It all rests on this…
Nvidia (NVDA) is releasing its earnings report this week.
The $1.7 trillion stock that your mother has (likely) never heard of.
Yet it feels as though the entire market rally relies on this one stock.
So, what can we expect?
Is the bull market reaching new heights… or is it the beginning of a market slump that may not turn around for years?
We’ll give our take below and explain that, whatever the outcome, there’s no need to panic.
But first, let’s check in on today’s market action…
Market Data
The S&P 500 closed down 0.6% to end the day at 4,975.51… the NASDAQ fell 0.9% to close at 15,630.78.
In commodities, West Texas Intermediate crude oil trades at $78.27, down 90 cents…
Gold is $2,035 per troy ounce, up $11…
And bitcoin is $52,020, up $136 since Friday.
And now, back to our story…
A Big Week Ahead
Don’t underestimate the impact Nvidia’s growth has had on the market.
Five years ago, its market capitalization was less than $100 billion.
You can see the growth on the chart below. Instead of showing the price on the chart, the “y” axis represents the market cap.
Source: Bloomberg
Today the market cap is $1.7 trillion. Its peak value was $1.82 trillion last week.
The stock price has gained about 1,670% in five years.
Compare that to a stock your mother probably does know… Apple (AAPL). Over the same time frame, its stock has climbed from $820 billion to $2.8 trillion today.
That’s a 241% gain. That’s still pretty darn good, mind you.
(And by the way, so much for the idea that it’s difficult for mega-cap stocks to double in price. There are two examples for you right there.)
But as it stands right now, Nvidia came out of nowhere to be one of the market’s biggest stocks. And it did so with rapid growth.
The issue for the company and investors is what happens if the business growth is over… and the expectations for growth by investors are also at an end.
After all, Nvidia isn’t the first stock to see rapid growth and high expectations. Two other recent examples are Amazon (AMZN) and Tesla (TSLA).
Both experienced periods when it seemed as though their stock prices could never fall. And all along the way, many tried to short-sell those stocks… without much success.
But eventually, the growth spurt ended, and it took a long while for investors to adapt to the new expectations. Take Amazon first. The following chart goes back to 2014.
Source: Bloomberg
You can see from 2018 until early 2020, investors had to deal with minimal stock price growth… even though revenue over that period more than doubled.
Then we had the Covid price spike… but by mid-2022, the stock was back to 2019 levels. Only over the past year or so has it taken off. It’s now at the “Covid peak” again.
Tesla is another great example. You can see from this chart it had a lot of ups and downs from 2013 through to late 2019. And then it took off through 2020:
Source: Bloomberg
If you recall, Tesla didn’t suffer the same chip shortage problem faced by the other major carmakers.
Yet, since the peak in 2021, it has been harder for Tesla to gain further ground. In fact, the Tesla stock price is down 53% from that 2021 peak.
Short story, at some point, Nvidia will go through the same pattern. The growth spurt will end. Investors will question whether it really has kept growing as much as it has in the past…
And growth investors will begin to bail out and look for other hyper-growth opportunities.
What does that mean for you?
First, just because you may not own Nvidia stock, don’t assume any stock price fall won’t impact you. It will. It’s not just Nvidia that has climbed on the back of the AI (artificial intelligence) boom.
Microsoft (MSFT), Amazon, and Alphabet (GOOG) have all benefited from it. It’s just that Nvidia has been the “face” of the boom.
So if Nvidia misses earnings this week… or even if it doesn’t beat earnings by as much as some folks predict, don’t be surprised if it drags the market down with it.
But it’s not all bad news. At this stage of the market, you shouldn’t be in a position where you’re gambling your whole portfolio on one earnings hit or miss.
If you’re worried about Nvidia, it probably means that you’ve either got too much in growth stocks, or too much in stocks overall.
Remember what we wrote last week: “The higher the market goes, the more conservative I become.”
It’s advice every investor should take. We don’t know for sure what Nvidia’s earnings results could be. They could be terrific, and the stock could gain another 20% over the next six months.
But is that a risk you can afford to take? We doubt it.
The message is clear on this. As an investor, you should never be in a position where you’re forced to panic. Instead, use every market rally as an opportunity to take profits (or cut losses) on a little bit more of your portfolio.
Redirect the funds elsewhere. Put the cash into a CD (certificate of deposit) or buy a lower-risk dividend stock.
When the market looks as though it has found a level with more realistic valuations, then you’ll have the chance to buy back in.
We’ll watch Nvidia’s earnings closely this week, but we won’t panic if it’s a bad result. We hope you will be in a position where you won’t panic either.
More Markets
Today’s top gaining ETFs…
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iShares MSCI Chile ETF (ECH) +1.7%
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iShares MSCI Sweden ETF (EWD) +1.3%
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iShares MSCI Malaysia ETF (EWM) +1.2%
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iShares MSCI Switzerland ETF (EWL) +1.2%
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First Trust Brazil AlphaDEX Fund (FBZ) +1.1%
Today’s biggest losing ETFs…
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Global X Lithium & Battery Tech ETF (LIT) -3.3%
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Invesco Semiconductors ETF (PSI) -2.8%
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Global X MSCI China Consumer Discretionary ETF (CHIQ) -2.5%
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KraneShares Electric Vehicles and Future Mobility Index ETF (KARS) -2.5%
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Invesco Dorsey Wright Technology Momentum ETF (PTF) -2.4%
Cheers,
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Kris Sayce
Editor, The Daily Cut