Market Pulse
Thursday, August 29, 2024
Welcome to this week's Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.
Our three stories this week:
1. The Market Mover: Nvidia’s Earnings
2. The Time Has Come: Powell Signals Cuts
3. Queen Bev: Beyoncé Partners with LVMH
It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.
To call Nvidia’s earnings release “widely anticipated” would be an understatement. If the stock is not making new highs, the hype around it certainly does, with pubs now hosting earning release parties akin to major sports events. [1]
The question on everyone’s minds ahead of earnings was not if Nvidia will beat analyst estimates, but rather by how much. A 4.2% positive surprise (revenues grew 122% year over year vs. estimates of 118%) and an in-line guidance for the next quarter was enough to send the stock 7% lower in after-hours trading.
The stock is polarising, volatile, and its historic rise has been discussed to the point of exhaustion. None of those should take away from the fact that Nvidia is one of the greatest equity stories of our time. On the back of being a near-monopolist in the AI chip market, the company has soared from a $300 billion market cap in late 2020 to a $3 trillion market cap today. Its outsized influence on the broader market is staggering.
The company now accounts for 6% of the entire S&P 500 index, which is weighted by market capitalization. [2] That fact, combined with the stock’s volatility, means that swings in Nvidia’s share price are market-moving events. Recently, Nvidia has been moving the S&P 500 by more than 1% per week, accounting for some of the largest single-stock contributions to the index’s volatility in history. [3]
Nvidia’s performance can also have a substantial impact on the index for fundamental reasons. Currently, Nvidia dominates the enterprise AI chip industry, controlling more than 70% of the market. That means the company’s performance can help signal how rapidly tech firms are implementing AI, widely expected to be a profit-booster for the industry.
While Nvidia’s influence on major indexes means that fund managers cannot overlook the firm entirely, we continue to be wary of Nvidia’s current valuation. As one of just three public firms to be worth more than $3 trillion and with a price-to-sales ratio that significantly exceeds peers, the downside risk does not appear to be justified by upside potential. Competitors like AMD and Intel remain a clear threat to Nvidia’s margins and market share in the mid to long term.
Note: We hold Nvidia in our Flagship portfolio
In his speech at Jackson Hole last Friday, Fed Chair Jerome Powell made it clear that rate cuts are coming. While Powell acknowledged that the Fed’s policy path will depend on how future data and economic risks evolve, he noted that “time has come for policy to adjust.” [4]
One major source of economic risk right now is the U.S. labour market, which has shown some evidence of a slowdown. Although the Fed has been laser-focused on keeping inflation in check for the past few years, the balance of risk could be tipping toward employment. In his speech, Powell said that the Fed would not welcome any additional cooling of the labour market.
Thursday’s jobless claims report was encouraging, showing fewer Americans filing for unemployment. [5] Prior to the Fed’s next meeting, we will receive even more information on the U.S. labour market, including another set of jobless claims and a full employment report. This data will help determine whether the Fed sticks with a 25 basis point cut (as the market largely expects) or opts for a more significant 50 basis point cut. [6] For investors, however, the reason for rate cuts may prove to be more important than the magnitude of the cuts themselves.
If the labour market remains robust and the Fed cuts rates simply because they have achieved their inflation objective, cuts could help spur a risk-on attitude. This would be beneficial for small-cap equities, which are more heavily influenced by rate cuts and also tend to be riskier in general. [7]
If the Fed cuts rates to battle a deteriorating employment picture and possible recession, however, markets would likely favour safer assets. Defensive sectors like real estate and healthcare have historically been more attractive when rates are cut during recessionary periods. [8]
In our view, closely monitoring the incoming economic data is currently more useful than trying to predict the Fed’s precise policy path. Although rate cuts are coming, the opportunities stemming from those cuts will be determined by the economic context in which they take place.
Last week, LVMH announced a partnership with Beyoncé to develop a new whiskey line called SirDavis, composed of a rye and malted barley blend. [9] The name is a nod to the singing icon’s great-grandfather, a Prohibition-era moonshiner in the American South. Appropriately, the whiskey will be crafted and bottled entirely in the U.S., a first for LVMH.
Set to be released in September, SirDavis will target the premium side of the market, launching with a retail price of $89. The collaboration follows in the footsteps of other celebrity-backed high-end spirit brands, including Mark Wahlberg’s Flecha Azul and Dwayne Johnson’s Teremana. This pattern is no coincidence – instead, it hints at the “premiumisation” currently driving the beverage market.
Young adults today are showing significantly less interest in drinking alcohol than previous generations. In the U.S., adults aged 18 to 34 average 1.6 fewer drinks per week than their older counterparts. [10] While this trend appears less pronounced in Europe, evidence suggests that young adults in the U.K. and Ireland are drinking less too. [11] [12]
But although drinkers may be pulling back on overall volume, they’re showing increased interest in high-end products. In 2023, growth in the sales of spirits and wine outperformed other alcohol categories. [13] Within these submarkets, the growth in money spent per case sale hints at a growing preference for premium brands.
While LVMH is the latest company to pursue this trend, Flagship portfolio holding Diageo is also well-positioned for premiumisation, particularly owing to their Scotch whiskey labels. In addition, Diageo has a string of recent acquisitions targeting celebrity liquor brands, most notably George Clooney’s Casamigos tequila in 2017 and Ryan Reynolds’ Aviation American Gin in 2020. [14] [15]
In our view, the consumer preference for quality over quantity in alcohol looks here to stay, with declining volume paired with increased selectivity. As a result, investors need to be equally selective about their exposure to the beverage market overall.
Note: We hold LVMH in our Flagship portfolio
[1] NYMag
[2] Bloomberg
[3] Bloomberg
[4] The FT
[5] AP
[6] CME
[7] GlobalX
[8] Schroders
[9] CNBC
[10] Gallup
[11] The Guardian
[12] BBC
[13] Beverage Industry
[14] Diageo
[15] Diageo
Please remember, investing should be viewed as longer term. Your capital is at risk — the value of investments can go up and down, and you may get back less than you put in.
