THIS WEEK WITH SADIQ

Nvidia Does It Again

August 28 to September 1, 2023

THIS WEEK WITH SADIQ

Nvidia Does It Again

August 28 to September 1, 2023

Commentary

Market Recap

  • In this last full week of August, stocks struggled to find direction, posting solid gains one day only to be wiped out the next day. By the time all was said and done, the S&P 500 eked out a 0.8% gain, marking the first increase in the past four weeks, while the Dow slipped 0.4%.
  • The Nasdaq jumped 2.3%. Despite the solid gains, the tech-heavy gauge failed to gain traction following more blow-out results from Nvidia.
  • Meantime, the TSX added 0.1% on the week.

Recession

The 3-month to 10-year yield curve remains deeply inverted, suggesting that a recession should already be here. So why are we not seeing it? We still view a recession as likely—our models show a 90% chance of a downturn in the next 12 months though. However, the odds of a soft landing or no landing have increased, and the time frame for the recession keeps getting pushed out. We see three reasons for this. The first and most significant is the resilience of the consumer. The second is that we’re approaching central banks’ inflation target and the likely end of the interest rate cycle, which are contributing to a mindset where people feel they can continue to spend rather than tighten their belts. And third, corporate earnings haven’t been as bad as analysts had expected, which ties back to consumer spending. It’s important to note, however, that there are some troubling signs in recent earnings reports, especially among retailers; some have even reported higher rates of fraud and theft, a signal that some people are feeling more desperate. Consumers aren’t weak, but we are starting to see signs of adjustments to spending patterns that could indicate a recession on the horizon.

Bottom Line: A recession is still in the cards, but it not likely to be as bad as investors once feared.

AI

Last week, Nvidia crushed its earnings estimates once again, generating optimism in markets and spurring more speculation about the potential of AI (artificial intelligence). This is a great story for us—Nvidia is the largest position in the BMO Global Innovators Fund, and is a big position in the BMO Global Equity Fund and BMO Global Income & Growth Fund.1 Even though it sold off after the earnings, it had run up quite a bit beforehand and has been one of the top performers this year. AI is still in its infancy, but the opportunity set is massive, and our Technology portfolio managers have been beating the drum for a while. Nvidia’s earnings again highlight how well they’re doing when it comes to anything AI-related. To have a quarter like they just did after the massive results the previous quarter is incredibly difficult to do, especially given the already sky-high expectations. At the same time, we do have to be cognizant that things have moved up pretty far pretty fast—for some companies, AI-related valuations are ahead of earnings at this time. Every company with a connection to AI is likely to continue to receive a halo effect, and in many cases, investors are paying for potential. There will also be companies that say they’ll be players in AI but aren’t actually doing much in that space—those names will get hit later on. As always, some degree of caution is warranted. But we’ve been playing the AI story for some time, and thus far, it’s worked out incredibly well.

Bottom Line: AI is an attractive long-term story, and Nvidia remains poised to be a leader in that space.

China

Chinese equities have experienced massive outflows over the past two weeks. Does this signal a looming crisis for the world’s second-largest economy? We wouldn’t go that far, but China’s property sector—which is the most important market in the country, even ahead of the stock and bond markets—is still showing cracks. So far, government stimulus is not what it should be, and consumer sentiment is not as strong as one might have expected. In addition, we haven’t seen mega cap companies like Alibaba, Tencent or Baidu benefitting from the AI theme like their U.S. counterparts, and political problems continue, including growing tension with the United States. Given these issues, it’s not surprising that some money has come out of the market. The only silver lining has been good news on the valuation front. For those who hold Emerging Markets (EM), which we do, the story is less about China and more about the broader region—as China has lost some of its export business, other countries within the EM space have picked up the slack. The wealth is now spread around a bit more than it had been, and that’s a trend Beijing would like to reverse.

Bottom Line: The Chinese property sector will have to rebound in order for China to begin to address its broader economic challenges, and so far, there’s no sign of that happening.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Prices Cool in a Scorching Summer: What Happens Next?

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