Equities hit fresh record highs this week in a number of markets from Europe to Japan.
In North America, the rally was fuelled by a stellar earnings report by Nvidia on Wednesday, which sparked broader exuberance on the benefits of AI. Consumer staples and technology led the way, though gains in the S&P 500 were broad-based among sectors.
The feeling was a bit more muted on the TSX (despite better economic data; see below), which eked out only a 0.7% advance on the week. Note that tech companies fell, perhaps as investors were lured by flashier names south of the border; that said, the sector remains well above its 200-day moving average.
Nvidia
Last week, Nvidia again topped earnings expectations, causing its stock to end the week near $800 per share. For investors, the question is: are there further gains to be found or is it time to take profits? As we’ve said before, the thesis behind Nvidia is a long-term story—their microchips are needed globally, across all sectors. Even if one industry were to falter, demand from other areas would still be there. That tells us that there is likely still room for them to deliver even better results. Think of Microsoft when they introduced Windows or Apple when they launched the iPhone: these were game-changers that led to years—or even decades—of solid growth. Nvidia is potentially on that path; in the booming A.I. (artificial intelligence) space, no one is in the same category as them. Eventually, competition will emerge and growth will have to slow down. There’s also a case to be made that valuations have gotten stretched and that it’s worth taking some profits to fund other buys. But the market’s reaction to the company’s latest announcement re-confirms that earnings matter, and if you believe in the A.I. story—which we do—then Nvidia is the name you want to own. That’s why it continues to be one of the biggest positions in the BMO Global Innovators Fund, BMO Global Equity Fund, and BMO Global Income & Growth Fund.
Bottom Line: If you want to get into a space like A.I., you want to get in with the best products, and right now, that’s Nvidia.
Inflation
Recently, the U.S. and Canadian inflation trajectories have diverged, with Canada now back within the Bank of Canada’s (BoC) target range of 2-3% while U.S. inflation slowed less than expected in January and remains above 3%. This reflects the relative strength of the two economies: the U.S. economy—and the American consumer—is still strong, which makes it hard for inflation to come down. Supply chain setbacks, like recent ones in the Red Sea, have also caused the occasional inflation uptick. In Canada, conversely, the consumer is weakening faster, causing people to be more selective about how they spend. The market had previously expected more rate cuts from the U.S. Federal Reserve (Fed) than the BoC this year—that now appears to have reversed. Our base case is still some easing from the Fed in the second half of the year, but we wouldn’t be too surprised if the U.S. didn’t get any rate cuts at all in 2024—it’s all data-dependent. The Fed likely doesn’t want to cut too early, because that could lead to a start-and-stop situation, which could be confusing for markets. As a result, they may have to wait for more data before pivoting to a cutting phase. The BoC, meanwhile, have been a bit more hawkish than the Fed. Our hope is that they move before their American counterparts, because otherwise Canadian consumers will have a tougher time. But it remains to be seen if they’re willing to take that leap.
Bottom Line: Inflation reflects the strength of the consumer—that’s why U.S. inflation has proven stickier than Canadian inflation.
Housing
In the last few months, we saw a bit of a bounce-back in both the U.S. and Canadian housing markets as mortgage rates came down. We believed this would be temporary, and that appears to be how it’s playing out—the Fed’s announcement in November allowed mortgage rates to fall, providing some relief and causing activity to pick up, but that activity has now slowed. The U.S. market may rebound faster than the Canadian market due to a stronger economy and differences in the structure of mortgages south of the border. But we continue to see pressure on Canadian housing, especially if rate cuts don’t come through soon. If the BoC does opt to decrease rates, however, Canada could start to rebound, especially with seasonal effects diminishing; in general, we don’t typically see a lot of housing activity in the winter. It’s possible there could be a divergence between the high-end and low-end markets, with some homeowners choosing to downsize in order to keep their monthly payments level.
Bottom Line: The greatest damage to the housing market is likely behind us, but Canada has more fallout to contend with than the U.S.
Positioning
Instead of asking why markets could fall, we think investors should be asking why markets will not go higher from here. It’s not hard to find a good reason—earnings from quality companies look good, the U.S. consumer is still relatively strong, and there’s been no spike in unemployment. The only real negativity at present is around the timing of interest rate cuts—but even if they don’t come next month, they would likely only be deferred, not deleted. Momentum remains strong, and our intention is to stay the course.
The viewpoints expressed by the author represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular Investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
This article may contain links to other sites that BMO Global Asset Management does not own or operate. Also, links to sites that BMO Global Asset Management owns or operates may be featured on third party websites on which we advertise, or in instances that we have not endorsed. Links to other websites or references to products, services or publications other than those of BMO Global Asset Management on this article do not imply the endorsement or approval of such websites, products, services or publication by BMO Global Asset Management. We do not manage, and we are not responsible for, the digital marketing and cookie practices of third parties. The linked websites have separate and independent privacy statements, notices and terms of use, which we recommend you read carefully.
Any content from or links to a third-party website are not reviewed or endorsed by us. You use any external websites or third-party content at your own risk. Accordingly, we disclaim any responsibility for them.
Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.
“BMO (M-bar roundel symbol)” is a registered trademark of Bank of Montreal, used under licence.
Looking past the Mag 7: Why Mid- and Small-Caps could outperform going forward
Given current valuations, those who choose to increase allocations to small and mid-caps at this point in the monetary policy cycle may expect to be rewarded.
What does Saudi Arabia’s increased oil production mean for crude prices and inflation? How is the market responding to China’s recent stimulus package, or U.S. consumer confidence data?
What are the key takeaways from the Fed’s 50-bps rate cut and Chairman Jerome Powell’s remarks? Why did the yield on 10-year Treasuries rise rather than fall after the Fed’s announcement, and what is the outlook for bonds?
This information is for Investment Advisors only. By accepting, you certify that you are an Investment Advisor. If you are NOT an Investment Advisor, please decline and view the content in the Investor or Institutional areas of the site. The website is for informational purposes only and is not intended to provide a complete description of BMO Global Asset Management’s products or services. Past performance is not indicative of future results. It should not be construed as investment advice or relied upon in making an investment decision. The opinions expressed are subject to change without notice. Products and services of BMO Global Asset Management are only offered in jurisdictions where they may be lawfully offered for sale. The information contained in this website does not constitute an offer or solicitation by anyone to buy or sell any investment fund or other product, service or information to anyone in any jurisdiction in which an offer or solicitation is not authorized or cannot be legally made or to any person to whom it is unlawful to make an offer of solicitation. All products and services are subject to the terms of each and every applicable agreement. It is important to note that not all products, services and information are available in all jurisdictions outside Canada.
How Nvidia Became the New Apple
February 26 to March 1, 2024
How Nvidia Became the New Apple
February 26 to March 1, 2024
Sadiq S. Adatia, CFA, FSA, FCIA
Market Recap
Nvidia
Last week, Nvidia again topped earnings expectations, causing its stock to end the week near $800 per share. For investors, the question is: are there further gains to be found or is it time to take profits? As we’ve said before, the thesis behind Nvidia is a long-term story—their microchips are needed globally, across all sectors. Even if one industry were to falter, demand from other areas would still be there. That tells us that there is likely still room for them to deliver even better results. Think of Microsoft when they introduced Windows or Apple when they launched the iPhone: these were game-changers that led to years—or even decades—of solid growth. Nvidia is potentially on that path; in the booming A.I. (artificial intelligence) space, no one is in the same category as them. Eventually, competition will emerge and growth will have to slow down. There’s also a case to be made that valuations have gotten stretched and that it’s worth taking some profits to fund other buys. But the market’s reaction to the company’s latest announcement re-confirms that earnings matter, and if you believe in the A.I. story—which we do—then Nvidia is the name you want to own. That’s why it continues to be one of the biggest positions in the BMO Global Innovators Fund, BMO Global Equity Fund, and BMO Global Income & Growth Fund.
Bottom Line: If you want to get into a space like A.I., you want to get in with the best products, and right now, that’s Nvidia.
Inflation
Recently, the U.S. and Canadian inflation trajectories have diverged, with Canada now back within the Bank of Canada’s (BoC) target range of 2-3% while U.S. inflation slowed less than expected in January and remains above 3%. This reflects the relative strength of the two economies: the U.S. economy—and the American consumer—is still strong, which makes it hard for inflation to come down. Supply chain setbacks, like recent ones in the Red Sea, have also caused the occasional inflation uptick. In Canada, conversely, the consumer is weakening faster, causing people to be more selective about how they spend. The market had previously expected more rate cuts from the U.S. Federal Reserve (Fed) than the BoC this year—that now appears to have reversed. Our base case is still some easing from the Fed in the second half of the year, but we wouldn’t be too surprised if the U.S. didn’t get any rate cuts at all in 2024—it’s all data-dependent. The Fed likely doesn’t want to cut too early, because that could lead to a start-and-stop situation, which could be confusing for markets. As a result, they may have to wait for more data before pivoting to a cutting phase. The BoC, meanwhile, have been a bit more hawkish than the Fed. Our hope is that they move before their American counterparts, because otherwise Canadian consumers will have a tougher time. But it remains to be seen if they’re willing to take that leap.
Bottom Line: Inflation reflects the strength of the consumer—that’s why U.S. inflation has proven stickier than Canadian inflation.
Housing
In the last few months, we saw a bit of a bounce-back in both the U.S. and Canadian housing markets as mortgage rates came down. We believed this would be temporary, and that appears to be how it’s playing out—the Fed’s announcement in November allowed mortgage rates to fall, providing some relief and causing activity to pick up, but that activity has now slowed. The U.S. market may rebound faster than the Canadian market due to a stronger economy and differences in the structure of mortgages south of the border. But we continue to see pressure on Canadian housing, especially if rate cuts don’t come through soon. If the BoC does opt to decrease rates, however, Canada could start to rebound, especially with seasonal effects diminishing; in general, we don’t typically see a lot of housing activity in the winter. It’s possible there could be a divergence between the high-end and low-end markets, with some homeowners choosing to downsize in order to keep their monthly payments level.
Bottom Line: The greatest damage to the housing market is likely behind us, but Canada has more fallout to contend with than the U.S.
Positioning
Instead of asking why markets could fall, we think investors should be asking why markets will not go higher from here. It’s not hard to find a good reason—earnings from quality companies look good, the U.S. consumer is still relatively strong, and there’s been no spike in unemployment. The only real negativity at present is around the timing of interest rate cuts—but even if they don’t come next month, they would likely only be deferred, not deleted. Momentum remains strong, and our intention is to stay the course.
For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled The American Exception: How U.S. Markets Beat the Bears…Again.
Disclaimers
The viewpoints expressed by the author represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular Investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
This article may contain links to other sites that BMO Global Asset Management does not own or operate. Also, links to sites that BMO Global Asset Management owns or operates may be featured on third party websites on which we advertise, or in instances that we have not endorsed. Links to other websites or references to products, services or publications other than those of BMO Global Asset Management on this article do not imply the endorsement or approval of such websites, products, services or publication by BMO Global Asset Management. We do not manage, and we are not responsible for, the digital marketing and cookie practices of third parties. The linked websites have separate and independent privacy statements, notices and terms of use, which we recommend you read carefully.
Any content from or links to a third-party website are not reviewed or endorsed by us. You use any external websites or third-party content at your own risk. Accordingly, we disclaim any responsibility for them.
Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.
“BMO (M-bar roundel symbol)” is a registered trademark of Bank of Montreal, used under licence.
Insights
How we voted: a recap of the 2024 proxy season
Looking past the Mag 7: Why Mid- and Small-Caps could outperform going forward
Debunking the “second wave of inflation” fears
AI’s Exponential Energy Boom: Can Clean Energy Keep Up?
Powell enters the endgame
Pure private equity, simplified