For more on what is moving your portfolio? I
want to bring in that stuck chief Portfolio Manager of
Equities in Northwestern Mutual Wealth Management. Welcome to the
show. Good morning. Thanks for having me on
. We're happy to have you so fractured losses across
the board. I mentioned in video weighing down some
of these stocks here, especially the NASDAQ and the
S and P. What do you expect from NVIDIA
earnings this afternoon? Well, we think the fundamental
story is gonna continue on for NVIDIA um just in
terms of how much has changed over the last course
of the 12 months for NVIDIA. Look, you
know, at this point, last year, investors
were broadly anticipating about an 8 billion quarter uh for
NVIDIA. And after the results of the third quarter
, NVIDIA guided to a$20 billion fourth quarter.
Uh And so there's been a substantial step change function
in Nvidia's data center business that's really driving all of
this growth. And, and the reality is is
that NVIDIA remains supply constrained uh and against that supply
constraint, they have continuing growth in their demand profile
. Uh And so, uh you know, for
us, it's not so much the question of kind
of where this quarter is likely to settle out.
Uh but it's more about their commentary about the remaining
demand profile and supply profile for the remainder of 2024
. And beyond, those are going to be big
drivers for the stock response after the close. Interesting
. So we do see some selling, but do
you think that this company can deliver and exceed expectations
? Matt? Well, we think that they can
deliver and we think that they are likely to exceed
expectations. Expectations are a little bit above guidance at
about 400 million or so over where the company posted
that$20 billion guidance number for the fourth quarter.
Uh We don't necessarily think it's gonna be the outsized
beat that we saw the last three quarters where you
saw in the video beat guidance by 10 to 15%
on the top line number. Uh However, you
, you know, that still might not be enough
to satisfy just the hype that's gone into uh into
this, this upcoming release. Um You know,
just looking at kind of the share price appreciation for
NVIDIA, it's up still, you know, four
percent plus so far this year, you know,
that's a lot of sentiment moving higher for this company
. And so while the story remains bright in the
shorter term, you could see a pullback just based
on some of that sentiment cooling off. It's interesting
, Matt. So I have mentioned that NVIDIA really
kind of is a pure play in the A I
space here. Any other stocks on your radar that
could offer A I exposure if NVIDIA is too expensive
for some investors? Yeah. Um, you know
, look what makes NVIDIA so special is just the
dominance that they have in the data center A I
chip market. Um, and there are certainly some
competitors out there in the space, but no one
has the dominance that they have both in terms of
the hardware and the software. But there are still
, you know, a lot of good stories around
artificial intelligence. Uh excluding kind of the market specifically
, I'm talking about software. So, you know
, companies like Microsoft as an example or Amazon as
another example, kind of really delivering the software and
cloud solutions where a lot of this innovation has taken
place. Um you know, while from a valuation
perspective, we're still not talking about cheap stocks here
. Um You know, this is a rapidly evolving
space and there's gonna be a lot of winners at
the end of the day. How much does Nvidia's
market direction that impact the overall sentiment around stocks?
Well, it's, it's certainly growing in importance,
you know, at this point last year, Navidi
was still a large company, but it represented about
1.5% of the S and P 500 you know,
with its explosive growth and just the parabolic move in
the stock over the last 12 months, it's up
to over 4% of the S and P 500 it's
importantly contained in a lot of momentum factor trades at
this moment. So, um certainly sentiment move pretty
rapidly depending on the result that we get after the
close, just based on that kind of quick move
higher, just in terms of the importance and the
weight within the index. Interesting, let's talk broader
about the magnificent seven how NVIDIA fits into that?
Well, it's certainly from our perspective, probably the
sh the brightest shining star within that group. Um
And you know, it, it's really interesting just
looking at this basket of companies relative to the to
the rest of the market. Um You know,
we're, we're closing the books here on the fourth
quarter earnings season with about 80% of companies already reported
. If you look at just those uh seven stocks
and let's take Tesla out of this just for um
just for a brief moment, you know, just
those, those top six companies excluding Tesla have posted
, you know, over 50% year on year profit
growth, looking at the fourth quarter to fourth quarter
, the rest of the S and P 500.
So the S and P 494 have seen Ernie's contraction
by about 10% or so. So there's been this
, this, this dichotomy within the market just based
on how strong the fundamentals have been for these six
very large companies in the S and P. Do
you expect that the magnificent seven will continue to fuel
the broader market this year? And I ask it
in so far as to how much exposure should investors
think about having to these stocks? Maybe NVIDIA in
particular to within the mag seven, those results on
top later today. Well, sentiment has been certainly
rising for this, uh this, you know,
group of companies that um that are, are growing
and we in the S and P 500 delivering,
you know, really strong fundamentals. The question is
, you know, how long can this growth continue
and how long can this market leadership profile continue?
And I think there's a variety of kind of avenues
we can talk about with uh with that question,
you know, in the shorter term, with,
with investors concerned about the macroeconomic outlook, what you
tend to see in that environment is investors gravitate towards
quality. And these magnificent six or seven companies certainly
have that and they have fantastic margins, strong balance
sheets, great returns on invested capital. They're exposed
to more secular growth drivers in the economy versus more
cyclical um sources of growth that are more dependent on
the macro. So a little bit more insulated versus
the average company in the S and P. However
, over the longer term, you know, with
these companies aggressively deploying capital hal into artificial intelligence,
you know, the the ultimate long term leadership is
can be dictated by that return on those investments in
artificial intelligence. We're not going to know the answer
to that until 2025 and beyond, as a lot
of these, a lot of this product innovation turns
into product deployment and then ultimately measurement in terms of
the return on that product deployment. So it's a
longer term story for that leadership profile. But in
the shorter term, it can continue as long as
investors are gravitating towards this quality trade. It's pretty
impressive, you know, that NVIDIA a tech name
. Yes, we know it's up on A I
hype and the first use case that we had seen
which had GPT rightfully. So at the end of
2022 but with interest rate cuts still expected that in
this market, how could that environment lower interest rates
help some of these tech names? The mag seven
, especially in video, I mean, that would
seem like still a pretty big tail wind. Yeah
, lower interest rates certainly would be some added fuel
to the fire uh simply because these companies have moved
up in their valuation profile, making them a little
bit more sensitive to movements in interest rates. Um
Yeah, you know, I think ultimately the reaction
to kind of that interest rate question is the reason
why interest rates would be moving lower in the first
place if it's more of the fed declaring victory and
we don't have this deterioration in the macro. They
can simply just modulate real interest rates a little bit
um without kind of like a rising unemployment profile,
that's very bullish for uh for longer duration. Uh
companies like the mag seven. However, if they
are cutting interest rates in response to recessionary worries or
maybe we're talking about negative payroll prints, uh something
of, of that category, you know, these
companies aren't exactly lower beta. Uh And so in
that environment, we might not see kind of the
same kind of uh lift to these, these stocks
in the in the environment where interest rates are moving
lower. So it really depends on on the macro
environment. How much do you think that the broader
stock market rally matt can really widen that we can
see an expansion of breadth, more stocks, more
sectors rising if we do get rate cuts later this
year, again, I would point to the macro
as being the determining factor behind market breadth. If
the economy starts to trough out re accelerate, inflation
is not a problem and interest rates can come down
in that environment. That's a very fertile environment for
seeing widening market participation. So things like small caps
make caps international equities as an example, international equities
being probably somewhat of a coiled spring because you might
get the the double kind of tail wind of just
, you know, valuation moving in your favor as
well as maybe a weakening dollar profile. Um And
so, you know, if if, if we're
talking about uh that environment, it's more conducive to
, you know, broader participation. If, if
we're kind of more in this flight to quality environment
with investors concerned about a possible recession, that to
me sounds like, you know, tougher, tougher
sledding to seeing widening, widening participation. All right
, Matt Ducky, Chief Portfolio Manager of Equities at
Northwestern Mutual Wealth Management.