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Our views 27 February 2024

ClockWise: Nvidia at the epicentre of the melt up in stocks. Can AI mania go on much further?

5 min read

The melt up in global equities continued last week as US mega caps once again led markets higher.

The event of the week was referred to by many as ‘Nvidia day’, where the most talked about stock in the world reported stellar earnings in one of the most watched corporate earnings reports of recent times.

The AI chip maker showcased 265% year-on-year earnings growth in the fourth quarter of 2023, beating already hefty analyst expectations, and provided upbeat forward guidance. Investors cheered this result and the stock’s market cap rallied by the largest amount in the history of the US equity market (Chart 1).

Chart 1: Single session gains in market value ($bn)

Chart 1 shows the single session gains in market value as at 26/02/2024

Source: Bloomberg as at 26/02/2024.

In total, Nvidia’s stock has risen close to 60% so far this year, to become the fourth largest company in the world at the time of writing. Just this year, excitement around the company’s essential role in the AI industry has seen the company increase its market cap by close to $750 billion. That is more than the entire market cap of Tesla and close to the size of Switzerland’s economy. Not a bad start to the year for the chip maker.

Positivity has not only been limited to Nvidia at the stock specific level – AI exuberance has seen growth stocks have a very positive start to the year. The tech heavy Nasdaq index has now advanced for 15 of the last 17 weeks in US dollar terms. With various equity indices now at all-time highs, investors are wondering: is the Nvidia led rally in global stocks reaching its peak, or is there more to go? Is this a bubble, or the start of a new melt up?

One important distinction to make about this current rally is that the macro backdrop is supportive for equities at this juncture. As we have pointed out in recent weeks, our global growth scorecard has recently turned positive, helped by improvements in business surveys. With inflation having faded and growth indicators looking more positive over the turn of the year, our Investment Clock model is signalling that we are in Recovery, the most positive phase of the business cycle for equity performance on a relative basis.

Additionally, unlike the previous time we saw a tech bubble, this time we are seeing the rally being supported by earnings – hence the story goes broader than Nvidia. It is worth noting that S&P 500 companies beat earnings estimates by an aggregate 7.6% in the fourth quarter. A stronger macro backdrop, as signalled by our growth scorecard turning positive, would also indicate a potential boost for corporate earnings later this year, with analysts’ expectations already being upgraded (Chart 2).

Chart 2: Global growth scorecard and earning revisions

Chart 2 shows the global growth scorecard and earning revisions as at 15/02/2024

Source: LSEG Datastream as at 15/02/2024.

Concern from some investors reflects current market levels. The recent narrow rally led by growth stocks has left equities at all-time highs and in a year with much policy and political uncertainty, markets may be priced for too much perfection.

The improvements we have seen to global growth so far this year could fade and as the year progresses, we could see this macro support weaken. A big drop in business confidence could pose a more direct threat to growth stocks: corporations in a downturn would likely reduce capex and that could include more caution on AI-related spending, putting pressure on earnings and stock prices.

Alternatively, the current stronger backdrop in global growth could instead act as a headwind to stock prices if it results in fewer central banks rate cuts than expected. In January, markets had priced in over six interest rate cuts for this year in the US. Amid upside surprises in growth and inflation, markets have now moved to expect only three cuts for 2024. With markets finely balanced there is a risk that any further reduction of rate cut expectations could see equities fall from these highs.   

We are currently positive stocks, a view we have held for over a year. We are not overly concerned by current valuations and believe that the current macro environment can continue to support an improvement of earnings and ultimately support equity markets higher. However, with the situation finely balanced we are vigilantly watching macro developments.


This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.