Nvidia wins again. But do markets?

Market Recap

• 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.

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.