The Week in Charts (9/3/24)
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The most important charts and themes in markets and investing…
1) Priced for Perfection
It was another record quarter for Nvidia ($NVDA):
- Revenues surged to $30 billion, up 122% over the prior year (consensus estimate was $28.7 billion). Their revenue projection for Q3 is $32.5 billion, which would be a 79% YoY increase.
- Net Income hit another record high at $16.6 billion. That was a 168% increase over last year’s Q2 Net Income of $6.2 billion.
So why is the stock down 12% since reporting these incredible numbers?
It was priced for perfection, up 154% on the year heading into earnings, which was well above the expected revenue growth for all of 2024 (104%). And while Nvidia’s earnings and revenue numbers handily beat street estimates, that’s not the benchmark when you’re trading at 59x earnings and 32x sales.
A sky-high valuation requires you to not only beat those estimates, but crush them. Put simply: everything has to be perfect.
For the past two years, Nvidia has achieved perfection like no other company in history. But trees don’t grow to the sky – eventually growth rates slow – and we now appear to be entering that part of the cycle.
The biggest questions for Nvidia going forward are not only how much and how fast of a slowdown we will see, but also how long it will be able to demand premium pricing with unbelievably fat margins.
On that point, Nvidia’s net profit margin moved down slightly to 55% in Q2 from a record 57% in Q1. That was the first decline in its profit margin since Q2 2022.
2) Will AI Arms Race Pay Off?
Nvidia’s historic advance over the past few years has been a direct result of the AI arms race, where the biggest tech companies are making some enormous bets on the future.
Google has increased capital expenditures by a whopping 64% in the past year, while Amazon (+41%), Microsoft (40%) and Meta (+23%) have also boosted spending.
Google’s CEO Sundar Pichai said recently that the “risk of underinvesting” in AI is “dramatically greater than the risk of overinvesting” and Meta’s CEO Mark Zuckerberg said he would “rather risk building capacity before it is needed, rather than too late.”
While Nvidia has clearly benefitted from this trend, the question for investors more broadly is how much of return on investment other companies will experience from their AI infrastructure build out. And when will we see that translate into higher profits?
In looking at valuations, the expectations here seem quite high. The S&P 500’s price to peak earnings ratio of 25.7 is 49% above the historical median and the highest we’ve seen since 2000.
The bet investors seem to be making: the huge AI investments will start paying off in the coming quarters, with S&P Dow Jones forecasting a 26% increase in S&P 500 earnings by the end of 2025. If that actually happens, one could argue that current valuations are justified. But if earnings fall far short of these lofty expectations, a painful revaluation may occur.
3) Berkshire Joins the Trillion Dollar Club
It’s official. Berkshire Hathaway is a trillion-dollar company, surpassing the milestone last week for the first time. This is more than double its market cap from five years ago ($491 billion).
Berkshire is now the 7th US company with a market cap over $1 trillion, joining 6 tech giants: Apple ($3.5 trillion), Microsoft ($3.1 trillion), Nvidia ($2.9 trillion), Google ($2.0 trillion), Amazon ($1.9 trillion), and Meta ($1.3 trillion).
Despite holding a record amount of cash ($277 billion as of the end of Q2), Berkshire is up over 33% this year, widely outpacing the S&P 500’s 19% gain.
4) The Return of Sound Money
For the 3rd month in a row, the Fed’s preferred measure of inflation (Core PCE) held steady at 2.6%. While still above the Fed’s target rate of 2% and higher than at any point from September 2006 through March 2021, the market is betting this is low enough to warrant a rate cut in September.
Why has the inflation rate moved lower over the last two years?
First and foremost, the return of sound money.
After a record 40% increase in 2020-21, the US Money Supply has decreased by 2% from the start of 2022 through today.
While the US Money Supply (M2) has increased 1.3% over the last year (the biggest YoY increase since October 2022), it remains well below the historical average increase of 6.9% since 1960.
5) Double the Down Payment
The median down payment for US homebuyers has moved up to a record $67,500. That’s 116% higher than the median down payment 5 years ago ($31,250).
Higher prices, of course, require a higher down payment. And home prices in the US continue to hit record highs, with the Case-Shiller National Index up 5% over the last year.
Another factor has been higher mortgage rates, which have incentivized homebuyers to put more money down, borrowing less. The typical homebuyer down payment has moved up to 18.6%, the highest level in over a decade.
6) Why Housing Remains Unaffordable for Many
But if you don’t have money saved for a big down payment, housing remains unaffordable for many.
The reason?
Price appreciation has far outpaced income gains.
The Case-Shiller 20-City Index is up over 52% in the past 5 years while wages have grown 24%.
This gap between price increases and income gains exists in all major cities but is most pronounced in south Florida. Prices in Miami have spiked over 80% in just the past 5 years.
7) Is the Lock-in Effect Starting to Ease?
57% of US mortgage holders have a rate below 4% and 86% have a rate below 6%. With current mortgage rates at 6.4%, many existing homeowners have been staying put, leading to a record shortage of homes for sale. This has become known as the “lock-in” effect, as those “locked in” to low interest rate mortgages have been incentivized to stay.
But supply has been slowly rising for months and inventories are now at their highest levels since 2020.
Which begs the question: is the lock-in effect starting to ease?
It seems to be, with a number of factors likely pointing to a continued easing in the years to come…
- The growing number of recent homeowners who bought at high interest rates and are not locked into low rate mortgages.
- Major life events that force a sale (ex: death, divorce, or change in employment).
- Increased equity among existing homeowners which makes buying a new home easier (less reliant on mortgage rates), especially when downsizing.
- Rising share of Americans that are mortgage-free and are not dependent on taking out a new mortgage when moving.
8) More Affordable Rents
While the market to buy a home has become much less affordable over the past two years, the market to rent an apartment has become much more affordable.
US Asking Rents were down 0.8% over the last year, the 15th consecutive month showing a YoY decline.
The median monthly Asking Rent of $1,412 is 2% lower today than the peak back in 2022 at $1,441.
Wages, of course, have gone up over the past two years. And when you adjust for those higher earnings, Asking Rents are actually 9% lower than the 2022 peak.
The biggest reason why Asking Rents have gone down, both on a nominal and real basis? More supply. The multi-family construction boom in recent years has pushed the vacancy rate up to 6.7%, its highest level since 2020.
9) A Few Interesting Stats…
a) US Households now have 42% of their financial assets in stocks. That’s the highest percentage on record with data going back to 1952.
b) The Fed’s balance sheet is now over 20% below its peak from April 2022. That’s the largest drawdown on record.
c) Nvidia’s market cap per employee is in a league of its own…
d) The S&P 500 was up 18.4% in the first 168 trading days of 2024, the 15th best start to a year going back to 1928 and best start to a presidential election year ever.
And that’s all for this edition. Have a great week everyone!
-Charlie
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The post The Week in Charts (9/3/24) appeared first on Charlie Bilello’s Blog.
