February 2024 Market Commentary

Courtesy of Nvidia, the S&P 500 surged to 5,100 setting a fresh record and effectively marking the best February in nearly a decade. The index rose over +250 points in February to finish the month at 5,096.27, just a smidge below our 2024 annual forecast price target. Meanwhile, the TSX climbed another +34 points to complete the month at 21,363.61, a level not seen since April 2022. Investor sentiment survey shows 44% bulls, which is extremely bullish territory, considering anything over 37.5% is considered bullish. Conversely, the percentage of bears is just 26%, below the historical average of 31%. Back in October 2023 the reading for bulls was just 30% and bears was 41.6%. So, the message is clear, that investors are bullish about the outlook, but what about the risks?

Nvidia was the last of the ‘Magnificent 7’ to report Q4 results. Consensus was looking for $20.4 billion in revenue and earnings per share of $4.59, which implies ~237% y/y revenue growth and ~422% Earnings per share growth. Over the last three quarters, revenue had beat consensus by an average of just over 14%, while EPS has beat expectations by an average of 22.5%. Before their earnings were reported the stock was up over 50% since last quarter’s earnings and has added nearly $600 billion in market cap year-to-date surpassing Google and Amazon. The AI theme that has provided a broader tech tailwind has exacerbated scrutiny surrounding big tech’s earnings and performance contributions. Goldman Sacs noted that if Nvidia reports Q4 in line with consensus, Magnificent 7 will have grown sales by 15% year-over-year and lifted margins by 582 basis points, leading to earnings growth of 58%. However, the remaining 493 companies listed on the S&P 500 only grew by 3%, while margins contracted by 56 bps and earning fell by 2%.

Nvidia beat revenue and EPS by more than 8% and 12% respectively, while revenue guidance was nearly 9% ahead. The beats came against very elevated expectations. Data Center, the standout with revenue up 27% quarter-over-quarter and 409% year-over-year. Momentum in the ‘Magnificent 7’ stocks is a phenomenon, something we haven’t seen before, and investors seem to be viewing these big tech names as a ‘safe haven’. Meanwhile, recent upside inflation surprises made for some choppy markets, causing some analysts to raise their year-end S&P targets. An exercise we may have to consider ourselves, but for the moment we are holding firm with our call of 5,100. Note, that Goldman Sachs is now forecasting a year-end level of 5,200 citing increased profit estimates, with particular emphasis on fundamental strength of the Magnificent 7. Either way, if these targets are accurate, we should expect some volatility in the coming weeks considering it’s only the end of February and our target has already been reached.

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