How Nvidia Became the New Apple

Weekly Commentary

Market Recap

• Equities hit fresh record highs this week in a number of markets from Europe to Japan.
• In North America, the rally was fuelled by a stellar earnings report by Nvidia on Wednesday, which sparked broader exuberance on the benefits of AI. Consumer staples and technology led the way, though gains in the S&P 500 were broad-based among sectors.
• The feeling was a bit more muted on the TSX (despite better economic data; see below), which eked out only a 0.7% advance on the week. Note that tech companies fell, perhaps as investors were lured by flashier names south of the border; that said, the sector remains well above its 200-day moving average.

Nvidia

Last week, Nvidia again topped earnings expectations, causing its stock to end the week near  $800 per share. For investors, the question is: are there further gains to be found or is it time to take profits? As we’ve said before, the thesis behind Nvidia is a long-term story—their microchips are needed globally, across all sectors. Even if one industry were to falter, demand from other areas would still be there. That tells us that there is likely still room for them to deliver even better results. Think of Microsoft when they introduced Windows or Apple when they launched the iPhone: these were game-changers that led to years—or even decades—of solid growth. Nvidia is potentially on that path; in the booming A.I. (artificial intelligence) space, no one is in the same category as them. Eventually, competition will emerge and growth will have to slow down. There’s also a case to be made that valuations have gotten stretched and that it’s worth taking some profits to fund other buys. But the market’s reaction to the company’s latest announcement re-confirms that earnings matter, and if you believe in the A.I. story—which we do—then Nvidia is the name you may want to own.

Bottom Line: If you want to get into a space like A.I., you want to get in with the best products, and right now, that’s Nvidia.

Inflation

Recently, the U.S. and Canadian inflation trajectories have diverged, with Canada now back within the Bank of Canada’s (BoC) target range of 2-3% while U.S. inflation slowed less than expected in January and remains above 3%. This reflects the relative strength of the two economies: the U.S. economy—and the American consumer—is still strong, which makes it hard for inflation to come down. Supply chain setbacks, like recent ones in the Red Sea, have also caused the occasional inflation uptick. In Canada, conversely, the consumer is weakening faster, causing people to be more selective about how they spend. The market had previously expected more rate cuts from the U.S. Federal Reserve (Fed) than the BoC this year—that now appears to have reversed. Our base case is still some easing from the Fed in the second half of the year, but we wouldn’t be too surprised if the U.S. didn’t get any rate cuts at all in 2024—it’s all data-dependent. The Fed likely doesn’t want to cut too early, because that could lead to a start-and-stop situation, which could be confusing for markets. As a result, they may have to wait for more data before pivoting to a cutting phase. The BoC, meanwhile, have been a bit more hawkish than the Fed. Our hope is that they move before their American counterparts, because otherwise Canadian consumers will have a tougher time. But it remains to be seen if they’re willing to take that leap.

Bottom Line: Inflation reflects the strength of the consumer—that’s why U.S. inflation has proven stickier than Canadian inflation.

Housing

In the last few months, we saw a bit of a bounce-back in both the U.S. and Canadian housing markets as mortgage rates came down. We believed this would be temporary, and that appears to be how it’s playing out—the Fed’s announcement in November allowed mortgage rates to fall, providing some relief and causing activity to pick up, but that activity has now slowed. The U.S. market may rebound faster than the Canadian market due to a stronger economy and differences in the structure of mortgages south of the border. But we continue to see pressure on Canadian housing, especially if rate cuts don’t come through soon. If the BoC does opt to decrease rates, however, Canada could start to rebound, especially with seasonal effects diminishing; in general, we don’t typically see a lot of housing activity in the winter. It’s possible there could be a divergence between the high-end and low-end markets, with some homeowners choosing to downsize in order to keep their monthly payments level.

Bottom Line: The greatest damage to the housing market is likely behind us, but Canada has more fallout to contend with than the U.S.

Positioning

Instead of asking why markets could fall, we think investors should be asking why markets will not go higher from here. It’s not hard to find a good reason—earnings from quality companies look good, the U.S. consumer is still relatively strong, and there’s been no spike in unemployment. The only real negativity at present is around the timing of interest rate cuts—but even if they don’t come next month, they would likely only be deferred, not deleted. Momentum remains strong, and our intention is to stay the course.

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled The American Exception: How U.S. Markets Beat the Bears…Again.

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Originally Posted February 26, 2024 – How Nvidia Became the New Apple