Equity markets were little changed this week, with the S&P 500 flat and the TSX dipping 0.6%.
Stocks are holding near record highs in North America at a time when expectations of Fed easing are getting scaled back and longer-term Treasury yields are trending higher.
Given that there’s not too much leeway in valuations—a discussion for another day—the market is relying more on the idea that earnings will remain solid.
Nvidia
Last week, Nvidia once again reported better-than-expected earnings, sending its stock soaring to record highs. At the same time, the artificial intelligence (A.I.) leader announced a 10-for-1 stock split effective June 7, as well as an increase to its quarterly dividend. It really is an unbelievable story—even after several quarters of delivering incredible earnings, and facing elevated expectations, Nvidia continues to beat the street’s estimates. The company continues to exert dominance in the A.I. space, and the latest announcement checked all the boxes: its forecast continues to be promising; it isn’t anticipating being hurt by any supply hitches in the near future; and its management and execution have been excellent. There was also something for everyone in the sense that long-term investors will be exceptionally happy given the company’s growth and outlook, while the stock split will make the company more accessible to smaller investors and the dividend increase will appeal to dividend growth-oriented investors. In our view, that combination is ultimately what caused the stock price to surge over 7%. A.I. is a decades-long story, and we believe the hype is justified for the leading companies. Are some of these companies arguably overvalued at present? Perhaps. But you’re not paying for the present, you’re paying for the future—and you don’t know when sudden stock price surges like the one we just saw are going to occur. In our view, this is a space you want to be in overweighted over the next two-to-three years, and Nvidia remains the largest position in the BMO Global Equity Fund, BMO Global Innovators Fund, and BMO Global Income & Growth Fund. One might argue that markets are too hung up on A.I. as they wait for interest rate certainty. If companies weren’t reporting good earnings, we do think it’s likely that the market would be more neutral than positive. But the fact that we have seen good earnings from companies like Nvidia makes the gains valid—higher earnings justify higher multiples even though rates haven’t been cut. It’s possible markets will receive another lift when rate cuts start coming through as long as it is not tied to a much slower economy.
Bottom Line: Nvidia is firing on all cylinders and continues to stay at the forefront of the A.I. story.
The Fed
Minutes from the U.S. Federal Reserve’s (Fed) most recent policy meeting were released last week, and they were somewhat more hawkish in tone than many were hoping, as committee members noted the lack of progress toward the Fed’s 2% inflation target. Does this mean investors should abandon hopes of any rate cuts this year? Not exactly. The minutes didn’t come as a surprise to us—we don’t expect the Fed to get dovish until the data is where it needs to be and they’re ready to lower rates. That said, we still feel there were undertones of the Fed wanting to cut before the end of 2024—they just need sufficient economic justification. Lately, inflation numbers have tended to be flat or a bit hotter than expected, forcing the Fed to stay on the sidelines. Political considerations may make it somewhat more difficult for them to cut the closer we get to the November presidential election, but we don’t expect that to prevent them from cutting if that data warrants it. Our big takeaway from this meeting that the Fed is likely to maintain a fairly neutral tone—walking a narrow line between hawkish and dovish–until they see some real progress toward the 2% inflation target.
Bottom Line: The Fed likely wants to cut rates this year—they just need the right economic data to do it.
Metals
Prices for metals like copper and gold have reached new highs over the past several months, making this an opportune moment to discuss the role metals should play in a portfolio. There are times when metals are particularly valuable, and we appear to be in one of those times right now. Metals serve different roles in a portfolio at different times. If you suspect a country’s economy is poised to explode on the upside or rebound out of a poor environment, then it makes sense to increase your weight to metals. As a real-world example: if you think China’s weakness is over and its economy will stabilize, then it might be the right moment to get back into the metals space. If sticky inflation or uncertainty around the U.S. dollar are a concern, then gold is likely what you want to own. Overall, having an allocation to metals makes sense in many instances, and many implementation possibilities are available—including gold, copper, silver, or a diversified basket. We continue to remain bullish in this area.
Bottom Line: We think it makes sense to have some exposure to metals at this time, and that there’s likely room for prices to go higher from here.
The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
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With the end of the month, quarter and first half of 2024 in the books, markets seem to be taking a collective deep breath in anticipation of what the remainder of the year will bring.
What did we learn from the Fed’s reaction to the latest inflation data? How will election-related volatility manifest, and how big of an impact could it have on markets?
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Nvidia Wins Again. But Do Markets?
May 27 to 31, 2024
Nvidia Wins Again. But Do Markets?
May 27 to 31, 2024
Sadiq S. Adatia, CFA, FSA, FCIA
Market Recap
Nvidia
Last week, Nvidia once again reported better-than-expected earnings, sending its stock soaring to record highs. At the same time, the artificial intelligence (A.I.) leader announced a 10-for-1 stock split effective June 7, as well as an increase to its quarterly dividend. It really is an unbelievable story—even after several quarters of delivering incredible earnings, and facing elevated expectations, Nvidia continues to beat the street’s estimates. The company continues to exert dominance in the A.I. space, and the latest announcement checked all the boxes: its forecast continues to be promising; it isn’t anticipating being hurt by any supply hitches in the near future; and its management and execution have been excellent. There was also something for everyone in the sense that long-term investors will be exceptionally happy given the company’s growth and outlook, while the stock split will make the company more accessible to smaller investors and the dividend increase will appeal to dividend growth-oriented investors. In our view, that combination is ultimately what caused the stock price to surge over 7%. A.I. is a decades-long story, and we believe the hype is justified for the leading companies. Are some of these companies arguably overvalued at present? Perhaps. But you’re not paying for the present, you’re paying for the future—and you don’t know when sudden stock price surges like the one we just saw are going to occur. In our view, this is a space you want to be in overweighted over the next two-to-three years, and Nvidia remains the largest position in the BMO Global Equity Fund, BMO Global Innovators Fund, and BMO Global Income & Growth Fund. One might argue that markets are too hung up on A.I. as they wait for interest rate certainty. If companies weren’t reporting good earnings, we do think it’s likely that the market would be more neutral than positive. But the fact that we have seen good earnings from companies like Nvidia makes the gains valid—higher earnings justify higher multiples even though rates haven’t been cut. It’s possible markets will receive another lift when rate cuts start coming through as long as it is not tied to a much slower economy.
Bottom Line: Nvidia is firing on all cylinders and continues to stay at the forefront of the A.I. story.
The Fed
Minutes from the U.S. Federal Reserve’s (Fed) most recent policy meeting were released last week, and they were somewhat more hawkish in tone than many were hoping, as committee members noted the lack of progress toward the Fed’s 2% inflation target. Does this mean investors should abandon hopes of any rate cuts this year? Not exactly. The minutes didn’t come as a surprise to us—we don’t expect the Fed to get dovish until the data is where it needs to be and they’re ready to lower rates. That said, we still feel there were undertones of the Fed wanting to cut before the end of 2024—they just need sufficient economic justification. Lately, inflation numbers have tended to be flat or a bit hotter than expected, forcing the Fed to stay on the sidelines. Political considerations may make it somewhat more difficult for them to cut the closer we get to the November presidential election, but we don’t expect that to prevent them from cutting if that data warrants it. Our big takeaway from this meeting that the Fed is likely to maintain a fairly neutral tone—walking a narrow line between hawkish and dovish–until they see some real progress toward the 2% inflation target.
Bottom Line: The Fed likely wants to cut rates this year—they just need the right economic data to do it.
Metals
Prices for metals like copper and gold have reached new highs over the past several months, making this an opportune moment to discuss the role metals should play in a portfolio. There are times when metals are particularly valuable, and we appear to be in one of those times right now. Metals serve different roles in a portfolio at different times. If you suspect a country’s economy is poised to explode on the upside or rebound out of a poor environment, then it makes sense to increase your weight to metals. As a real-world example: if you think China’s weakness is over and its economy will stabilize, then it might be the right moment to get back into the metals space. If sticky inflation or uncertainty around the U.S. dollar are a concern, then gold is likely what you want to own. Overall, having an allocation to metals makes sense in many instances, and many implementation possibilities are available—including gold, copper, silver, or a diversified basket. We continue to remain bullish in this area.
Bottom Line: We think it makes sense to have some exposure to metals at this time, and that there’s likely room for prices to go higher from here.
Positioning
For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled The Fed’s Last Stand: A Solitary Rate Cut Expected for 2024.
Disclosures:
The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
Insights
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