Market Overview
Since the third quarter, the assets that performed better: RUT (Russell 2000 Index) and XAUUSD (gold price) and SPF (financial stocks) and US bonds, the assets that performed worse: Ethereum, crude oil, US dollars. The almost flat BTC, Nasdaq 100.
For US stocks, the current market is still in a bull market, and the main trend is still upward. However, the trading environment will lack performance themes in the last few months of the year, and the upside and downside of the market will be limited. The market continues to revise down Q3 earnings expectations:
The valuation has recently adjusted back, but it rebounded quickly, and the PE of 21 times is still much higher than the 5-year average:
93% of the companies in the S&P 500 have announced actual results, of which 79% of the companies have exceeded EPS expectations and 60% of the companies have exceeded revenue expectations. The stock price performance of companies that exceeded expectations is basically the same as the historical average, but the stock price performance of companies that missed expectations is worse than the historical average:
Buybacks are currently the strongest technical support for the U.S. stock market. Corporate buyback activity has reached twice the normal level in the past few weeks, about $5 billion a day (about $1 trillion a year). This buying force may continue until mid-September and then gradually fade.
The performance of large technology stocks has weakened in the middle of the summer, mainly due to lower earnings expectations and the market's waning enthusiasm for the AI theme. However, the long-term growth potential of these stocks is still there, and the prices are unlikely to fall.
There was a time when the market was really bullish, for example, the period from October last year to June this year experienced some of the best risk-adjusted returns in a generation (NDX sharpe ration reached 4). Today, the stock market has higher PE multiples, economic and financial growth is slower, and the market's expectations of the Fed are higher, so it is relatively difficult to expect the stock market to perform as well as the previous three quarters in the future. And we have seen signs that large funds are gradually switching to defensive themes (for example, both subjective and passive strategy funds have increased their holdings in the healthcare sector, which provides defensiveness and growth unrelated to AI). It is expected that this trend will not be reversed soon, so it is safer to take a neutral attitude towards the stock market in the next few months.
At the Jackson Hole meeting on Friday, Fed Chairman Powell made the clearest statement on rate cuts so far. The September rate cut is a foregone conclusion. He also said he did not want to further cool the labor market and that he was more confident that inflation would return to the 2% path. But he still insisted that the speed of policy easing would depend on future data performance.
Therefore, I personally think that Powell’s statement this time was not more dovish than expected, so it did not cause much splash in the traditional financial market. What everyone is most concerned about is whether there will be a single 50bp interest rate cut this year, and Powell did not hint at it at all. Therefore, the expectations for interest rate cuts this year have hardly changed from before:
Therefore, if future economic data improves, the current priced-in 100bp rate cut expectation may even be adjusted downward.
However, the crypto market reacted strongly. This may be due to the squeeze caused by too much short position accumulation (for example, the recent position increase has been very fast, but the contract often has negative rates), and the fact that the pace of understanding of macro news by crypto players is not as unified as that of traditional markets, that is, the damping of news transmission is relatively large. Many people may not know that Powell will speak at the JH conference this week. However, whether the current market environment supports the crypto market to hit new highs may be a question mark. Generally speaking, in order to hit new highs, the macro environment must be relaxed and the sentiment must be risk-averse. Crypto native themes are also indispensable, including NFT, defi, spot ETF release, and meme craze. At present, the only theme with strong momentum is the growth of Tele ecology. Whether it has the potential to become the next theme depends on the performance of the latest token issuance projects. What is the quality of the incremental users brought?
At the same time, the jump in the crypto market is also related to the sharp downward revision of last year's non-farm payrolls in the United States this week. However, as we have analyzed in depth in previous videos, this downward revision is excessive, ignoring the contribution of illegal immigrants to employment, and these people were included in the original employment statistics, so this revision is of little significance. As a result, the traditional market reacted lukewarmly, while the crypto market saw this as a sign of a sharp interest rate cut.
From the experience of the gold market, most of the time the price is positively correlated with the holdings of ETFs, but the market structure has changed in the past two years, and most retail investors and even institutional investors have missed the rise in gold, and the main purchasing power has become the central bank:
From the figure below, we can see that the inflow rate of BTC ETF has slowed down significantly since April. In terms of BTC, it has only increased by 10% in the past five months, which is consistent with its price peaking in March. If the risk-free rate declines, it may attract more investors to enter the gold and BTC markets, which is very likely.
In terms of stock positions, subjective strategy funds did quite well in the early summer, reducing their positions in time and having an opportunity to attack in August. The following figure shows that the green line subjective strategy funds have recently replenished their positions very quickly, and their positions have returned to the historical 91st percentile, but the systematic strategy funds have reacted a little slower and are currently only at the 51st percentile:
Stock market shorts closed their positions during the decline:
In politics, Trump's approval rating has stopped falling, and his betting approval rating has risen. Trump also received the support of Kennedy Jr. over the weekend. Trump trading may heat up again, which is generally a good thing for the stock market or the crypto market.
Fund Flow
The Chinese stock market has been falling, but funds with Chinese concepts have been receiving net inflows. This week's net inflow of $4.9 billion hit a five-week high and marked the 12th consecutive week of net inflows. Compared with other emerging market countries, China also has the largest inflows. Those who dare to choose to increase their positions against the trend in the current market downturn are either national teams or long-term funds, betting that as long as the stock market is not shut down, it will eventually rise again.
However, from the perspective of Goldman Sachs clients, they have been reducing their holdings of A shares since February, and the most recent increases are mainly in H shares and Chinese concept stocks:
Despite the global stock market recovery and capital inflows, the low-risk money market has also seen inflows for four consecutive weeks, with the total size rising to $6.24 trillion, a new record high. This shows that market liquidity is still very abundant:
Keep paying attention to the fiscal situation of the United States, which is basically hyped up as a topic every year. As shown in the figure below, the US government debt may reach 130% of GDP within ten years, and the interest expenditure alone will reach 2.4% of GDP. The military expenditure to maintain the US global hegemony is only 3.5%, which is obviously unsustainable.
Weaker dollar
Over the past month, the U.S. Dollar Index (DXY) has fallen 3.5%, the fastest rate of decline since the end of 2022, which is related to the market's increased expectations for the Federal Reserve to cut interest rates.
Looking back at the beginning of 2022, the Federal Reserve adopted an aggressive interest rate hike policy to combat inflation, which pushed the dollar to strengthen. However, by October 2022, the market began to expect that the Fed's interest rate hike cycle was coming to an end and might even begin to consider cutting interest rates. This expectation led to a decline in market demand for the dollar, pushing the dollar to weaken.
Today's market seems to be a repeat of that year, except that the hype at that time was too advanced, and today the interest rate cut is about to land. If the US dollar falls too much, the unwinding of long-term carry trades may emerge again, and then become a force to suppress the stock market:
Two major themes next week: inflation and Nvidia
Key price data include the PCE (personal consumption expenditures) inflation rate in the United States, Europe's preliminary CPI (consumer price index) for August, and Tokyo's CPI. Major economies will also release consumer confidence indexes and economic activity indicators. In terms of corporate earnings, the focus will be on Nvidia's earnings report after the U.S. stock market closes on Wednesday.
The PCE data released on Friday is the last PCE price data before the next Fed meeting on September 18. Economists expect core PCE inflation to remain at +0.2% month-on-month, with personal income and consumption increasing by +0.2% and +0.3% respectively, the same as in June, which means that the market expects inflation to maintain a moderate growth momentum and will not decline further, leaving room for possible downward surprises.
Nvidia earnings preview: The dark clouds are dispersing, which is expected to inject a shot of adrenaline into the market
Nvidia's performance is not only a barometer of AI and technology stocks, but also a barometer of the entire financial market sentiment. NV's demand is not a problem for the time being, and the most critical topic is the impact of the postponement of the Blackwell architecture. After reading several institutional analysis reports, I found that the mainstream view on Wall Street is that this impact is not significant. Analysts generally maintain optimistic expectations for this financial report, and in the past four quarters, NVDA's actual announced results have exceeded market expectations.
The most core indicators of market expectations are:
Revenue of $28.6 billion, up 110% year-on-year and 10% quarter-on-quarter
EPS: USD 0.63, up 133.3% YoY and 5% QoQ
Data center revenue was $24.5 billion, up 137% year-on-year and 8% quarter-on-quarter
Profit margin: 75.5%, same as Q1
The most concerning issues are:
1. Has the Blackwell architecture been delayed?
UBS analysts believe that Nvidia's first batch of Blackwell chips will be delayed by 4-6 weeks at most, and is expected to be delayed until the end of January 2025. Many customers will instead purchase H200, which has a very short delivery time. TSMC has begun production of Blackwell chips, but the initial production is lower than the original plan because the CoWoS-L packaging technology used by B100 and B200 is more complex and has yield challenges. H100 and H200 use CoWoS-S technology.
However, this new product was not included in the recent performance forecast:
Since Blackwell will not enter sales expectations until Q4 2024 (Q1 2025) at the earliest, and NVIDIA only provides single-quarter performance guidance, the delay will have little impact on the performance of Q2 and Q3 2024. At the recent SIG GRAPH conference, NVIDIA did not mention the impact of the Blackwell GPU delay, indicating that the impact of the delay may not be significant.
2. Has demand for existing products increased?
Secondly, the decline in B100/B200 can be compensated by increasing the growth of H200/H20 in the second half of 2024.
According to HSBC's forecast, production of B100/B200 substrates (UBBs) has been corrected by 44%, although deliveries may be partially postponed to the first half of 2025, resulting in reduced shipments in the second half of 2024. However, H200 UBB orders have increased significantly, with an estimated increase of 57% between the third quarter of 2024 and the first quarter of 2025.
Based on this projection, H200 revenues in H2 2024 are $23.5 billion, which should more than offset the potential $19.5 billion loss in B100 and GB200 related revenues - equivalent to 500,000 B100 GPUs or $15 billion in implied revenue losses, and an additional $4.5 billion in ancillary facility (NVL 36) revenue losses. We also see potential upside from strong H20 GPU momentum, primarily for the Chinese market, with 700,000 units potentially shipped in H2 2024 or $6.3 billion in implied revenues.
In addition, TSMC's step-by-step increase in CoWoS production capacity may also support revenue growth from the supply side.
On the customer side, U.S. hyperscale technology companies account for more than 50% of NVIDIA's data center revenue, and their recent comments indicate that NVIDIA's demand outlook will continue to increase. Goldman Sachs' forecast model shows that year-on-year growth in global cloud computing capital expenditures will reach 60% and 12% in 2024 and 2025, respectively, higher than the previous forecast (48% and 9%, respectively). But it can also be seen that this year is a big year for growth, and it is impossible to maintain the same growth level next year:
Below is a summary of recent comments from the largest technology companies regarding AI capital spending, showing their expectations for capital spending growth in 2024 and 2025:
“Alphabet: Expects to spend $12 billion or more per quarter in capital expenditures through the remainder of 2024, for total spending that could reach $12 billion to $13.5 billion.
Microsoft: Capital expenditures are expected to be higher in 2025 than in 2024 to meet growth demand for its AI and cloud products.
Capital expenditures are expected to increase quarterly to meet cloud computing and AI demands that currently exceed Microsoft's capacity.
In particular, capacity constraints in Azure cloud services for AI are expected to continue until the first half of fiscal 2025.
Meta: Raised its 2024 capital spending outlook to between $37 billion and $40 billion from its previous range of $35 billion to $40 billion.
Significant capital expenditure increases are expected in 2025 as companies plan investments to support their AI research and product development efforts.
Amazon: Capital expenditures are expected to be higher in the second half of 2025.
The majority of capital expenditures will be used to support the company’s growing demand for both generative AI and non-generative AI workloads.”
3. The extent of the slowdown in momentum
In addition to the slowdown in spending growth among large companies next year, NV's performance growth will also slow further.
The market consensus expects revenue in fiscal year 2025 to be $105.6 billion, compared with $60.9 billion last year, and the growth rate has slowed from 126% last year to 73%. The official guidance Q2 revenue is $28 billion, and the market expects it to be more optimistic, but the growth rate of performance this quarter will further slow from the 2x% growth rate range to the 1x% growth rate range:
It is important to note that there are more and more players in the AI market: AMD's MI300X chip is said to be superior to Nvidia in some aspects. Cerebras has launched chips with whole-wafer architecture, which significantly reduces interconnection and network costs and power consumption. In addition, major technology companies including Google, Amazon and Microsoft are developing their own AI chips. These may reduce dependence on Nvidia products in the future.
However, there are not enough cases to support this concern, and Wall Street still expects Nvidia to maintain its dominance in data center chips:
4. Focus on China
NVIDIA's demand trends in China will also be a focus in the upcoming earnings outlook, especially as the market expects increased demand in H20. Pay attention to the following information in the earnings conference call:
· How customer interest has changed since the launch of H20.
The company’s competitiveness against domestic competitors (mainly Huawei).
· The launch schedule of B20 (a watered-down version of Blackwell) in 2025.
5. Changes in product lines
Due to the unprecedented production complexity faced by TSMC chip packaging (CoWoS-L vs. traditional CoWoS-S) and ARM-based Grace CPUs (compared to traditional x86 CPUs), it is possible to reduce the number of high-bandwidth memory stacks to reduce packaging complexity (allowing the use of traditional CoWoS-S instead of CoWoS-L). For example, the new NVIDIA products B200A and GB200A Ultra may use the old CoWoS-S packaging. The changes in technical specifications and cooling methods of the new products make it difficult for NVDA to maintain its previous high pricing power in the market:
1. Technical Specifications: The new A-series GPUs have reduced performance compared to the standard B100 and B200 GPUs. Lower performance means that the market will also expect lower prices for these new products. As a result, the average selling price (ASP) of the B200A is expected to be between $25,000 and $30,000, while the ASP of the previous B100 and B200 GPUs was between $35,000 and $40,000. This reduction in specifications and performance directly leads to a reduction in pricing power.
2. Cooling method: It is expected that the upcoming GB200A Ultra NVL36 rack solution will use air cooling instead of a complex liquid cooling system. This change may result in lower comprehensive revenue compared to the previous GB200 NVL36 and NVL72 racks.
This could have an uncertain impact on performance. On the one hand, it could be good for revenue, but on the other hand, it could reduce NVDA's pricing power because its own product lines would be competing with each other.
6. Stock price fluctuations
Due to the delay of Blackwell, slight challenges to the AI narrative, and the overall market correction, Nvidia once fell 30% from its peak, but investors bought on dips, causing the stock price to rebound by another 30%. Its current market value of US$3.18 trillion ranks second in the world, only 7% away from its historical high.
NVDA's current valuation level is basically at the median level of the past three years, neither high nor low.
Compared with its competitors, NVDA's P/E ratio is definitely not low, reaching 47.6 times. However, since it still maintains a high growth expectation, the so-called PEG ratio, which is the result of dividing the P/E ratio by the growth rate, is still one of the lowest levels among its peers:
7. Bull-Bear Hypothesis
The AI narrative encountered some challenges in the first two months, mainly from the perspective of the possible low contribution to corporate revenue. Based on this pessimistic assumption, that the investment boom in AI is a one-off, NVIDIA's data center business may quickly return to the trend level before 2023.
That is, we assume that data center revenue will decline to $69 billion in 2025, 38% lower than the current level and 55% lower than the baseline expectation, as the assumption of the "most pessimistic" scenario. Then, we assume that data center revenue growth will reach 100% in 2025 as the most optimistic assumption.
Goldman Sachs' stock price change forecast under this bull-bear scenario is:
Based on the current share price of $124.58 and the baseline expected share price of $135, Bull #1 and Bull #2 will rise by 41% and 89% respectively, while Bear #1 and Bear #2 will fall by 61% and 26% respectively. That is, at the current price level, NVDA's potential return is still less than the risk.
8. Summary: Trend slows down, but remains optimistic
NVDA’s valuation is currently in a neutral range, and its performance remains satisfactory, but the market’s most FOMO period has passed, and its performance growth rate has entered a downward channel. It is obviously difficult for NVDA’s price to replicate the 10-100 increase of that year.
The biggest risk is that the AI narrative is falsified, but as long as this matter does not continue to ferment, the negative impact on NVDA's performance is more of a mood swing. Other negatives come more from macro interest rates and geopolitical uncertainties. For example, the U.S. Department of Commerce will conduct an annual review of semiconductor export restrictions in October, which may prohibit the export of the "special version" H20 chip that has weakened performance, and even affect the difficulty of obtaining the "castrated version" B20.
Uncertainties in the market may bring some stock price fluctuations, and valuation multiples may also shrink, but we can still remain optimistic at this stage because the problems are mainly concentrated in the supply chain rather than demand. These supply chain problems can be solved and will not fundamentally undermine NVIDIA's long-term growth momentum. The company will remain attractive in the next few years. For example, there has been a 30% rebound in just a few days recently, which shows the market's enthusiasm for buy the dips.
In particular, the outlook for AI demand may still be early, with Meta's next-generation Llama 4 large language model expected to run 10 times more compute than Llama 3.1, suggesting that the long-term outlook for AI computing chip demand may exceed our expectations.
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