Day: September 21, 2024

• Stifel warns of a sharp stock market correction by year-end, with the S&P 500 potentially dropping 12%.

• Chief equity strategist Barry Bannister said high valuations and speculative investor behavior are a concern.

• “Our instruments tell us to expect an S&P 500 correction to the very low 5,000s by 4Q24,” Bannister said.

Investors should prepare for a sharp and quick correction in the stock market before the end of the year, according to Stifel.

In a note on Thursday, chief equity strategist Barry Bannister of Stifel warned that the S&P 500 could trade 12% lower in the fourth quarter.

“Our instruments tell us to expect an S&P 500 correction to the very low 5,000s by 4Q24,” Bannister said.

According to Bannister, there are a number of factors that are giving him cause for concern, including the idea that investors are exhibiting the type of behavior that is present during bubbles and manias.

“Just as countries that go rogue become almost un-investable, investors caught in the grips of a speculative fever become almost un-analyzable,” Bannister said.

For one, Bannister is concerned about current stock market valuations, which are approaching a “near three-generation high” based on the S&P 500’s price-to-earnings multiple of around 24x.

In addition, the sharp outperformance of large-cap growth stocks relative to value stocks is approaching the same peak seen in February 2000 and August 2020, which both served as a warning of an imminent bear market.

On the labor front, while Bannister admits that rising labor supply via increased immigration has supported economic growth, with US GDP growing at a rate above pre-pandemic trend levels, overall labor demand has been fading.

“Fading labor demand is now symbolic of recession risk,” Bannister said.

Bannister highlighted that the non-farm payroll 6-month diffusion index just crossed below a “recession trigger level.”

The diffusion index helps measure the breadth of job gains or losses across all economic industries.

Shifting to the election in November, Bannister said the typical “pre-election juice” for the economy is likely to fade towards the end of the year, as election promises from both sides of the aisle retreat and reality sets in that it’s hard to pass significant legislation in what could be a divided government.

“Pre-election juice for the economy may recede at year-end, causing stocks (which anticipate the future) to dip ~4 months in advance, and that is 4Q24E,” Bannister explained.

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Finally, Bannister said that many investors are not appreciating the risks of a bubble in technology stocks, akin to what happened during the dot-com craze nearly 25 years ago.

“It takes one generation to forget the dangers of a bubble, and it is Groundhog Day versus the 1990s Tech Bubble; in reality ‘new tech’ isn’t even ‘new’ and today’s low Equity Risk Premium appears to us to lock-in a weak S&P 500 next-10-year compound annual real total return close to 3% real and 6% nominal,” Bannister said.

Read the original article on Business Insider

Key Takeaways

• A late-Friday report that Qualcomm recently made a “takeover approach” to Intel sent the latter company’s shares higher.

• Investors in Intel have read a raft of reports about possible M&A activity this week, with the company seemingly taking some options off the table.

• Intel shares have lost more than half their value since the start of the year amid concerns about the chipmaker’s ability to turn around the business.

Shares of chipmaker Intel (INTC) popped in extended trading Friday, pulled higher by a report that Qualcomm (QCOM) had made a “takeover approach.”

The story in The Wall Street Journal, citing people familiar with the matter, said Qualcomm recently made a takeover approach to Intel. The news sent Intel’s stock up about 4%. Qualcomm’s was little changed, after falling close to 3% in the regular session.

Investors have in recent weeks considered a raft of stories about possible deal activity involving Intel, with Wall Street looking for signs that the company might be on a path to raising fresh capital or shoring up its businesses. The company this week, meanwhile, updated investors about its strategic plans and said a sale of its stake in Mobileye (MBLY) was off the table.

Qualcomm had been cited in some of those Intel reports. A takeover, however, would be particularly dramatic: Intel’s market capitalization was recently about $90 billion.

Intel’s shares are down more than 50% in 2024.

Read the original article on Investopedia.

There’s no denying that artificial intelligence (AI) has generated a lot of buzz since early last year. Recent technological advances have taken these algorithms to the next level, enabling them to generate original content of all stripes, improve productivity, and streamline processes.

Companies on the leading edge of this trend have profited from these advances in technology. In fact, six of the world’s seven most valuable companies, when measured by market cap, have embraced the paradigm shift of generative AI and staked their claims to profits from these next-generation systems. Topping the charts are Apple and Microsoft, the only two companies that currently boast a market cap of more than $3 trillion.

However, one company that appears ordained to make a name for itself as a founding member of the $10 trillion club is Nvidia (NASDAQ: NVDA). The pioneer in graphics processing units (GPUs) is nipping at the heels of the current leaders with a market cap of $2.8 trillion but seems destined to break new ground.

Let’s look at the numerous growth drivers that could send Nvidia stock to new heights.

Shall we play a game?

Nvidia revolutionized gaming a quarter of a century ago when the company pioneered the GPU, which produced lifelike images in video games. The secret to its success is parallel processing, or the ability of these advanced chips to process a multitude of mathematical calculations simultaneously. It wasn’t long before Nvidia realized the vast potential of this discovery and pivoted to tailor this technology to a host of other applications.

The company has since adapted GPUs to power cloud computing, data centers, machine learning, autonomous driving, generative AI, and more.

The tale of the tape

Over the past 10 years, Nvidia’s revenue has grown by 2,350% (as of this writing), while its net income has surged 9,490%. While it hasn’t all been in a straight line, the company’s consistently strong performance has driven impressive growth in its stock price, which has soared 23,110%.

In its fiscal 2025 second quarter (ended July 28), Nvidia delivered record revenue of $30 billion, up 122% year over year and 15% sequentially. This drove diluted earnings per share (EPS) of $0.67 up 168%. The star of the show was the data center segment, which includes processors used for cloud computing, data centers, and — of course — AI. Revenue for the segment surged 154% to $26.3 billion, driven by insatiable demand for AI.

There’s likely much more demand ahead. Analysts at Goldman Sachs Research estimate the economic impact of AI at $7 trillion by 2030. Furthermore, the improving macroeconomic backdrop could help accelerate adoption, which would be a boon to Nvidia.

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Not a one-trick pony

There’s no question that AI is currently Nvidia’s biggest opportunity, but it’s far from the only one.

Let’s not forget that, until recently, GPUs for gaming were the company’s cash cow, while AI played second fiddle. During the economic downturn, many gamers made do with their existing processors, waiting for the specter of inflation to subside. As the economic outlook continues to improve and graphics cards come to the end of their useful lives, there’s plenty of pent-up demand that could fuel a long overdue upgrade cycle, and Nvidia stands to benefit the most.

In the first quarter, Nvidia controlled 88% of the discrete desktop GPU market, according to Jon Peddie Research. Furthermore, demand is expected to soar over the coming five years, jumping from $3.6 billion in 2024 to $15.7 billion by 2029, a compound annual growth rate (CAGR) of 34%, according to Mordor Intelligence. The market for gaming processors is ripe for a recovery, a trend that benefits Nvidia.

There’s also the data center market, which will be driven by the growing adoption of cloud computing. Many businesses are moving their data to the cloud, foregoing on-site storage, another trend that favors Nvidia. It controls an estimated 95% of the data center GPU market, according to Angelo Zino, senior equity analyst at CFRA Research.

It’s estimated that the data center market will climb from $302 billion in 2024 to $622 billion by 2030, a compound annual growth rate of 10%, according to data provided by Prescient and Strategic Intelligence Market Research.

Nvidia’s supremacy and the growing market puts the company in the pole position of another opportunity. Generative AI isn’t the only game in town. The company has a virtual monopoly in the machine learning market, an established branch of AI. The company controls an estimated 95% share of that market, according to New Street Research.

There are other areas that aren’t material to Nvidia’s growth but could eventually make a meaningful contribution. Self-driving cars aren’t yet ready for prime time, and quantum computing is still largely experimental, but either could be a catalyst for the next stage of Nvidia’s growth.

This helps illustrate the point that while generative AI is at the heart of Nvidia’s recent run-up, other opportunities abound.

The path to $10 trillion

Nvidia currently sports a market cap of roughly $2.78 trillion, which means it will take stock-price gains of 260% to drive its value to $10 trillion. According to Wall Street, Nvidia is poised to generate revenue of nearly $113 billion in fiscal 2025, giving it a forward price-to-sales ratio (P/S) of roughly 24.7. Assuming its P/S remains constant, Nvidia would need to grow its revenue to roughly $405 billion annually to support a $10 trillion market cap.

Wall Street is currently forecasting revenue growth for Nvidia of 47% annually over the next five years. If the company reaches that watermark, it could achieve a $10 trillion market cap as soon as 2029. But don’t take my word for it. Beth Kindig, CEO and lead tech analyst of the I/O Fund, has an estimate that’s eerily similar:

Given the company’s multiple avenues for growth and the accelerating adoption of AI, I think Kindig hit the nail on the head.

There’s a caveat, of course. Given Nvidia’s parabolic rise since early last year, any weakness by the company — real or perceived — could crush the stock price, at least temporarily. We’ve seen an example just recently when Nvidia lost nearly a quarter of its value over six weeks between June and July, as investors became skittish about rumors of a delay in the release of its next-generation Blackwell platform.

That said, I would submit that 36 times forward earnings is a reasonable price to pay for a company at the cutting edge of one of the biggest paradigm shifts in technology in a generation.

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Danny Vena has positions in Apple, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Apple, Goldman Sachs Group, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Meet the Supercharged Growth Stock Headed to $10 Trillion by 2030, According to 1 Wall Street Analyst was originally published by The Motley Fool