Head of Saxo Strats
Summary: Nvidia's share price surged 6.5% to a new record high driven by the announcement of new AI chips for personal computers. The move highlights the growing investment opportunities in AI and the potential for the technology to expand into consumer markets. Meanwhile, the four major US banks will report Q4 earnings on Friday, with analysts expecting revenue growth to normalize and credit provisions to rise.
Nvidia shares jumped 6.5% yesterday to a new all-time high keeping the AI hype alive and increasing bets that 2024 will be another year of massive technology investments into AI. The positive sentiment yesterday was due to Nvidia announcing a new AI chips for personal computers that will allow AI capabilities to potentially expand closer to consumer. One of the key arguments for putting AI chips into personal computers compared to the current model with massive AI chips sitting in gigantic datacentres is that it increases security running AI applications more decentralized. The share price increase yesterday constituted an increase in market value of $79bn. This corresponds to adding the market value of Equinix (the world’s largest operator of datacentres) or Schlumberger (one of the world's largest oil and gas services providers).
Nvidia remains the hottest trade in the US technology sector seen as the most direct and potent exposures to the initial investment boom in AI as Nvidia is leading the industry of AI chips. The high expectations are clearly reflected in the company’s equity valuation which measured on 12-month EV/EBITDA is 23x which is significantly above the MSCI World Index at 12x. The sell-side consensus price target is currently $648 around 24% above yesterday’s closing price. Despite a year of galloping expectations for Nvidia the chipmaker’s astounding results exceeding expectations have created a powerful feedback loop. This is also the biggest danger this year as Nvidia is estimated to increase revenue by a whopping 57% in FY25 (ending 31 January 2025) to reach $92.6bn. One of the key outstanding questions about Nvidia revenue is how much of revenue to China was frontloaded due to upcoming sanctions and thus could pose a hangover risk over the coming year.
On Friday the market enters its first big earnings release day with the four major US banks JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup reporting Q4 earnings. Analysts expect net revenue growth to begin normalizing as interest rates have stopped rising and also expect credit provisions to rise reflecting a deterioration in credit quality and future losses on loans. Higher credit provisions were the big surprise factor in Q3 for US banks as they across the board reported lower than estimated credit provisions as the resilient US economy shielded the corporate and household sector. JPMorgan Chase is the largest US bank and is projected to increase net revenue by 16% y/y in Q4 and deliver EPS of $3.57 down 1% y/y. The stock price is up 27.6% since the lows in October 2023.
As the chart below shows the operating income (EBITDA) rose 13.2% for Nasdaq 100 in 2023 up until Q3 outpacing the S&P 500 and STOXX 600 due to aggressive cost cutting and accelerating revenue growth. However, technology stocks much more expanding equity valuations as investors believe the growth and good times will continue into 2024. This is exactly why technology earnings are more important than ever to this market. One because they set sentiment but also because US equity market index concentration is extremely high.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
