from life sciences company Danaher and industrial firm Dover. Ford was a major disappointment and its nearly 20% stock drop for the week was the worst performer in the portfolio. Alphabet and Honeywell were net positive, in our view, even though both of them saw post-earnings sell-offs. In Alphabet’s case, we think it was profit-taking because the company did report a blowout, allowing the bears to seize on a small miss at YouTube. As for Honeywell, the company was forced to shave its earnings outlook, despite an upward revision to sales guidance as the short-cycle businesses aren’t seeing demand rebound as fast as originally thought.
More broadly, 41% of the S&P 500 has now reported earnings. Of those, 78% exceeded earnings expectations and 60% reported better-than-expected revenue. In the week ahead, it’s going to be another big week of earnings with the four mega-cap names and 10 other Club names set to report. Major economic reports are also on the docket.
Earnings
We’ll hear from Procter & Gamble, Stanley Black & Decker, Advanced Micro Devices, Microsoft, Starbucks, GE Healthcare, DuPont, Meta Platforms, Eaton, Amazon, Apple, Nextracker, Coterra Energy, and Linde.
Procter & Gamble
: With consumers now pushing back on price hikes, it’s all about how P&G can continue to provide better value through innovation. Also in focus are market share gains and volume growth, which are key to top-line growth when price hikes are no longer a meaningful level. On the post-earnings call, we’ll be listening for commentary about input costs and freight costs in the context of profit margins.
Stanley Black & Decker
: It’s all about the turnaround underway. That means inventory optimization, increased cost efficiencies, and supply chain improvements. Management’s commentary on demand against the prospect of lower Fed interest rates will also be in key. While we still see more upside in the stock, we nonetheless opted to trim our position twice this past week, understanding that the bar is much higher when a stock rallies like this one into a release.
Advanced Micro Devices
: Demand for artificial intelligence accelerator chips (MI300) as the supply chain improves and an update on the pace on the PC refresh cycle will be key items to watch out for on the call. We’re also interested to hear how management plans to push deeper into software offerings following AMD’s recent announcement to acquire Silo AI.
Microsoft
: Azure cloud growth is the single most important metric aside from sales and earnings. On the call, we’ll be interested to hear about AI investments — and more importantly, any details management can provide regarding both the timing and size of return we might see on those investments. Microsoft doesn’t provide guidance until about 20 minutes into the post-earnings call, so any reaction seen immediately after the release should be taken with a bucket of salt.
Starbucks
: We expect to see signs of traffic stabilizing after a horrible previous quarter. If the company continues to disappoint, expect activist firm Elliott Management to apply pressure.
GE HealthCare
: Order rates, the backlog, margin expansion, and the timing of stimulus in China converting to orders will all be things to watch when GEHC reports.
DuPont
: Results should be solid thanks to the ongoing recovery in the electronics industry and the end of destocking in its water business. Any update on the three-part breakup will be welcomed.
Meta Platforms
: In addition to the headline results, costs will be a key watch item as heavy AI investments without much clarity on the returns remains a key concern for investors. Fortunately, in addition to slowly working on ways to monetize AI more directly, Meta can benefit and work to assuage these concerns by talking about how investments are already improving cost efficiencies internally and providing better targeting capabilities to its advertising customers.
Eaton
: We’re looking for the string of beat and raise quarters to continue thanks to strong demand for its electrical equipment. We added to our position this past week.
Amazon
: In addition to further Amazon Web Services cloud revenue growth, investors will be focused on logistics costs, specifically the “cost to serve” on the retail side of the company’s business as we look for Amazon to grow into excess capacity.
Apple
: Reported results are always important — but for Apple, given the iPhone 16 announcement is a little over away and what we’ve learned about Apple Intelligence requiring an iPhone15 Pro or better, it’s the guidance that will determine the stock reaction.
Nextracker
: We’ll be focused on margins, the backlogs, and the state of solar projects amid political uncertainty.
Coterra Energy
: It’s all about management executing on things they can control. That means using capital efficiently and targeting the commodity with the most economic potential — oil or natural gas — to ensure solid cash flows and continued cash returns to shareholders. As for guidance, we want to see more production without any real increase in the capital expenditures forecast.
Linde
: We’re looking for more of the same — steady earnings growth; 6% is the Street estimate. End market commentary will also help us better formulate our view of the economy — and in turn the stock market. We did trim the position this past week to lock in gains ahead of the report.
Economy
It’s all about jobs this week, with the July employment report on Friday, the July ADP survey of hiring at U.S. companies on Wednesday, and the June Job Openings and Labor Turnover Survey, JOLTS, on Tuesday.
Of the three, Friday’s jobs numbers from the government carry the most weight as they’re the most comprehensive and provide insight into, among other things, nonfarm payroll additions, the nation’s rate unemployment rate, wage inflation, and part-time worker dynamics. Economists, per FactSet, are expecting to see 160,000 job additions, wage inflation of 3.9% year-over-year, and a 4.1% unemployment rate.
ADP has been a tough predictor of the government employment report since Covid. However, it is closely monitored by traders and can also be helpful in understanding what areas of the economy are hiring and where employment may be struggling, given that it does breakdown jobs by sector and business size. According to FactSet, economists are expecting to see a 154,000 job additions.
JOLTS provides insight into how tight the labor market is. Those are June numbers so they are on a lag compared to the other two reports on employment.
Last, but certainly not least, we have the two-day July Fed meeting set to conclude Wednesday. The market isn’t expecting to a cut this time around but will want to hear as clearly as possible that we’re on the path to a cut in September.
Monday, July 29
Before the bell: McDonalds (MCD)
After the bell: F5 Networks (FFIV)
Tuesday, July 30
Before the bell: Procter & Gamble (PG), Stanley Black & Decker (SWK), SoFi (SOFI), PayPal (PYPL), Pfizer (PFE), BP (BP), JetBlue Airways (JBLU), Merck (MRK), Corning (GLW)
After the bell: Advanced Micro Devices (AMD), Microsoft (MSFT), Starbucks (SBUX), Pinterest (PINS), First Solar Inc (FSLR), Caesars Entertainment (CZR), Electronic Arts (EA), Live Nation Entertainment (LYV), Match Group (MTCH)
Wednesday, July 31
8:15 a.m. ET: ADP Employment Survey
10 a.m. ET: Pending Home Sales
2 p.m. ET: FOMC Meeting
Before the bell: GE HealthCare (GEHC), DuPont (DD), Boeing (BA), Norwegian Cruise Line (NCLH), Wingstop (WING), Kraft Heinz (KHC), Mastercard (MA), Teva Pharmaceutical (TEVA), Fiverr (FVRR), Humana (HUM), Vita Coco (COCO), Generac (GNRC), Hess Corp (HES), AutoNation (AN)
After the bell: Meta Platforms (META), Arm Holdings (ARM), Qualcomm (QCOM), Carvana (CVNA), Lam Research (LRCX), Western Digital (WDC), Etsy (ETSY), eBay (EBAY), MGM Resorts (MGM)
Thursday, Aug. 1
8:30 a.m. ET: Initial Jobless Claims
10:30 a.m. ET: ISM Manufacturing
Before the bell: Eaton (ETN), Moderna (MRNA), Crocs (CROX), ConocoPhillips (COP), Mobileye Global (MBLY), Wayfair (W), SiriusXM (SIRI), Biogen (BIIB), Canada Goose Holdings (GOOS), Hershey (HSY), Toyota Motor (TM), Dominion Energy (D), Wendy’s (WEN), Roblox (RBLX), Regeneron (REGN), Air Products & Chemicals (APD), Shake Shack (SHAK), Shell (SHEL), Southern Company (SO), WW International (WW)
After the bell: Amazon (AMZN), Apple (AAPL), Nextracker (NXT), Coterra Energy Intel (INTC), Coinbase Global (COIN), DraftKings (DKNG), Roku (ROKU), Block (SQ), Cloudflare (NET), Booking Holdings (BKNG), Snap (SNAP), DoorDash (DASH)
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In what was the most anticipated quarter this earnings season, Nvidia far outpaced lofty expectations on the top and bottom lines. Even better was a big revenue guide and a broader vision from CEO Jensen Huang that reinforced the notion that companies and countries are partnering with the AI chip powerhouse to shift $1 trillion worth of traditional data centers to accelerated computing.
Revenue for its fiscal 2025 first quarter surged 262% year-over-year to $26.04 billion, well ahead of analysts’ forecasts of $24.65 billion, according to data provider LSEG, formerly known as Refinitiv. The company had previously guided revenue to $24 billion, plus or minus 2% — so that was a huge beat.
Adjusted earnings-per-share increased 461% to $6.12, exceeding the LSEG compiled consensus estimate of $5.59.
Adjusted gross margin of 78.9% also beat the Street’s 77.2% estimate, according to market data platform FactSet. The company had guided gross margins to 77%. plus or minus 50 basis points.
On top of the strong results, Nvidia announced a 10-for-1 stock split. Although stock splits don’t technically create value, they do tend to have a positive impact on the stock. The company said the split is to “make stock ownership more accessible to employees and investors.” We commend Nvidia for doing this and will continue to press other companies to do the same. Nvidia most recently split its stock in July 2021 on a 4-for-1 basis. In after-hours trading, it was little surprise to see Nvidia shares surging.
Nvidia
Why we own it: Nvidia’s high-performance graphic processing units (GPUs) are the key driver behind the AI revolution, powering the accelerated data centers being rapidly built around the world. But this is more than just a hardware story. Through its Nvidia AI Enterprise service, Nvidia is in the process of building out a potentially massive software business.
Competitors: Advanced Micro Devices and Intel
Most recent buy: Aug 31, 2022
Initiation: March 2019
Bottom line
What air pocket?
Coming into the quarter, it sounded like the only thing that could hold Nvidia back was a product transition-related slowdown from customers delaying orders of the H100 and H200 GPUs (graphics process units) in anticipation of the superior Blackwell chip platform. As you can see from Nvidia’s big beat and upside guide, that was far from the case and demand is expected to exceed supply for quite some time.
Should this narrative form again, here’s a good thing to remember for next time so that these concerns don’t shake you out of a strong long-term thesis: Jensen explained on the post-earnings conference call that customers are still so early in their build-outs that they have to keep buying chips to keep up in the current technology arms race.
And technology leadership is everything. “There’s going to be a whole bunch of chips coming at them and they just got to keep on building and just, if you will, performance average your way into it. So that’s the smart thing to do,” the CEO said. More broadly, we didn’t hear anything Wednesday evening to change our long-term view about how Nvidia is the driving force behind the current AI industrial revolution.
Here’s how Jensen explained the shift that’s happening: “Longer term, we’re completely redesigning how computers work. And this is a platform shift. Of course, it’s been compared to other platform shifts in the past, but time will clearly tell that this is much, much more profound than previous platform shifts. And the reason for that is because the computer is no longer an instruction-driven only computer. It’s an intention understanding computer.”
Jensen went on to mention how computers not only interact with us, “but it also understands our meaning, what we intend that we asked it to do, and it has the ability to reason, inference iteratively to process and plan and come back with a solution.”
The billions and billions of dollars being spent on accelerated computing is why we own Nvidia for the long-haul and are not trying to trade it back and forth on every headline.
By the way, another bearish narrative we often hear is that the custom chips all the big cloud companies are making are a threat to Nvidia’s leadership. Jensen doesn’t see it that way because his platform system has the highest performance at the lowest total cost of ownership. It’s an unbeatable value proposition.
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NVIDIA Corp
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Nvidia YTD
The strong results and outlook, upbeat commentary, and stock split were sending Nvidia shares roughly 6% higher to above $1,000 per share for the first time ever. However, we don’t think the gains end here. We’re increasing our price target to $1,200 from $1050 and maintaining our 2 rating, meaning we view it as a buy on pullbacks.
Quarterly Results
Growth was driven by all customer types, but enterprise and consumer internet companies led the way. Large cloud companies represented a mid-40% of data center revenue in the quarter, so when you see companies like Oracle
and Club names Amazon, Microsoft and Alphabet
raise their capital expenditure outlooks, understand that a lot of those dollars will flow Nvidia’s way. And, there’s a good reason for it. On the call, Nvidia CFO Colette Kress estimates that for every $1 spent on Nvidia AI Infrastructure, a cloud provider has an opportunity to earn $5 in GPU instant hosting revenue over four years.
One customer call out in the quarter was Tesla
, expanding its training AI cluster to 35,000 H100 GPUs (graphic processing units). Nvidia said Tesla’s use of Nvidia AI infrastructure “paved the way” for the “breakthrough performance” of full self-driving version 12. (Full self-driving, or FSD, is the way Tesla markets its high level of driver-assisted software.) Interestingly, Nvidia sees automotive as a huge vertical this year, a multi-billion revenue opportunity across on-premise and cloud consumption.
Another highlight was Meta’s announcement of Llama 3, its large language model. It was trained on a cluster of 24,000 H100 GPUs. Kress believes that as more consumer internet customers use generative AI applications, Nvidia will see more growth opportunities.
The Tesla and Meta clusters are examples of what Nvidia calls “AI Factories.” The company believes “these next-generation data centers host advanced full-stack accelerated computing platforms where the data comes in and intelligence comes out.
Nvidia also pointed out that sovereign AI has been a big source of growth. The company defines sovereign AI as a “nation’s capabilities to produce artificial intelligence using its own infrastructure, data, workforce, and business networks.” Kress expects sovereign AI revenue to approach the high single-digit billions of dollars this year from nothing last year.
Looking ahead, Nvidia sees supply for the H100 improving but is still constrained on the H200. Even with the transition to Blackwell, Nvidia expects demand for Hopper for quite some time. “Everybody is anxious to get their infrastructure online, and the reason for that is because they’re saving money and making money, and they would like to do that as soon as possible,” the company said. In other words, customers will take whatever they can get.
But look for Blackwell revenue later this year, perhaps in a very meaningful amount. The company explained manufacturing of Blackwell has been in production and shipments are expected to start the fiscal 2025 second quarter, ramp in the third, and customers will have full data centers stood up in the fourth quarter.
As for China, the company said it started to ramp up new products specifically made for the region that don’t require an export control license. The U.S. government has put restrictions on sales of the fastest chips for fear they will be used by the Chinese military. However, it doesn’t like China is expected to be a driver of revenue like it was in the past because the limitations to Nvidia’s technology have made the environment more competitive.
Guidance
The company’s fiscal second quarter guide should dismiss the market’s concerns that some sort of AI spending “air pocket” was forming. For the current Q2, Nvidia projected revenue of $28 billion, plus or minus 2%, above consensus estimates of $26.6 billion Adjusted gross margins are expected to be 75.5%, plus or minus 50 basis points, above estimates of 75.2%.
Capital returns
Nvidia increased its quarterly dividend by 150%, which is nice but the annual yield is insignificant to the investment case. More impactful is the $7.7 billion of stock the company repurchased in fiscal Q1.
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This week’s strong market pushed three of our portfolio stocks well clear of our current price targets. Since these rallies look like they have legs, we’re taking our numbers up.
Nvidia price target increased to $1,050
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NVIDIA Corp
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Nvidia YTD
Coming off a bullish GTC conference where Nvidia
CEO Jensen Huang made the case that the artificial intelligence investment cycle is still in its early innings, we are increasing price target on the chip giant to $1,050 per share from $850. With such a big move this year, an over 90% gain, we’re reiterating our 2 rating, meaning look to buy on pullbacks. Not only did Nvidia unveil its next-generation Blackwell platform, Jensen stressed the importance of the company’s software. Nvidia is taking a page out of Apple’s playbook as Jensen builds a platform company driven by software and hardware working together in an ecosystem. “It’s not just a chip. It is a platform. Now what does that mean? It means it’s filled with software. What does that mean? It’s recurring revenue; it’s not one-off,” Jim Cramer said Tuesday. “There are a lot of people who say it’s a defensive move. I say it’s an offensive move.”
Eaton price target hiked to $330
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Eaton Corporation PLC
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Eaton YTD
The need for all new AI data centers is going to increase the demand for electricity and new solutions to modernize the grid. As a result, we remain positive on power management company Eaton
even after its big run of more than 30% in 2024. It hit another 52-week high on Friday. We’re increasing our Eaton price target to $330 per share from $290 and reiterating our buy-equivalent 1 rating. As a sanity check, Bank of America increased its Eaton price target to $340 from $330 on Thursday following a meeting with management. The analysts said the key message from the meeting was that growth opportunities are in their early innings. Indeed, in the company’s fourth-quarter report, management said its electrical backlog coverage is roughly three times its historic average, providing them the visibility of growth at least through 2025.
Wells Fargo raised to $60
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Wells Fargo & Co
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Wells Fargo YTD
Wells Fargo has made a string of new 52-week highs, and we think those gains can continue due to better-than-expected net interest income performance from higher interest rates, more buybacks, and ongoing cost discipline. Shares have already increased around 16% year to date, getting a big boost last month when a key consent order tied to the bank’s phony accounts scandal of 2016 was lifted. We’re increasing our Wells Fargo price target to $60 per share from $54 and reiterating our 2 rating. Since becoming CEO of Wells Fargo in 2019, Charlie Scharf has made good progress in clearing regulatory orders that predated his tenure. He’s still looking to clear the biggest one: the Federal Reserve’s $1.95 trillion asset cap.
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Just how much bigger will Nvidia
get in 2025 has emerged as a key among investors, even as the stock finished Monday at its third consecutive record high close. There are lots of price target hikes out there, including ours.
Goldman Sachs on Monday planted its flag in the camp of 2025 optimists — simultaneously arguing against a pillar of the Nvidia bear case and raising its price target to $800 per share from $625. The new Goldman price target — which implies nearly 15.5% upside from Monday’s — isn’t even the highest on the Street. Rosenblatt Securities is at $1,100 and there are others even higher.
We’re also raising our Club price target on Nvidia to $750 from $600. We’re being a little more conservative than Goldman, with plans to consider whether further adjustments are needed around Nvidia’s earnings report later this month.
One of the lowest Nvidia price targets belongs to DA Davidson at $410 per share. The firm initiated coverage of Nvidia with a hold rating in January, arguing financial estimates for the company in 2025 and beyond were too lofty.
On Monday, shares of Nvidia rose 4.8% to an all-time high of $693.32 each — bucking a downtrend for the three major U.S. stock benchmarks. Nvidia has already gained 40% year to date. It’s the best-performing S&P 500
stock this year as it was in 2023 when it more than tripled in value.
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Nvidia’s stock performance over the past 12 months.
Part of Monday’s move can be attributed to Goldman no longer projecting Nvidia’s data center revenue — its largest segment and home to artificial intelligence chip sales — to drop off in the second half of this calendar year 2024. According to Monday’s note to clients, the analysts cited several reasons why Nvidia should see “consistent growth” through at least the first half of 2025.
Large, longtime Nvidia customers — hyperscalers such as Microsoft
and Amazon
— keep spending heavily on generative AI initiatives, Goldman noted, while the universe of chip buyers is expanding to include smaller cloud players and governments. Nvidia’s plan to release a new AI chip each year also adds to the sustainability of data center growth, the analysts argued. And, after pronounced shortages and strong demand last year, the supply picture is improving, too.
“I don’t know when the data center is going to stop,” Jim Cramer acknowledged Monday. However, our “own it, don’t trade it” designation for Nvidia stock reflects our long-term confidence in the company to remain a leader in AI technology.
Inherent in our view is a recognition that the blistering growth rates Nvidia began reporting last year amid booming investment in generative AI will moderate and that a so-called digestion phase, in which new orders for its chips slow down, may eventually transpire. Predicting when that will happen is challenging and wouldn’t necessarily mean relinquishing Nvidia’s leadership position. After all, the semiconductor industry is historically prone to boom-and-bust cycles.
Fiscal vs. calendar year explained
Nvidia’s fiscal years — which run from January to January — are roughly one year ahead of the calendar years.
So, on Feb. 21, when Nvidia reports its fiscal 2024 fourth quarter, the results will cover the three months from November 2023 to January of this year.
All references to years in Goldman Sachs’ note are calendar years, so the analysts can compare apples-to-apples when talking about Nvidia and its industry peers.
However, the longer the current boom in AI investment holds, the more time Nvidia’s small, but fast-growing software business has to mature and develop into a more material revenue stream that can help smooth out the cyclical nature of hardware sales. This remains a somewhat underappreciated opportunity among investors.
At this point, we agree with Goldman Sachs’ view about Nvidia’s 2025 setup. As we wrote Friday, the robust capital expenditures guidance and general AI commentary from fellow Club holdings Microsoft, Amazon, Meta Platforms
and Google parent Alphabet during their quarterly earnings calls paint a favorable picture for Nvidia. Those five and Apple
make up our Significant Six mega-cap tech names.
Taiwan Semiconductor Manufacturing Company
, TSMC for short, also upped its multiyear AI chip revenue projection this earnings season, another encouraging development for Nvidia and even rival Advanced Micro Devices, which launched an AI-focused chip to compete with Nvidia late last year. TSMC is the third-party chip manufacturer for Nvidia, AMD as well as other companies like Apple.
One lingering obstacle for Nvidia is its ability to sell AI chips to customers in China — due to national security-driven export restrictions imposed by the U.S. The American government’s rules are designed to keep these powerful semiconductors out of the hands of the Chinese military.
However, access to the Chinese corporate market would help Nvidia sustain growth in the years ahead. To that end, the company is expected to begin mass production of AI chips for Chinese customers that comply with the latest U.S. regulations in the coming months. Nvidia’s earnings report and conference call scheduled later this month will likely feature discussion about management’s latest thinking about its China business.
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The Magnificent Seven stocks on Monday, led by Nvidia’s jump to all-time highs, were enjoying a rebound after a rough first week of 2024.
Nvidia and the five others we own — Alphabet, Amazon, Apple, Meta Platforms, and Microsoft — were all big winners last year.
While pleased to see our stocks go higher, we think last week’s caution remains warranted, considering the parabolic gains many of them made into year-end. As Jim Cramer discussed in his weekly column, the moves, spurred by the belief in a Federal Reserve pivot to lower interest rates in the near future, were not sustainable. That’s why we trimmed all of them first thing on Jan. 2.
We’re still cautious on the Jim-anointed Magnificent Seven (the only one we don’t own is Tesla
) but wanted to dig in a bit more into the six we own to better quantify their moves and get a sense of how hot the stocks may be at the moment.
To do this, we looked at how shares of these companies performed since their prior intraday lows in late October and how their forward price-to-earnings (P/E) multiples have changed over that same stretch. (It’s worth noting that both stock price action and Wall Street estimate revisions play into the change in valuation.)
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Alphabet Class A
GOOGL:NASDAQ
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Alphabet 1 year
Alphabet
bottomed recently at $120.21 on Oct. 27, 2023 and subsequently rallied to a high of $142.68 (up 18.7%) on Dec. 26.
Shares of the Google parent now trade around $137 (down 4% from the high but still up 14% from that prior low).
Over that time, Alphabet’s forward P/E/ has expanded from 18.8 times to 20.5 times. That’s still a bit below the five-year historic average of 23.4 times.
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Amazon.com Inc
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Amazon 1 year
Amazon
stock most recently troughed at $118.35 on Oct. 26 and then rallied to a high of $155.63 (up 31.5%) on Dec. 20.
It now trades at around $148 (down 4.9% from the high but still up 25.1% from that prior low).
Since that low, Amazon’s forward P/E has expanded from 38.2 times to 39.9 times. That’s still cheap based on the five-year historic average of 63 times.
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Apple Inc
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Apple 1 year
Apple
hit a recent low of $165.67 on Oct. 26. Since then, the stock rallied to a high of $199.62 (up 20.5%) on Dec. 14.
It now trades at around $183 (down 8.3% from the high but still up 10.5% from that prior low).
Since the Oct. 26 low, Apple’s forward P/E has expanded from 25.4 times to 27.3 times. That’s higher than the five-year historic average of 24.2 times.
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Meta Platforms Inc
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Meta Platforms 1 year
Meta Platforms
stock put in a recent low at $279.40 on Oct. 26 and then rallied to a high of $361.90 (up 29.5%) on Dec. 28.
The Facebook and Instagram parent now trades at around $355 (down 1.9% from the high but still up 27.1% from that prior low).
Over that stretch, Meta’s forward P/E has expanded from 17.1 times to 19.9 times – just a bit lower than the five-year historic average of 21.1 times.
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Microsoft Corp
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Microsoft 1 year
Microsoft
stock bottomed a bit before the others, finding a recent low at $309.45 on Sept. 26, 2023. It then rallied to a high of $384.30 (up 24.2%) on Nov. 29
It now trades at around $370 (down 3.7% from the high but still up 19.6% from that prior low).
Since the September low, Microsoft’s forward P/E has expanded from 27.4 times to 30.5 times. That’s only a little bit higher than the five-year historic average of 28.3 times.
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NVIDIA Corp
NVDA:NASDAQ
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Nvidia 1 year
Nvidia
, which hit a new all-time high Monday, bottomed out at $392.30 on Oct. 31.
That move since then represented a gain of 31.5%.
Since its recent low, Nvidia’s forward P/E has actually contracted from 26.4 times to 25.3 times, putting it well below the five-year historic average of 39.4 times. (In a separate commentary Monday, we took a closer look at how Nvidia can still be so undervalued even at record highs.)
As we can see, of the six names, only Apple and Microsoft currently trade at a level above their five-year average valuation. That said, we can’t say the other four names are necessarily undervalued given that current interest rates are much higher than what we’ve seen over the past five years. That means that some compression may be warranted.
But, if rates truly have peaked and a soft landing for the economy is indeed playing out, it stands to reason some re-expansion of multiples may be on the horizon in those names trading below their five-year averages. Or that at the very least, there is no cause for concern that we’re looking at anything more than your run-of-the-mill pullback as profit takers step in and buyers hold off following a year of stellar gains.
Put simply, this isn’t the market setup in which you should feel you need to get money to work. Don’t let the fear of missing out get the better of you — especially as earnings season is about to heat up. Concern yourself more with the question: Are your cash levels are adequate? To reiterate Jim’s Sunday night conclusion, if you haven’t raised a hearty amount of cash in recent weeks, then you are out of sync with us.
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The Club on Friday is changing the rating and price target on one of our favorite semiconductor stocks, while updating the price targets on four other names in the portfolio to reflect recent earnings, new internal developments and broader economic forces.
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Broadcom Inc
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Broadcom year-to-date performance.
We’re increasing our price target on Broadcom
to $1,200 a share, up from $1,000 to reflect the strong quarter it reported last week. At the same time, we are bullish on the integration of recently acquired VMware, and appreciative of the semiconductor firm’s capital returns through a growing dividend and aggressive share-repurchase program.
The stock has been one of the best performers in the S&P 500
this week, advancing roughly 20% compared to the index’s 2.5% gain. Given the run it’s had in such a short period of time, we are downgrading our rating to 2, meaning we would be buyers on a pullback. In addition, Broadcom’s surge this week has us feeling a little greedy on this big position. It’s not every week you see a company of its size go on a run like this — with the company’s market cap swelling to roughly $460 billion. We plan to trim a small number of shares out of discipline to lock in our huge gains when we are not restricted from trading.
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Costco Wholesale Corp
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Costco Wholesale year-to-date performance.
We are increasing our price target on Costco Wholesale
to $680 a share, up from $630. The decision reflects the stronger-than-expected quarter the retailer reported Thursday, with earnings of $3.58 per share beating estimates of $3.42. We think more gains are ahead for Costco on appreciation of its $15-a-share special cash dividend and anticipation of a membership-fee increase that could come sometime in late 2024.
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Honeywell International Inc
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Honeywell year-to-date performance.
We are nudging up our price target on Honeywell
to $230 a share, from $225. The market didn’t care at first for Honeywell’s $4.95 billion acquisition of Carrier
’s security business, but we loved the deal for its high margin, recurring revenue characteristics at an attractive price of 13 times earnings. We also thought it was a smart play on the reindustrialization boom underway in the U.S. Honeywell was a laggard in 2023, with shares down roughly 5% year-to-date, but we think the setup for the next few years will be better as its aerospace business continues to thrive and the struggling parts of its business — like warehouse automation and building products — trough and finally turn a corner.
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Palo Alto Networks Inc
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Palo Alto Networks year-to-date performance.
We are increasing our price target on Palo Alto Networks
to $320 a share, up from $300. The move comes after raising our price target earlier in the month to $300, from $280. That decision proved too conservative, as the market continued to favor cybersecurity leaders. We see no reason to change our bullish views on Palo Alto Networks because cybersecurity is one of the most important areas of investment in the IT space. It’s become a secular theme due to the rising threat from bad cyber actors.
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Wells Fargo & Co
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Wells Fargo year-to-date performance.
We’re raising our price target on Wells Fargo
to $54 a share, up from $50. Wells Fargo made a new 52-week high Friday, with bank stocks significantly benefiting from the Federal Reserve’s dovish pivot Wednesday. What the market is betting on is that lower interest rates rejuvenate loan activity and ease pressure on commercial real estate, of which Wells Fargo has notable exposure. But even after the move, the stock still looks cheap at around 10 times earnings, along with a dividend yield of 2.8%.
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