Nvidia Continues Its Run While Salesforce Reports Earnings After The Close

Key Takeaways

• Nvidia Up 10% Since Earnings
• First Quarter Earnings Coming To An End
• Equity Valuations Being Stretched

Stocks came into the holiday shortened weak on a hot streak. Both the S&P 500 and Nasdaq Composite have notched five consecutive weeks of gains, putting May on pace to be the best month of 2024. Although Tuesday was relatively quiet, with the Nasdaq gaining 0.6%. Meantime, the S&P 500 was flat on the day but is still up over 5% this month and 11% for the year.

With earnings season all but over, it appears to be a very strong quarter. According to FactSet, first quarter earnings are tracking to be up 6% on a year-over-year basis. Communications Services, Utilities, Information Technology and Consumer Discretionary were the strongest performing sectors. At the other end of the spectrum, Energy, Health Care and Materials were the only sectors reporting year-over-year drops.

One thing that really stood out to me this quarter was the continuing narrative around Artificial Intelligence (AI). Obviously, Nvidia is the standout company in this space. Its stock has seen an astronomical run over the past year and is up 10% since reporting its most recent earnings. In addition to Nvidia, 199 out of the 500 companies in the S&P mentioned AI during their earnings calls. Between the optimism around that and the earnings growth we saw, the S&P 500 now trades at 20.5x its 12-month forward-looking earnings. And there are a couple things about that which might strike a note of caution.

First, if you’re old enough to remember the mid to late 90s, you remember the dotcom hysteria. The simple mention of adding a website to a company’s business plan was good for some multiple in share price. While the internet revolution certainly did change the world and subsequently corporate valuations, that doesn’t mean it didn’t get ahead of itself when it came to those valuation effects. Investors caught up in the euphoria of the era paid a price when the Nasdaq fell over 39% in 2000, another 21% in 2001 and 31.5% more in 2002 taking the index down from nearly 4100 to 1335. That lesson has stuck with many of us and when we see similar euphoric responses to AI, we start having flashbacks.

The other aspect to this is the more quantifiable one of valuations. Over the past five years, the average 12-month forward-looking price to earnings ratio in the S&P 500 is 19.2. During the past ten years, that average has been 17.8. At 20.5, we are well above both those levels. Now, averages are just that, averages. Nonetheless, price to earnings ratios are pretty straightforward metrics. They consist of just two things, price and earnings. With first quarter’s earnings season almost in the books, further price increases will only stretch that multiple more. That isn’t to say prices can’t move higher; however, it does add more emphasis to not only next quarter’s earnings but also any mid-quarter updates. At the end of the day, earnings drive stock prices and thus far this year, they have backed up the run in equities. Still, as valuations stretch, equity prices become more susceptible to shock if the earnings picture were to dim at all.

Other stories making news this morning include Conoco Phillips announcing it is in discussions to buy Marathon Oil
Marathon Oil
. In premarket trading, shares of Marathon are up over 6%. In healthcare, Merck is in advanced talks to buy Eyebiotech, the maker of Restoret which is a treatment for age-related macular degeneration, for $1.3 billion. And finally, shares of American Airlines are down nearly 9% in premarket after the company cut its sales outlook and second quarter earnings projection. This news reinforces my statement earlier about the importance of mid quarter earnings updates and the importance of earnings driving stock prices.

After the close today, Salesforce
Salesforce
Inc. is scheduled to report earnings. Then tomorrow before the open, both Best Buy
Best Buy
and Foot Locker
Foot Locker
are due to report. I’m interested in what all these companies have to say, but I’m especially interested in Salesforce and Best Buy. As I mentioned already, IT and Consumer Discretionary earnings have been very strong this quarter and with just a few companies left to report, there could be added emphasis placed on their respective earnings. As always, I would stick with your investing plan and long-term objectives.

tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.