Insights

Weekly Market Update

Our Asset Allocation team comments on what’s moving markets and how the PIMCO GIS Dynamic Multi-Asset Fund (DMAF) is positioned.

FOREWORD

  • Access these views via the Dynamic Multi-Asset Fund, a dynamic fund designed to deliver across market environments and help investors navigate the toughest market situations.

From the desk of Our Asset Allocation team, Friday 23th February 2024.

Quality until clarity

Nvidia surged $277 billion in one day on Thursday, following its Q4 results on Wednesday – equivalent to the total market capitalization of its main competitor, Advanced Micro Devices. Nvidia is now worth as much as Canada’s GDP ($2 trillion), after rallying almost 60% since the beginning of the year.

The rally in big cap stocks last week extended further the narrowness of breadth which has been characterizing equity markets for months now. Of note, this is not only a US phenomenon: three European companies (ASML, LVMH and Novo Nordisk) have driven more than 50% of the Eurostoxx 50’s surge so far this year.

Similarly to the past few quarters, for most companies the bar was very low going into results season, as ‘street’ (or market) analysts downgraded estimates just before the earnings releases. The only exception was for the Magnificent 7, where the consensus was elevated, but easily beaten – and that only left Nvidia, which did not disappoint in outperforming high expectations once again. The beat was less extreme than in past quarters, but we got a few positive news items in the earnings call.

First, Nvidia management highlighted that, while supply is still expected to improve, this will not match elevated demand throughout the year 2024. Second, Nvidia’s CEO mentioned there was rising demand from sovereign and enterprise, in addition to the strong demand from internet companies. And finally, Nvidia expressed confidence for continued growth in the “calendar year 2025 and beyond“ (for context, earnings grew by five times in 2023, and are expected to double again in 2024).

While Nvidia gave another boost to the Magnificent 7’s rally this week, commentaries from Fed speakers pushing back on imminent rate cuts put additional pressure on the most rate sensitive stocks (small caps, weak balance sheet stocks etc.). Fed governor Waller, known for being close to the Federal Open Market Committee majority’s view, said: “The Committee can wait a little longer to ease monetary policy…in the absence of a major economic shock, delaying rate cuts by a few months should not have a substantial impact on the real economy in the near term. And, I think I have shown that acting too soon could squander our progress in inflation and risk considerable harm to the economy.” This can be summarized by the title of his remark: “What’s the rush?”

This message for “patience” was echoed by several speakers last week and market pricing adjusted accordingly. As of now, a bit more than three cuts are priced for 2024, down from almost six at the start of the year.

Following the strong earnings from big tech, the consensus for earning per share (EPS) has continued to be upgraded, and has been the main contributor to the Magnificent 7’s price performance. Interestingly, Nvidia was trading at 32x forward price/earnings in summer 2022 with a market capitalization of $280 billion – today, with a $2 trillion market capitalization, it trades at a multiple of…32x!

The same cannot be said across regions and indexes. Indeed, for most equity indexes the rally of the past few months has only been driven by valuation re-rating. More recently, following Q4 earnings, bottom-up street estimates have been reduced again across most sectors, while they continued to be upgraded for the Magnificent 7.

The conclusion is that we need a broadening of EPS upgrades for the narrowness of the rally to turn, while clarity on the Fed cutting cycle remains one of the key determinants.

How can DMAF benefit investors in today’s uncertain markets?

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Disclosures

Data as of 23th February 2024 unless otherwise stated.

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