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Nvidia Plans to Buy Back Billions in Stock. Other Companies Could Join in Soon.
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Nvidia Corp.
NVDA,
shares failed to close at a record high Thursday after the AI-chip maker’s stellar earnings report initially boosted shares past $500 for the first time. Shares rose 0.1% to close at $471.74, after trading as high as $502.66 intraday, but fell short of the record closing high of $474.94 set on July 18, according to FactSet data. The earnings report took chipmakers on a ride Thursday, falling from an initial show of strength following the report. Nvidia shares are up more than 222% on a year-to-date basis, compared with a 37% gain in the PHLX Semiconductor Index
SOX,
a 14% rise in the S&P 500
SPX,
and a 29% surge in the tech-heavy Nasdaq Composite
COMP,
over the same span.
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Nvidia Corp. shares rallied in the extended session Wednesday after the maker of graphics processing units that is leading the AI-hardware charge reported a 141% surge in data-center sales and record results.
Nvidia
NVDA,
shares rallied 9% after hours, following a 3.2% rise in the regular session to close at $471.16, less than 1% below the stock’s record closing high of $474.94, set on July 18, according to FactSet data. A close at such levels on Thursday would mean a new record high for the stock.
The Santa Clara, Calif.-based company reported second-quarter net income of $6.19 billion, or $2.48 a share, compared with $656 million, or 26 cents a share, in the year-ago period. Adjusted earnings, which exclude stock-based compensation expenses and other items, were $2.70 a share, compared with 51 cents a share in the year-ago period.
Revenue surged to a record $13.51 billion from $6.7 billion in the year-ago quarter, driven by a 141% leap in data-center revenue to $10.32 billion.
Analysts surveyed by FactSet had forecast earnings of $2.08 a share on revenue of $11.19 billion, and data-center sales of $8.03 billion.
Nvidia forecast third-quarter revenue of $15.68 billion to $16.32 billion.
Analysts had estimated third-quarter earnings of $2.40 a share on revenue of $12.59 billion, with $9.15 billion of that from data-center sales. For the year, Wall Street, on average, expects earnings of $8.29 a share on $44.54 billion in revenue, a 71% increase from fiscal 2023’s $26.97 billion, with $32.41 billion of that in data-center sales.
“Companies worldwide are transitioning from general-purpose to accelerated computing and generative AI,” said Jensen Huang, founder and chief executive of Nvidia, in a statement. “Leading enterprise IT system and software providers announced partnerships to bring Nvidia AI to every industry. The race is on to adopt generative AI.”
Right after the report, Lopez Research analyst Maribel Lopez told MarketWatch that Nvidia’s “numbers prove just how much money there is in the AI hardware opportunity.”
“While cloud companies are selling AI services, Nvidia is walking away with a bulk of the revenue and profits,” Lopez said. “Nvidia’s minting cash with no apparent slowdown in sight.”
Nvidia shares are up more than 222% on a year-to-date basis, compared with a 42% surge in the PHLX Semiconductor Index
SOX,
a 15.5% rise by the S&P 500
SPX
and a 31% gain by the tech-heavy Nasdaq Composite
COMP
over the same span.
Nvidia, which has stood as the largest publicly traded chip maker by market cap since February, having traded that title back and forth with Taiwan Semiconductor Manufacturing Co.
TSM,
since late 2020, closed above the $1 trillion mark officially for the first time on June 14. Nvidia ended Wednesday with a valuation of $1.164 trillion, and one analyst thinks it could be the most valuable U.S. company in a few years.
Nvidia currently stands as the fifth-largest U.S. company by market cap behind Apple Inc.
AAPL,
Microsoft Corp.
MSFT,
Alphabet Inc.
GOOG,
GOOGL,
and Amazon.com Inc.
AMZN,
While all have a big stake in the future of AI, the latter three companies are scrambling to outfit their cloud-service provider data centers with new AI gear amid tight supply.
While Nvidia is considered the overwhelming leader in the AI chip market, Advanced Micro Devices Inc.
AMD,
is considered a distant second. AMD’s data-center numbers declined in the company’s recent earnings report, although the company didn’t have comparable AI chip sales in its results.
Shares of AMD and TSMC were both up more than 3% after hours Wednesday.
See also: Nvidia ‘should have at least 90%’ of AI chip market with AMD on its heels
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“‘You could ask who is really running the show? Jerome Powell or Jensen Huang? Amazingly, it may not be Powell, but Jensen Huang who is driving Fed expectations.’”
Those are the words of Ben Emons, a senior portfolio manager and the head of fixed income at NewEdge Wealth in New York, who identifies reasons why artificial-intelligence leader Nvidia Corp.
NVDA,
is demonstrating central-bank-like powers.
It starts with the idea that the Santa Clara, California-based chip designer — which reports fiscal second-quarter earnings on Wednesday — acts as a bellwether for AI-capital expenditures that are likely to boost productivity across the U.S. economy. And in the bond market, a surge of AI-related expectations is translating into higher real yields, which reflect inflation-adjusted growth in gross domestic product and productivity, he said.
Read: Nvidia’s stock snaps losing streak and sits 1% below record close as earnings optimism builds
Higher real yields in the U.S. are a key reason why 10-
BX:TMUBMUSD10Y
and 30-year Treasury yields
BX:TMUBMUSD30Y
climbed to multi-year highs through Monday. Real yields, as measured by rates of Treasury inflation-protected securities, offer a glimpse of how the market expects the U.S. to perform when inflation isn’t a factor.
Read: Rise in Treasury yields is almost entirely due to one factor, strategist says
“The bigger macro story behind Nvidia as the bellwether of artificial intelligence is the role it plays in the economy, which is proving to be stronger than anyone thought it would be,” Emons said via phone on Tuesday. “People connect AI to productivity and productivity leads to growth, and to some extent this is impacting interest-rate expectations today.”
Amid growing anticipation over Nvidia’s upcoming earnings announcement and Friday’s speech by Federal Reserve Chairman Jerome Powell in Jackson Hole, Wyo., “the probability of a rate hike is creeping higher,” the senior portfolio manager wrote in a note this week. “With each additional dollar increase of NVDA EPS estimates, the probability of a hike by November goes up. NVDA is gaining Fed-like power.”
Need to Know: Nvidia may be the AI stock for now, but here are the picks for later, says Goldman Sachs
A chart provided by Emons shows how the median estimate of analysts for Nvidia’s earnings-per-share in the fiscal second quarter has been rising alongside the market-implied probabilities of a November Fed rate hike.
In addition, the yield on one of Nvidia’s own corporate bonds, issued in 2020 and maturing in April 2040, has been rising in relation to the 10-year TIPS or real yield “because of the company’s broader effect on the economy,” Emons said.
As University of Pennsylvania Wharton School finance professor Jeremy Siegel explained in a separate interview with MarketWatch, real interest rates track real growth. Improving productivity and stronger growth “mean the Fed won’t be able to cut rates as much as it would otherwise be able to.”
On Tuesday, Treasury yields finished mixed, while Nvidia’s shares closed down by 2.8%, as traders and investors await the company’s earnings report on Wednesday followed two days later by Powell’s remarks.
Analysts expect Powell to address what’s known as the real neutral rate of interest — or the inflation-adjusted level which is likely to prevail when the economy is operating at full strength and price gains are stable — as a way of justifying the higher-for-longer theme in U.S. interest rates.
See also: How higher-for-longer rates are playing out as 10-year yield hits 15-year high
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Nvidia Corp.’s earnings are drawing nearer, and yet another analyst is feeling upbeat heading into the upcoming report.
KeyBanc analyst John Vinh hiked his price target on Nvidia’s stock
NVDA,
to $620 from $550 Sunday, writing that despite tight supply, Nvidia could see strong AI demand and incremental capacity drive upside. Nvidia is scheduled to report fiscal second-quarter earnings after the close of markets on Wednesday.
“Given the pushout of [Advanced Micro Devices Inc’s]
AMD,
MI300X, we believe Nvidia has been able to source increased [chip on wafer on substrate] capacity at Taiwan Semiconductor Manufacturing Co.
TSM,
” Vinh said.
Read: Nvidia earnings to offer first true glimpse of the AI windfall
Shares of Nvidia rallied more than 5% to an intraday high of $456.56 in Monday trading, after having logged declines in each of the prior three sessions for a total loss of 1.5%. The shares are up more than 210% on a year-to-date basis, compared with a 39% gain in the PHLX Semiconductor Index
SOX,
a 14% rise in the S&P 500
SPX
and a 28% surge in the tech-heavy Nasdaq Composite
COMP
over the same span.
In addition, Nvidia plans a fall launch of its L40S GPU for small to medium-sized model training and inferencing with competitive performance versus its A100. That debut will be significant given tech restrictions related to China.
“Given L40S meets the performance threshold of export restriction and doesn’t require CoWoS packaging, combined with favorable pricing (est. $7K-$8K/GPU), we expect this lineup can incrementally fulfill some of the pent-up GPU demand in the near term, particularly in China,” said Vinh, who has an overweight rating on the stock.
Read: ‘Magnificent Seven’ stocks are losing some of their shine, but their bonds are doing fine
Vinh raised his fiscal second-quarter revenue forecast to $12.7 billion and upped his earnings outlook to $2.49 a share. His prior expectations were for $11.1 billion and $2.05, respectively.
He also now forecasts fiscal third-quarter revenue of $14.8 billion and earnings per share of $3, up from prior projections of $12.4 billion and $2.34, respectively.
Read: Nvidia gets more good news from Big Tech, even as AI spending ‘may not lift all boats’
Of the 50 analysts who cover Nvidia, 43 had buy-grade ratings, six had hold ratings and one had a sell rating, along with an average price target of $432.99.
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When Nvidia Corp. last reported quarterly results, the chip maker forecast record revenue that was far above anything it had put up before. In response, investors sent the stock into orbit. On Wednesday, the latest round of earnings for the company will be a test of Nvidia’s status as the darling of the AI investment boom, and a test of whether it can deliver on its own lofty expectations.
The results will also be an update of tech demand overall, after businesses tightened their IT budgets following worries about an economic slowdown. But even with Nvidia’s
NVDA,
stock up more than 200% so far this year and expectations rising just as much, some analysts still say there’s room for shares to go higher, despite supply-side logjams.
Barclays said that Nvidia, whose chips analysts say will help power AI technology in the days to come, has “monopolized the economics of the AI boom, with no clear competitor close behind.” They added that “cloud capex budgets are being funneled towards AI.”
Signs that Nvidia might be falling behind on meeting chip demand have started to emerge. But as businesses rush to mark their territory, or potential territory, in the world of AI, Wedbush analysts have asked whether Nvidia’s results and forecast would even matter, as today’s production constraints turn into tomorrow’s sales.
“We don’t think NVDA results/guidance need to hit the high end of expectations,” Wedbush analyst Matt Bryson said in a research note on Friday.
“With demand for AI training having lifted substantially in the past quarter and with no other silicon supplier now capable of providing part volumes within an order of magnitude of NVDA’s output, we believe any unfilled demand will just be pushed into forward quarters fueling future sales and (earnings per share),” he continued.
Synovus analyst Daniel Morgan was also bullish on Nvidia’s business targeted toward data centers, as those facilities try to integrate generative AI and large language models. And within Nvidia’s gaming segment, he said the company’s new Ada Lovelace graphics-processing unit ecosystem “appears to be seeing a high level of success in retail.”
Still, the longer a stock runs higher, the harder it can fall. And Nvidia’s $1 trillion valuation, Morgan said, “is not for the faint-hearted.”
Along with Nvidia, China search giant Baidu Inc.
BIDU,
reports, as the nation’s economic rebound sputters. And if more businesses are still cautious about cloud spending, or shifting spending to AI, the mood could filter through to results from Splunk Inc.
SPLK,
and Snowflake Inc.
SNOW,
Peloton Interactive Inc.
PTON,
Workday Inc.
WDAY,
and Marvell Technology Inc.
MRVL,
also report.
Zoom and offices: If even Zoom is calling some of its workers back to the office, what could that possibly mean for its results on Monday and the business of videoconferencing? Zoom Video Communications Inc.
ZM,
hasn’t been spared from the wave of tech-industry layoffs, and the company is trying to branch out from its pandemic-mainstay video-call platform, and harnessing its technology to handle phone calls and customer contact centers. Benchmark Research analyst Matthew Harrigan, in a note last week, said he still liked Zoom’s prospects, even though he wasn’t expecting “much instant gratification.” “We do expect AI to crystallize as a significant positive for Zoom even as it navigates through customer pushback on using customer data to train AI models off privacy concerns,” he said.
Sales, forecasts and inventories from retailers: Last week, Target Corp.
TGT,
reported what one analyst called “the definition of mixed results,” while another said the results amounted to “Recessionary trends without the recession.” Sales of essentials like groceries, as they have over the past year, helped Walmart Inc.’s
WMT,
results, but management said that consumers were still feeling the pain from inflation, which for some shoppers over the past year has left little room for much beyond the basics.
In the week ahead, we’ll get results whole bunch of retailers that don’t sell basics — like department stores Macy’s Inc.
M,
and Kohl’s Corp.
KSS,
; clothing chains Nordstrom Inc.
JWN,
Gap Inc.
GPS,
Urban Outfitters Inc.
URBN,
; shoe retailer Foot Locker Inc.
FL,
and beauty-products chain Ulta Beauty Inc.
ULTA,
Those retailers will report as prices for some things start to come down, or at least not rise as fast, and as some economists overcome their recession fears. But remarks from executives could offer some sense of the impact from higher borrowing costs and the return of student loan payments, and how much they’ll be able to bank on the back-to-school season and wealthier — and more carefree — consumers.
Dollar-store Dollar Tree Inc.
DLTR,
will also report results, as low-income consumers suffer more under inflation and deal with the end of pandemic-era supplemental food assistance. Off-price retailer Burlington Stores Inc.
BURL,
reports as well, after Ross Stores Inc.
ROST,
Chief Executive Barbara Rentler said that while its low- and moderate-income shoppers were still hurting, shoppers overall “responded well to our improved value offerings throughout our stores.”
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The majority of second-quarter earnings season is over, with a handful of major technology and retail names left to report this week. Economists will be focused on any news from an annual gathering of monetary policy thinkers and practitioners in Jackson Hole, Wyoming.
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U.S. stocks closed higher on Monday, with the Dow flipping positive near the closing bell, as technology stocks bounced back. The Dow Jones Industrial Average DJIA rose about 26 points, or 0.1%, ending near 35,308, according to preliminary FactSet data. The S&P 500 index SPX scored a 0.6% gain and the Nasdaq Composite Index COMP closed up 1.1%, booking its best daily percentage climb since July 28, according to FactSet data. The S&P 500’s information technology sector outperformed with a 1.9% gain, while the communication services segment rose 1%. The rally saw shares of Meta Platforms META, Apple Inc. AAPL, Alphabet…
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Nvidia Corp.’s stock chart now shows that the stunning uptrend investors in the semiconductor maker have enjoyed this year amid all the artificial-intelligence hype may have ended.
But as history suggests, after a long uptrend, rather than a new downtrend, investors may have to endure some whipsaw action within a relatively static trading range over the next several months before the uptrend resumes.
The stock
NVDA,
slumped 4.7% on Wednesday to close at $425.54, which was 10.4% below the July 18 record close of $474.94, following a downbeat earnings report from Super Micro Computer Inc.
SMCI,
which counts Nvidia as a key supplier.
Many on Wall Street believe a correction is defined by a decline of at least 10% to up to 20% from a significant recent peak. A drop of 20% or more is thought of as a bear market.
But perhaps more important for chart followers, the stock closed below the widely followed 50-day moving average for the first time since Jan. 6, 2023. The 50-DMA had extended to $429.03 on Wednesday.
On Thursday, the stock bounced 0.5% in morning trading but held below the 50-DMA, which extended to $429.68, according to FactSet. Despite the recent correction, the stock was still up 192.6% year to date, while the PHLX Semiconductor Index
SOX
has climbed 43.7% and the S&P 500
SPX
has advanced 17.2%.
Read: Nvidia is ‘domination’ and could unlock $300 billion in AI revenue by 2027, analyst says.
The 50-DMA is used by many chart watchers as a short-term trend tracker. If the stock is above that line, it is viewed as being in an uptrend. The most time spent above that line, the stronger the uptrend.
Until Wednesday, Nvidia’s stock closed above the 50-DMA for 146 consecutive trading sessions, according to FactSet data, which is the second-longest stretch since it went public in January 1999.
The record stretch above the 50-DMA was 255 sessions, a streak that ended on Feb. 23, 2017, while the second-longest stretch of 143 sessions ended on Oct. 28, 2020.
After the stock snapped the super-50-DMA streak in 2020, it waffled around the line and was little changed for the next several months before resuming the uptrend with a big spike.
FactSet, MarketWatch
As the chart above shows, after the 50-DMA broke, investors set their sights on the 200-DMA, which many view as a dividing line between longer-term uptrends and downtrends. In this case, despite a one-day dip below the 200-DMA in mid-March 2021, the line acted as strong support.
And after the record super-50-DMA streak, the stock seesawed around the line, while having a slightly negative bias for the next few months, before the uptrend resumed in force.
FactSet, MarketWatch
This time, the stock never really threatened the 200-DMA.
In the current technical situation, one of the downside levels to keep an eye on is the bear-market threshold of 20% below the July closing high, which comes in at $379.95. Another level to watch is the 200-DMA, which currently extends to $269.63 and has been rising by $1.65 a day over the past 10 days.
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A wider swath of stocks have joined the S&P 500
SPX,
upswing after the so-called Magnificent Seven — Apple
AAPL,
Amazon
AMZN,
Alphabet
GOOG,
Microsoft
MSFT,
Meta
META,
Nvidia
NVDA,
and Tesla
TSLA,
— single-handedly propelled the large-cap index into a bull market in early June, with the gauge now up more than 28% from its low notched last October and rising to new highs since April 2022, according to Dow Jones Market Data.
Hopes that the U.S. economy could pull off a soft landing and avoid a recession despite the Federal Reserve’s aggressive interest-rate hikes, as well as receding inflation pressures and expectations for the end of the Fed’s monetary tightening campaign, have underpinned a notable expansion in market breadth over the past two months, according Adam Turnquist, chief technical strategist at LPL Financial.
The S&P 500 Equal Weighted Index
SP500EW,
which lagged behind the market-cap-weighted S&P 500 index for most of the year, has now kicked back into gear and staged an impressive comeback in July. The equal-weighted index and the S&P 500 each advanced 3.1% this month, according to FactSet data.
The equal weighting eliminates the distortion of the megacap components and significantly changes several sector weightings in the S&P 500, including technology, which drops from around 29% on the SPX to only 13% on the equal-weighted index, said Turnquist in a Friday note. Meanwhile, the industrials sector has the biggest increase in weight, jumping from 9% on the SPX to 16% on the equal-weighted index.
Another way to quantify and compare market breadth is to look at the percentage of stocks on an index trading above their longer-term 200-day moving average (dma), Turnquist said. In general, if a stock is trading above its 200 dma, it is considered to be in an uptrend, and if the price is below the 200 dma, it is considered in a downtrend. Furthermore, a higher percentage of stocks above their 200 dma implies buying pressure is more widespread — suggesting the market’s advance is likely sustainable.
The chart below shows that 73% of stocks within the S&P 500 are trading above their 200 dma as of July 27, which compares to only 48% at the end of 2022. Moreover, the composition of breadth leadership has turned increasingly bullish. The highest sector readings include technology, industrials, energy, and consumer discretionary.
“So not only is breadth on the index robust, but cyclical stocks are also leading,” said Turnquist.
Wall Street often views broadening participation in the stock-market rally as a measure of health and a constructive sign of the sustainability of the bull market.
Jimmy Lee, founder and chief executive officer of The Wealth Consulting Group said he is seeing “a lot of money” flowing into areas that are not the Magnificent Seven such as stocks in the industrials, financials, materials, energy and even real-estate sectors.
The S&P 500’s industrials sector
SP500.20,
climbed 2.9% in July, while the financials sector
SP500.40,
advanced over 4.7% this month. The S&P 500’s energy sector
SP500.10,
which had been the biggest laggard when the rest of the markets exited the bear market in June, jumped 7.3% month to date after the U.S. oil benchmark
CL.1,
CL00,
closed above $80 a barrel for the first time since April.
Meanwhile, the tech-heavy S&P 500’s communication-services sector
SP500.50,
rose 6.7% in July, while the consumer-discretionary sector
SP500.25,
gained 2.4% and the information-technology sector
SP500.45,
was up 2.6%, according to FactSet data.
Stephen Hoedt, managing director of equity and fixed income research at Key Private Bank, told MarketWatch in an interview that he doesn’t see “any reason to get bearish here with the fundamentals that are underlying,” which gives investors reason to rotate toward the more cyclical areas such as energy, financials and industrials, while broadening the market away from just being concentrated in the megacap technology names.
“The growth has been a surprise this year for everyone, so that’s what the market got wrong coming into this year. When I look at growth, nominal GDP growth translates directly into earnings and we’ve seen earnings continue to surprise on the upside,” Hoedt said.
Hoedt pointed to the direction of the 12-month forward earnings estimate for the S&P 500 as an important indicator. “As long as the direction of the 12-month forward earnings number for the S&P 500 is going up, it’s really, really difficult to be bearish on the stock market,” he said. “It seems to me that we may start to see another inflection higher in forward earnings revisions that take into account this stronger growth environment that we’re in.”
However, the broadening of the stock-market rally and the bullish sentiment were also driving some on Wall Street to believe stocks are overbought and due for a correction.
Lee said there’s still too much pessimism out there and too much concern that some investors haven’t chased the market yet. “In the second half of this year, when the Fed does stop raising rates and if the economy stays out of recession, you can see major money — trillions of dollars moving from the money market into equities and other risk assets,” he told MarketWatch in a phone interview on Friday.
“When that happens, it’s probably going to push valuations even further. So I would imagine when that happens is when you can expect more of a correction to occur, but I think that we still have more room to go before that happens.”
U.S. stocks ended higher on Monday, finishing up July on a positive note. Three major stock indexes rallied this month, with the S&P 500 up 3.1% and booking its fifth monthly gain. The tech-heavy Nasdaq Composite
COMP,
gained 4.1% month to date, while the Dow Jones Industrial Average
DJIA,
advanced 3.4%, according to Dow Jones Market Data.
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https://www.barrons.com/articles/servicenow-earnings-stock-price-ef3bea69
ServiceNow
posted better-than-expected results for its latest quarter and lifted its full-year outlook.
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Big Tech has gotten too big for Nasdaq’s liking.
So the exchange has decided to make some changes to the Nasdaq 100 index, its most popular index, according to company representatives, ostensibly to diminish the concentration risk that accompanies having an index that derives more than half of its value from just seven companies.
Nasdaq announced late last week that the Nasdaq 100
NDX,
will undergo a special rebalancing that will take effect prior to the market open on July 24. It’s only the third time that Nasdaq has announced such an impromptu rejiggering of how much individual stocks contribute to the index. Although Nasdaq can also reconstitute the index regularly every December, and there’s also a mechanism to rebalance every quarter as well.
In a statement announcing the move, the exchange alluded to the fact that the largest companies in the technology sector have too much sway over the index’s price. Nasdaq said special rebalancing can be implemented “to address overconcentration in the index by redistributing the weights.”
The rebalancing comes at a critical time. The Nasdaq 100 has risen 40% since the start of 2023, largely thanks to the “Magnificent Seven,” a handful of megacap technology names that have powered much of the U.S. stock market’s rally this year.
These gains have pushed the index to its highest level since mid-January 2022, meaning that Big Tech has now retraced nearly all of last year’s losses, and might soon be headed for the all-time highs from November 2021.
As of Thursday, the Magnificent Seven stocks — Nvidia Corp.
NVDA,
Apple Inc.
AAPL,
Microsoft Corp.
MSFT,
Amazon.com Inc.
AMZN,
Tesla Inc.
TSLA,
Meta Platforms Inc.
META,
and Alphabet Inc.’s Class A
GOOGL,
and Class C
GOOG,
shares — accounted for 55% of the Nasdaq 100’s market capitalization, while the top five names account for more than 45%.
According to Nasdaq’s official methodology, the goal is to keep the aggregate weighting of the biggest stocks below 40%. In fact, it’s possible that Tesla Inc. surpassing 4.5% of the index earlier this month triggered the Nasdaq’s rebalancing announcement, according to analysts from UBS Group AG
UBS,
Exactly how it plans to accomplish this isn’t yet known. Nasdaq said the new weighting scheme will be unveiled on Friday, likely after the U.S. market close. But the UBS team has an educated guess.
“The quarterly reviews would dictate that the aggregate weight to securities exceeding 4.5% be set to 40%. If that’s the approach Nasdaq takes, then we’d expect the weights of Microsoft, Apple, Nvidia, Alphabet, Amazon, and Tesla to be reduced,” the team said in a note shared with MarketWatch.
For investors trying to anticipate how this might impact their portfolios, here the answers to a few key questions.
Not likely. Or rather: if the rally in Big Tech does falter, history suggests it won’t be because of the rebalancing.
Here’s more on that from Nicholas Colas, co-founder of DataTrek Research, who discussed the topic in commentary emailed to MarketWatch on Wednesday.
“…[T]here is the natural inclination to think that the upcoming special reweighting is a sign that large cap disruptive tech is set to roll over because a handful of names have so handily outpaced the rest of its notional peers,” Colas said.
“History suggests otherwise. The last 2 one-off reweights were in 2011 and 1998. Neither proved to be the end of a Nasdaq 100/tech stock bull market. Not even close, really.”
More immediately, ETF experts expect trading around the rebalancing will be relatively muted.
“While it sounds scary, Investors are well positioned — this has been well bantered about,” said David Lutz, head of ETF Trading at Jones Trading, in comments emailed to MarketWatch.
Since megacap technology stocks don’t pay much, if anything, in dividends, the rebalancing could increase the amount of dividends that ETF investors receive each year, according to a team of analysts at JPMorgan Chase & Co.
Since the largest constituents pay a dividend yield well below the index average, the redistribution of weight from them to the rest of the index will result in a “meaningful boost” to the regular payouts received by investors, which will boost the total return of Nasdaq 100-tracking ETFs and mutual funds.
There might be. Since the new index weightings will be announced in advance, investors will have plenty of time to front-run the rebalancing trade.
Still, there are plenty of hedge funds and proprietary trading firms that run strategies explicitly designed to profit from rebalancing. These firms profits have to come from somewhere, and the logical place would be the fund managers of the Invesco QQQ exchange-traded fund
QQQ,
“There are prop traders and hedge funds that run the strategy of providing liquidity to indexes with the expectation that they’ll earn profits,” said Roni Israelov, president and CIO at Wealth Manager NDVR, during a phone interview with MarketWatch.
“if they are earning profits by providing that liquidity, the expectation is those profits are being paid by investors in those funds.”
So far at least, markets appear to have taken news of the rebalancing in stride. Megacap technology names tumbled earlier this week, but they’ve since recouped those losses and then some.
The Nasdaq Composite
COMP,
another Nasdaq index that isn’t quite as heavily weighted toward Big Tech, rose 1.2% to 13,918.96.
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The goal of many (or most) savers and long-term investors is to achieve financial independence. The combination of building up a nest egg, paying down debt and eventually receiving Social Security payments or another source of retirement income might put you in a comfortable position, but even people who have worked together to achieve financial independence may disagree on what to do after their careers end.
Quentin Fottrell — the Moneyist — heard from one couple who are facing a quandary. They have been financially responsible, but as they near retirement, the wife wishes to be very careful with their combined investment portfolio, while the husband wants to begin spending a significant portion of it. They both make reasonable arguments. Here’s what they should do.
From the Help Me Retire column: My 57-year-old husband works three shifts and is burned out. Can he retire?
Getty Images
Doing this even once might help encourage you or someone you know to begin saving and investing for the long term.
Getty Images
Even an index that includes hundreds of stocks can be heavily concentrated. Large technology-oriented companies have led this year’s 16% rebound for the S&P 500
SPX,
following last year’s 18% decline (both with dividends reinvested). But the index is weighted by market capitalization, which means the “Magnificent Seven” — Apple Inc.
AAPL,
Microsoft Corp.
MSFT,
two common share classes of Alphabet Inc.
GOOGL,
GOOG,
Amazon.com Inc.
AMZN,
Nvidia Corp.
NVDA,
Tesla Inc.
TSLA,
and Meta Platforms Inc.
META,
— make up 27.9% of the SPDR S&P 500 ETF Trust
SPY,
In the Need to Know column, Barbara Kollmeyer lists companies that might turn out to be among the next Magnificent Seven, based on a Goldman Sachs screen.
Getting back to the current Magnificent Seven, you may be surprised to see which of the stocks is cheapest — by far — per one commonly used valuation metric.
Rivian
There has been a lot of news in the electric-vehicle space this week. Here are lists of coverage organized by topic.
Rising unit sales among EV makers:
Legacy automakers report sales increases, including a tremendous increase in EV unit sales for Ford
F,
:
Reaction from analysts and investors:
In other news, Mullen Automotive Inc.
MULN,
has started to deliver electric vehicles. Further developments for the company this week included the announcement of a stock-buyback plan and possible action against naked short sellers.
The employment numbers for June from the U.S. Bureau of Labor Statistics showed the lowest level of job creation since late 2020. Then again, the demand for labor in the U.S. remains high, despite the Federal Reserve’s efforts to slow economic growth.
If you are looking to make a career change, what does all this mean to you? Andrew Keshner points to a development in the employment market that may have you thinking twice about jumping ship.
AFP via Getty Images
Meta rolled out its new Threads service on Wednesday to compete directly with Twitter and has already signed up 50 million users, according to some reports.
Twitter CEO Linda Yaccarino was quick to respond.
More reaction:
U.S. shoppers have been taking it slow during a period of high inflation, but the overall economy has been stronger than expected even as the Federal Reserve continues tightening its monetary policy.
The coming flurry of July sales events at Amazon, Walmart Inc.
WMT,
and Target Corp.
TGT,
could signal a turnaround for consumers, as James Rogers reports.
Lukas I. Alpert writes the Financial Crime column. Have you ever wondered how you might steal a lot of cash from a company that is likely to have rather tight accounting controls in place? This week Alpert explains how the manager of an Amazon warehouse managed to scale the heights of criminal achievement to collect $10 million — and a 16-year jail sentence.
Also read: Silver dealer ordered to pay $146 million in case of 500,000 missing coins
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Technology stocks reigned supreme in the first half of the year, far outperforming the wider market. But sustaining that rally will be tough, and investors need to look now for tech stocks that are ready to benefit from the growth of artificial intelligence.
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Shares of Nvidia Corp. and Advanced Micro Devices Inc. slumped in the extended session Tuesday following a report that the Biden administration is considering a new ban on sales of AI chips to China.
Nvidia shares
NVDA,
A fell 3% after hours, following a 3.1% gain to close at $418.76, while AMD shares
AMD,
also fell 3%, after a 2.7% gain in the regular session to close at $110.39.
Late Tuesday, the Wall Street Journal reported the Commerce Department could further block sales of AI chips to China unless U.S. companies first obtain a special license.
The ban would follow upon similar actions last year that threatened $400 million in Nvidia sales, but the company found a workaround in supplying a version of products that avoided the ban.
Read: AMD launches new data-center AI chips, software to go up against Nvidia and Intel
Both Nvidia and AMD have launched new AI chips this year: Nvidia in March and AMD earlier in the month. Last year’s release of Open AI’s ChatGPT generative AI — with billions of dollars invested by Microsoft Corp.
MSFT,
— resulted in an explosion of interest in artificial-intelligence technology, prompting luminaries to herald the technology as the biggest thing in tech since … you name it.
Read: Bill Gates says AI is only the second revolutionary tech advancement in his lifetime
News of the possible ban happened to follow a claim earlier in the day from Baidu Inc.
BIDU,
on the Chinese search company’s blog, which said its Ernie 3.5 version AI outperformed ChatGPT’s earlier version “in comprehensive ability scores,” and its latest iteration, GPT-4, which was released in mid-March, “in several Chinese-language capabilities.”
Baidu’s claim appeared to be based upon performance metrics published in China Science Daily. On Wall Street, ADRs of Baidu were down 0.7% after hours, following a 3.1% gain to close at $143.90.
As of Tuesday’s close, Nvidia shares were up 187% in 2023, and AMD shares were up 70% for the year.
Read: Snowflake adds partnerships with Nvidia and Microsoft for AI double play
Shares of Super Micro Computer Inc.
SMCI,
which have benefited from AI, also declined 3% after hours, while shares of Intel Corp.
INTC,
which supplies chips to data centers, saw shares decline 1% after hours.
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Watch what happens over the next 36 hours.
That was the advice from one financial analyst as U.S. investors awoke on Saturday to news of an apparent armed rebellion against Moscow led by Yevgeny Prigozhin, the owner of the powerful Russian mercenary organization Wagner Group.
Others speculated that the crisis in Russia could drive U.S. stocks lower, as some traders were already betting on a selloff once markets reopen on Monday due to this sudden spike in geopolitical risk.
“The developments in Russia are ultimately going to suggest President Putin’s leadership is weakening quickly and that resources may shift away from the war with Ukraine. It is too early to say how this will impact Wall Street, but the risk of desperate measures from Putin might make some investors nervous,” Edward Moya, senior market analyst at Oanda, said Saturday.
A simmering feud between Prigozhin, the leader of the military contractor whose mercenary forces have been fighting alongside Russian military troops in Ukraine, and the Russian Defense Ministry came to a head early Saturday as Prigozhin led his troops to successfully overtake a Russian military outpost near the Ukrainian frontier, which the Kremlin has used as its command center for overseeing the war in Ukraine.
Amid the mixture of reliable information and unfounded speculation, market analysts have scrambled to make sense of the situation and what it might mean for financial markets and the global economy.
The main theme that has emerged so far is that U.S. stocks would suffer unless the Russian military managed to quickly suppress the rebellion, as may have occurred with reports late Saturday that Prigozhin had halted a Wagner advance on Moscow and, in fact, might be relocating to neighboring Belarus. But how would something that could potentially cut short the war in Ukraine — which has been a bugbear for markets since the full-scale invasion by Russian forces in February 2022 — be a negative for stocks?
The answer is that chaos leads to uncertainty, and that uncertainty is anathema to markets — especially when it could disrupt global oil and food supplies.
“I’d bet on this creating more uncertainty which is generally going to be negative for risk … in the short term at least you see higher geopolitical risk premia — longer term the risks are on both sides really: does this precipitate the collapse of the Russian front and the war ends?” said Neil Wilson, chief market analyst at Finalto, in a note to clients on Saturday.
Others noted that the crisis is coming at a vulnerable time for U.S. markets, while Michael Antonelli, a market strategist at R.W. Baird & Co., suggested in a tweet that the crisis “has to be” bearish for U.S. stocks.
The S&P 500 index
SPX,
closed out its worst week since March on Friday as a series of interest-rate hikes in the U.K. and across Europe last week sparked fresh fears of a global recession. Some analysts noted that the pullback swiftly followed signs that investors are growing more bullish following a powerful rally that sent stocks to their highest levels in 14 months. There are concerns that this shift in sentiment could presage investors’ final capitulation.
Sven Henrich, founder and lead strategist of Northman Trader, noted that the Cboe Volatility Index
VIX,
the market’s so-called fear gauge, which measures the stock market’s expectations for volatility over the next 30 days, managed to finish last week below 13.5, its lowest level since January 2020, even as stocks pulled back.
If stocks do continue to slide, that would mean new lows for the Vix have proved to be a reliable counterindicator, suggesting that investors had grown complacent before being walloped by a fresh shock.
Asian markets will be the first to react to ongoing developments by Sunday evening Eastern time, but derivatives traders using CME Group’s Globex platform to trade swaps tracking the value of U.S. equity indexes are already betting on a selloff.
Meanwhile, bitcoin
BTCUSD,
an asset that does reliably trade 24/7, was down just 0.8% at $30,675, a slight pullback after achieving its highest level in a year late last week. By Saturday evening the leading cryptocurrency has reversed that earlier dip.
Where might investors turn for safety if markets do become chaotic?
Finalto’s Wilson said investors could seek shelter in the currency market, where the U.S. dollar
DXY,
Swiss franc
USDCHF,
and maybe the euro
EURUSD,
and British pound
GBPUSD,
could benefit from a spike in demand. More “de-risking” could send investors into ultrasafe government bonds like U.S. Treasurys
TMUBMUSD10Y,
which could help to push yields lower, as bond yields move inversely to prices.
Wilson anticipated that European indexes could be “more exposed to de-risking due to makeup and proximity to Russia and the war in Ukraine.” He also noted the possibility that this latest crisis could send the S&P 500 and Nasdaq Composite
COMP,
higher if investors decided to seek shelter in high-quality growth names like Apple Inc.
AAPL,
Nvidia Corp.
NVDA,
or Microsoft Corp.
MSFT,
which have helped to drive this year’s equity-market rally.
Whatever happens, the outcome of the crisis should be more clear within the next 35 hours, Wilson said.
“[H]ow the market opens after the weekend will depend on what happens in the next 36 hours. … [I]t could all be over by then,” Wilson said.
Regardless, one of the first to interpret the market’s reaction on Monday will be Melbourne-based Chris Weston, head of research at online broker Pepperstone.
Until then, he cautioned investors against reading too much into the Wagner situation, since analysts’ visibility into a very complicated geopolitical situation is “poor.”
“The humble market participant would simply say they have no edge in knowing how this plays out and our visibility to read this through to markets is currently poor — the information is often biased and it’s hard to truly know what is fact and what is fed to influence. … [W]ill this lead to genuine regime change, fail or perhaps inflame and lead to a market shock?” Weston said in comments provided to MarketWatch.
“At this point we simply don’t know, but it feels like we get enough clarity on potential outcomes and even timelines in the next 24-48 hours — at this point the prospect of modest downside risk on Monday is elevated and naturally we’ll be watching crude and EU assets most closely,” he said.
Terry Haines, founder of Pangea Policy, said in an email to clients that the ongoing uncertainty fueled by the Wagner rebellion reveals the fragility of the Putin regime, and might marginally boost chances of a Ukraine victory.
But Haines also conceded that it’s a “developing and unstable situation with various facets that on net add to geopolitical uncertainties, to which markets usually react negatively.” Investors must also consider that, should that rebellion fail, it could be “replaced by stronger Russian control” or create further instability as “Wagner disintegrates.”
In that same vein, Jim Bianco, head of Bianco Research, offered up a joke aimed at all the armchair geopolitical analysts suddenly flocking to Twitter.
Markets may take a look at this crisis and view it as a “bullish development after some initial volatility, the Kobeissi Letter’s editor in chief and founder, Adam Kobeissi, told MarketWatch in Saturday comments.
“After all, the end of the war in Ukraine is the market’s top geopolitical driver right now, and if this increases the odds of a peace agreement and/or Russia withdrawing from Ukraine, it is likely to be perceived as bullish over the next few weeks,” he said.
He recommended that investors keep an eye on prices of oil and gold, which could be particularly sensitive to any fresh developments.
“If this means more conflict,” he said, “then oil
CL.1,
bonds
TMUBMUSD10Y,
and gold
GC00,
are poised to rally.”
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Trading in U.S. stock option contracts has surged in 2023 as retail and institutional traders have harnessed bullish call options to chase a runaway rally in U.S. stocks, market analysts told MarketWatch.
As of Friday, 46 million option contracts linked to U.S. equity indexes, individual stocks and exchange-traded funds have traded hands every trading session on average this month, according to an analysis by Callie Cox, a U.S. equity strategist at eToro.
This means that, barring a sudden drop-off in trading activity, June is on track to be the busiest month for option traders ever, Cox said. That is particularly notable given that the summer months are typically more placid on Wall Street.
“It’s pretty incredible for a summer month. It shows how engaged investors are after such a strong rally,” said Callie Cox, a U.S. equity strategist at eToro, during an interview with MarketWatch.
Much of the demand has centered on call options: trading volume in these contracts has averaged 26 million a day so far, leaving June on track for the heaviest month of call buying since November 2021, Cox said.
Several overlapping trends have contributed to the surge in option demand, market analysts said.
Investors wary about a rally that recently carried the S&P 500 index to its highest level in 14 months have opted to buy short-dated calls. Often these are contracts tied to the S&P 500 or the index-tracking SPDR S&P 500 exchange-traded fund with less than 24 hours left until expiration, a class of options referred to as “0DTEs” for “zero days to expiration.”
Some traders see these cheap short-term bets as a particularly affordable, if risky, strategy for reaping gains as the market marches higher, according to market analysts and portfolio managers who spoke with MarketWatch.
And when stocks pull back, investors often change their strategy and instead of buying calls, opt to take advantage by buying or selling put options.
While a call represents a bet that a given index, stock or currency will rise, a put represents the opposite.
In addition to betting on calls tied to popular equity indexes and exchange-traded funds like the S&P 500 or the Invesco QQQ Trust Series 1 ETF
QQQ,
investors are also scooping up bullish options tied to Nvidia Corp. and other market leaders, hoping to maximize any returns from the artificial intelligence boom.
The Wall Street Journal reported earlier this week that trading in call options tied to shares of Nvidia Corp.
NVDA,
and two other chip stocks, Advanced Micro Devices
AMD,
and Intel Corp.,
INTC,
has surged fivefold since the beginning of the year, citing data from Cboe Global Markets, owner of the world’s largest options exchange.
But demand for calls has expanded beyond megacap technology names into areas of the market that have trailed since the start of the year, including small-cap stocks and others, which have rallied in June.
The Russell 2000
RUT,
an index that tracks small-cap stocks traded in the U.S., is up nearly 5% year-to-date. As of the end of May, it was marginally negative for the year, options experts said.
“With mega cap technology leading the indexes higher, investors started to play catch-up by trying to buy the second-tier and heavily shorted companies,” said Alon Rosin, head of equity derivatives at Oppenheimer, in emailed commentary shared with MarketWatch.
This means that investors’ rush to try to keep up with the market hasn’t only benefited hot AI-stocks.
Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets, made a similar observation in a recent note to clients where she pointed out that call buying has surged for both companies expected to benefit from the AI boom, as well as stocks in an RBC basket of companies that are threatened by it — stocks like Robert Half International
RHI,
Chegg Inc.
CHGG,
and Yext Inc.
YEXT,
she said.
Silverman said heavy call buying in this group is indicative of the market’s “extreme call exuberance.”
Call buying has helped send popular indicators of positioning like the put-call ratio and skew, which measures the cost of downside protection via puts vs. demand for upside exposure via calls, to their lowest levels of the year earlier this month.
“People are reaching for upside via calls, and you’re seeing skew falling due to the fact that everybody has been buying calls,” said Mark Callahan, head of trading and a portfolio manager at Aptus Capital Advisors, during a phone interview with MarketWatch.
Callahan manages several active exchange-traded funds that require heavy option trading.
U.S. stocks have marched higher this year, with the S&P 500 rising for five straight weeks through June 16, its longest streak of weekly gains since November 2021. The Nasdaq Composite
COMP,
has seen even stronger performance, and its eight-week win streak has been heralded as the tech-heavy index’s longest rally since 2019, according to FactSet data.
The S&P 500 has risen more than 13% so far this year, while the Nasdaq has gained more than 30%. Both have erased much of their losses from 2022, which was the worst year for stocks since 2008. Last week, both the S&P 500 and Nasdaq hit their highest levels since April 2022.
However, there are some signs that the torrid rally might be in the midst of a pullback as the S&P 500, Nasdaq and Dow Jones Industrial Average
DJIA,
are all on track to finish the week lower on Friday.
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Stock futures were falling following three straight days of losses for Wall Street. Federal Reserve Chairman Jerome Powell again will be delivering testimony before Congress. His comments on Wednesday that the central bank likely would be raising rates further this year pushed markets lower.
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