“I never said ‘Well, I don’t have this and I don’t have that.’ I said, ‘I don’t have this yet, but I’m going to get it.’” ~ Tina Turner (November 26, 1939 – May 24, 2023)
Good evening:
What a run it’s been for longtime Granny Shot Nvidia ($NVDA), a lead player in the semiconductor space. It soared to a new record high this week as the chip maker approaches a $1 trillion valuation. Our Tom Lee has long held Nvidia in the Granny Shots portfolio because of its importance in gaming and artificial intelligence. Since being added to Lee’s list in January 2019, the share price has risen more than 900%.
The latest surge: Nvidia, whose shares had already more than doubled in value this year, on Wednesday evening reported current-quarter sales of about $11 billion, up 64% from a year earlier and much higher than the $7.2 billion that Wall Street analysts were expecting. Perhaps more impactful were its forecasts: Nvidia provided a Q2 outlook that was more than 50% higher than Street expectations. The stock is up 172% through the year’s first five months.
CEO Jensen Huang said the rise of language-generating tools such as OpenAI’s ChatGPT and other AI applications is driving demand for computing power. Nvidia’s chips are key to creating AI tools. One AI system can require thousands of Nvidia’s computing engines. Shares of Microsoft, another Granny Shot, also rose this week on the news. Some analysts say Nvidia’s sales acceleration appears sustainable because it is seen by some as “*the* AI company.”
This week, Head of Technical Strategy Mark Newton credited Nvidia with helping to continue the recent strength of the Technology sector.
“Technology has come back with a vengeance and that certainly is a very positive thing,” Newton said. “It’s not just FAANG, a lot of it’s been some of the semis and everything else. But it’s going to be important for tech to really continue to show some strength and not break down, and I’m not certain if that happens over the next couple of months.”
Resident bear Brian Rauscher is also positive on Tech, noting that he had held this view since February, when he upgraded his opinion on the sector and recommended an overweight. “The tech rally makes sense to me even though I have not been bullish on the overall index. Of course, there are still lots of tech names that look good in my work, they all have clearly turned,” the Head of Global Portfolio Strategy and Asset Allocation said on Thursday.
Rauscher continues to urge caution on the rest of the market, pointing out what he sees as a disconnect between Tech and the other sectors. “I’m probably going to start talking about the market ex-tech and put tech in its own bucket, because when I see the rest of the market — the non-tech bucket, I see a much different setup.”
That’s something Newton also sees from a technical perspective. “Just like it did in early 2022, technology yet again has begun to dominate market performance and has begun to camouflage some of the weakness being seen in other sectors,” he observed.
“Sectors like Energy, Utilities, Consumer Discretionary, Financials and Materials have begun to show meaningful signs of weakness that, if not reversed in the next couple weeks, will likely coincide with a drawdown not dissimilar from March.”
Other highlights from Rauscher
- Outside of tech, earnings revisions still don’t look great. “So we have a weak economy, I see no Fed easing, and the non-tech world doesn’t have the revisions we want to see, so the rest of the year looks very very challenging.”
- Healthcare earnings remain attractive. “Not the traditional defensive healthcare names, but a lot of the names in there are ‘growthier’ things like healthcare equipment.”
- Energy, which has struggled in 2023, could soon become a contrarian buy. “If you look at the earnings, I think energy is getting close. I don’t mean ‘close’ like in a couple of days or a week, but I think before year-end, my work will bottom for energy and then energy will become a strong contrarian buy. I think we have the weakest quarters in front of us, and if that’s the case I don’t know how energy’s going to avoid being impacted by more talk of economic slowing. However, I think once we get to peak economic slowdown fears whenever that may occur, that may be the bottom for energy.”
A in-depth technical view
Meanwhile, Newton has been overweight energy this year, and it’s next to technology as one of his favorite sectors for 2023. Yet it’s been a rough few months for the area, and he said “it’s really going to be important over the next few weeks or the next month that this really starts to turn up. It can’t really afford to break the lows of the energy trend that began last summer. That’s just something to keep in mind.”
- On Materials, Newton is favorable. “I think commodities have been taken out to the woodshed. I like copper. I like buying gold and silver as a trade — not necessarily today, because right now the dollar is still going up and yields are still rising, which is generally a negative for precious metals. But in general, I like buying dips in the metal stocks. There’s also a lot of Industrials that are still acting great.”
- On sentiment: “The equity put-to-call in general has been at the highest level it’s been in the last couple months so people have gotten a little concerned. In addition, the positioning of U.S. stocks in funds of all types shows an incredible level of pessimism right now — two standard deviations below average levels.”
- On the general market: “The key of course is going to be to get back over the 4,200 level. I’m not certain if that happens right away, but that is something to watch carefully along with any sort of break of this week’s lows, which would likely cause a test of May lows.”
- If markets soften, a June-October timeframe would make sense in his view. “We just have to watch for signs of what technology is doing. That’s all and S&P really can’t afford to drop under 3800 — that would be a big big deal. We are exiting the best six-month stretch of the four-year [Presidential election] cycle. But we’re still in a pre-election year. My bottom-line thinking is that even if we were to attempt to break out in the next few weeks, we’re probably still going to be muddled and that eventually we are going to see a little bit of weakness that likely gets us down toward 4,000, if not 3,900, between now and the fall. And then that in turn should be viable for a year-end rally, so I’m still optimistic for the year.”
Lee Still Bullish
Lee maintains his bullish outlook for the year. He acknowledged that Fed officials spoke relatively more hawkishly this week, and Friday’s “hotter” than expected April Core PCE numbers (0.40% MoM vs Street 0.3%) had some market observers worried. However, Lee noted that already, 69% of Core PCE (ex-housing), 3M annualized (aka SAAR) inflation is below 5%. That is below the 65-year average of 69.5%. “To me, this suggests that inflation internals are back to pre-pandemic trends. And this implies that future inflation should be cooling,” he said.
This is shown by our Chart of the Week:
Debt ceiling
Still, the market was undeniably choppy this week. Lee attributed much of the week’s market churn on the lack of resolution over raising the debt ceiling. “The brinkmanship around this issue has temporarily supplanted the longer term view,” he noted. That’s something that Newton and Rauscher also agreed on.
“Sentiment seems to have gotten a little more fearful in the last couple of weeks on the threats of just the debt ceiling debate being drawn out and nobody knows what to make of that,” Newton said.
Rauscher added, “Each headline about the debt-ceiling negotiations that hits the tape creates ripples in the market.
Tom Block, our Washington Policy Strategist, argued that the market impact is mostly limited to headline risk. “This sounds sort of counterintuitive,” he said at our huddle, “but while it’s clearly really bad to not make payments, that would still be transitory. If things fall apart and payments are missed it is a technical default as everyone will still accept US dollars as payments. It is not as if the U.S. is a company that runs out of money and defaults.”
As of this writing, Democrats and Republicans seem no closer to a deal than they were last Friday, and Block said it was clear that both sides would have to give away something. Among the Republican demands President Biden and his party might have to accept is stricter work requirements for public assistance such as Medicaid.
But Block noted that any deal will need House Democratic support to pass – Republicans of a more conservative bent will reject any proposal outright. Therefore, he predicted, Democrats will likely demand (and get) a deal that takes the debt ceiling issue off the table until at least 2025, rather than the April 1, 2024 expiration date in the bill that the House Republicans passed a little over a month ago.
“If you want to watch to see if they’re close to an agreement, look for a resolution regarding when the debt ceiling will next become an issue again. They will just probably suspend the debt ceiling rather than come up with a dollar figure,” Block suggested.
Elsewhere
China is once again bracing for a wave of COVID-19 infections, less than half a year after the country finally reopened. Omicron variant XBB new infections have increased sharply and respiratory disease specialists are projecting that they will reach 40 million per week by the end of May and 65 million a week by the end of June. The official numbers might never be known, as China’s CDC has stopped updating its COVID statistics. Other countries have long adapted to the XBB variant, but it is relatively new in China.
Three states agreed to a Colorado River water-preservation deal that will hopefully keep the river from running dry below the Hoover Dam. The states of California, Arizona, and Nevada, along with cities and Native American tribes in those states, agreed to temporarily reduce water usage for both residential and agricultural purposes after years of drought led to a looming power and water crisis for upwards of 40 million people.
Meanwhile, Montevideo, capital of Uruguay, has 10 days of water left in its reservoir, and what remains is so high in sodium that those with hypertension have been advised to avoid drinking tap water. A drought over much of the past year combined with unusually high temperatures has left the country with the worst water deficit in 74 years.
Argentina introduced its largest-denomination bank note, worth 2,000 pesos. Due to triple-digit inflation but also artificial currency controls imposed by the Argentine government, the note is worth roughly USD $8.48 based on the exchange rate as of this writing.
Markets briefly dipped on Monday after an AI-generated image of a purported explosion near the Pentagon went viral, shared by – among others – a “verified” account pretending to be an official account for Bloomberg. The event raises the issue of how fake information and photography can alter markets.
Italians are on the verge of striking over pasta prices, which rose 17.5% in March and 16.5% in April. The price increase, double that of the country’s inflation rate, seems to reflect a lag in price increases for the wheat and eggs that go into pasta making. As the constituent ingredients’ prices have settled, Italians might see a respite in the price of this much-loved staple soon.
State-sponsored hackers from China have compromised critical systems in numerous sectors, Microsoft warned this week. Among those affected are the communications, manufacturing, utility, transportation, construction, maritime, government, information technology, and education sectors or industries. The Redmond-based company said the ongoing attack, by a group known as “Volt Typhoon,” had two objectives: gathering intelligence and positioning China to disrupt U.S. communications with Asia during future crises. And finally: If you’re on the road for Memorial Day weekend, you might notice some savings at the pump from a year ago.
Notice: U.S. stock markets and Fundstrat offices will be closed on Monday in observance of Memorial Day. There will be no publications. Thank you to all those who served and those who continue to serve our country.
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