Although Wall Street’s major stock indexes don’t move higher in a straight line, there’s been no question that the bulls have been in firm control since the start of 2023.

Over a nearly 20-month stretch, the ageless Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and growth-powered Nasdaq Composite (NASDAQINDEX: ^IXIC) have respectively increased in value by 23%, 45%, and 68%, as well as surpassed their previous all-time highs on a multitude of occasions.

However, the party on Wall Street may be coming to a close. Even though investors were able to shrug off a 1,400-point, three-session plunge in the Nasdaq Composite to begin August, one predictive indicator, with a virtually flawless track record dating back to 1959, foreshadows trouble for the U.S. economy, as well as stocks.

This forecasting tool hasn’t been wrong in 58 years

Let me preface this discussion by pointing out that there is no such thing as a perfect predictive tool or metric. If there were a metric that could, with 100% accuracy, forecast short-term directional moves for stocks, every single professional and retail investor would be using it.

There are, however, a few economic data points and predictive metrics that have previously correlated very closely with big moves in the stock market’s major indexes. It’s these tools that investors are leaning on with the hope of gaining an edge in determining what comes next for Wall Street.

Recently, I’ve examined a number of these metrics and events that strongly correlate with moves lower in the Dow Jones, S&P 500, and Nasdaq Composite and/or portend trouble for the U.S. economy. This includes the first notable decline in U.S. M2 money supply since the Great Depression, one of the priciest S&P 500 Shiller price-to-earnings readings since the early 1870s, as well as the historic performance of stocks following the kickoff to a Federal Reserve rate-easing cycle. The nation’s central bank is expected to begin easing rates next month.

But it’s the Federal Reserve Bank of New York’s recession probability indicator that might be the most damning of them all.

The NY Fed’s recession tool measures the likelihood of a U.S. recession taking place over the next 12 months by examining the spread (i.e., difference in yield) between the 10-year Treasury bond and three-month Treasury bill.

When the U.S. economy is strong and investors are optimistic, the Treasury yield curve slopes up and to the right. This is to say that bonds set to mature in 10 or 30 years will have higher yields than Treasury bills that’ll mature in a year or less. It’s normal to receive a higher yield when your capital is tied up for a longer period of time.

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Conversely, when there are concerns about the health of the U.S. economy, we see the yield curve invert, with short-term T-bills sporting higher yields than long-term T-bonds. Although not every yield-curve inversion means a U.S. recession is imminent, every U.S. recession since World War II has been preceded by a yield-curve inversion.

As you can see from the latest monthly update of the NY Fed’s recession-forecasting model, which highlights the longest continuous yield-curve inversion in history, there’s a 56.29% chance of a U.S. recession taking shape by July 2025.

Since 1959, there’s only been one instance (October 1966) where the probability of a U.S. recession surpassed 32% and an official economic contraction, as declared by the National Bureau of Economic Research (NBER), didn’t take place. In other words, a recession probability of 32% or greater over the last 58 years has, without fail, signaled a coming recession for the U.S. economy.

Although the economy and stock market aren’t tethered at the hip, the overall health of the economy does matter for corporate America. If the U.S. economy weakens and unemployment rises, it’s almost a lock to adversely impact corporate earnings.

Data collected and analyzed by Bank of America Global Research finds that approximately two-thirds of the S&P 500’s peak-to-trough drawdowns occur after, not prior to, a recession being declared by the NBER. With a key recession ingredient firmly in place, the implication is that stocks could head meaningfully lower — i.e., into a bear market — in the foreseeable future.

Patience isn’t just a virtue — it’s a necessary ingredient to success on Wall Street

As much as investors might dislike U.S. recessions and stock market corrections/bear markets, they’re normal and inevitable aspects of the economic and investing cycle.

But if you take a step back, widen your lens, and allow patience and perspective to be your guides, you’ll see that these occasional moments of panic and disappointment serve as opportunities for long-term-minded investors to take advantage of potential price dislocations in time-tested businesses on Wall Street.

The key thing to understand about the economic cycle is that it isn’t linear. While recessions may be inevitable, nine of the 12 official downturns since the end of World War II were resolved in under a year. Comparatively, almost every economic expansion has stuck around for multiple years, including two growth spurts that surpassed the decade mark. Betting on the U.S. economy to expand over time has unquestionably been the smarter move, even with the occasional recession sprinkled in.

The nonlinear nature of economic cycles also translates to Wall Street’s major stock indexes.

In June 2023, the researchers at Bespoke Investment Group posted a dataset to X (the social media platform formerly known as Twitter) that examined the calendar length of every bear and bull market in the broad-based S&P 500, dating back to the start of the Great Depression in September 1929.

Over a 94-year stretch, the average length of the 27 recorded S&P 500 bear markets was just 286 calendar days, or about 9.5 months. On the other hand, the typical S&P 500 bull market was 1,011 calendar days long, equating to roughly two years and nine months.

You’ll also note that the lengthiest bear market in the S&P 500’s history, which occurred between January 1973 and October 1974, is still shorter than 13 out of the 27 S&P 500 bull markets since September 1929.

At the end of the day, we’re never going to be able to precisely forecast when a correction or bear market will begin, how long it’ll last, or where the ultimate bottom will be. But history does conclusively point to patience and perspective being powerful tools for investors that can help them navigate whatever short-term turbulence or uncertainty Wall Street or the U.S. economy throws their way.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $19,939!*

• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $42,912!*

• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $370,348!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of August 22, 2024

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America. The Motley Fool has a disclosure policy.

Are a Recession and Bear Market Imminent? A Virtually Flawless Predictive Indicator Weighs In. was originally published by The Motley Fool

What comes to mind when I mention Nasdaq stocks? I doubt many thought of ultra-high-yield dividend stocks. On the other hand, I suspect high-flying tech stocks were front and center in the thoughts of many readers.

The reality, though, is that the Nasdaq is chock-full of both high-flying tech stocks and stocks that offer exceptionally juicy dividends. Should you buy the three highest-paying dividend stocks in the Nasdaq? Here they are.

1. B. Riley Financial

B. Riley Financial (NASDAQ: RILY) is a Los Angeles-based financial services company. It focuses on investing in and acquiring companies. B. Riley also operates subsidiaries that provide asset management, brokerage, direct lending, investment banking, wealth management, and other services.

The company’s forward dividend yield stands at nearly 33%. Why is B. Riley’s yield so high? Mainly because the stock has plunged more than 70% so far this year.

B. Riley’s troubles largely stem from a federal investigation of a hedge fund operated by Brian Kahn, a business partner of the company’s founder and CEO, Bryant Riley. The hedge fund lost hundreds of millions of dollars for investors. Earlier this month, B. Riley received a federal subpoena from the U.S. Securities and Exchange Commission (SEC) related to the investigation of Kahn.

It hasn’t helped matters that B. Riley posted a net loss of $5.1 million in the first quarter of 2024. The company also delayed submitting its second-quarter filing to the SEC. It said the filing couldn’t be made on time “primarily due to delays experienced in finalizing the valuations of certain of the Company’s loans and investments for the quarter ended June 30, 2024.”

2. Icahn Enterprises LP

Icahn Enterprises LP (NASDAQ: IEP) is a master limited partnership (MLP) founded by billionaire Carl Icahn. It’s a holding company that owns businesses in the automotive, food-packaging, energy, home fashion, pharmaceutical, and real estate industries.

The MLP’s forward dividend yield tops 25%. Unlike B. Riley, Icahn Enterprises’ ultra-high yield isn’t due to a collapse in its share price. The stock is down year to date, but not by a huge percentage.

However, Icahn Enterprises was up by more than 25% early in 2024. The company’s announcement of a $411 million decrease in net asset value (NAV) on Feb. 21 caused some unitholders to panic. This significant reduction in NAV stemmed largely from the underperformance of Icahn Enterprises’ investments.

3. Service Properties Trust

Service Properties Trust (NASDAQ: SVC) is a real estate investment trust (REIT) that owns 220 hotels in the U.S., Canada, and Puerto Rico. The REIT also owns 749 retail properties across the U.S., including department stores, restaurants, and truck stops.

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REITs must return at least 90% of their income to shareholders as dividends. Service Properties Trust pays a quarterly dividend of $0.20 per share, which translates to a forward dividend yield of over 18%.

Why is Service Properties Trust’s dividend yield so high? Partially because its stock has plummeted nearly 50% year to date. The REIT continues to post hefty net losses. Its funds from operations (FFO) have also declined significantly year over year.

Are these highest-yielding Nasdaq stocks buys?

Investors should be leery of all three of these stocks, in my view. While their yields are tempting, I think these temptations should be avoided.

B. Riley Financial is the most worrisome of the group because of the SEC investigation. Perhaps everything will work out fine for the company. However, until the dark cloud passes, staying on the sidelines with this stock seems to be the smartest move.

Which is the most likely to rebound? I’d go with Service Properties Trust. The REIT should benefit if the Fed cuts interest rates in September. Its diversified lease portfolio also lowers risks to some extent.

Should you invest $1,000 in B. Riley Financial right now?

Before you buy stock in B. Riley Financial, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and B. Riley Financial wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $792,725!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of August 22, 2024

Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.

Should You Buy the 3 Highest-Paying Dividend Stocks in the Nasdaq? was originally published by The Motley Fool

It’s difficult to believe it’s been about 16 years since the Great Recession that nearly brought the automotive industry to its knees. It was a massive wake-up call, and executives at Ford Motor Company (NYSE: F) and General Motors (NYSE: GM) drastically adjusted their organizations and strategies from top to bottom.

While Ford was lauded for how it funded its way through the rough times, and the company has done so much correctly over the years, it could be about to make the same mistake that got it into trouble years ago.

More affordable, less desirable

Over the past few years, Ford did something that was considered controversial when it phased out all passenger cars other than the Mustang in North America, its primary profit engine. The idea was simple: Trucks and SUVs only cost marginally more to produce than passenger cars and can sell for two or three times as much.

You don’t have to be a finance major to figure out that math, and neither did Ford. The margins on SUVs and trucks keep the lights on and the profits rolling. So, here’s the rub: At a time when the automotive industry is in overdrive on transitioning to electric vehicles (EVs), Ford is refocusing on delivering a low-cost and highly affordable EV platform with a price target of $25,000.

The problem is that bigger vehicles require larger batteries, which are generally the highest-cost component of the vehicle. For now, that means some of those delicious margins are deteriorating — and amid a race to more affordable EVs to attract a mainstream consumer, Ford’s Model-e division is drowning and is projected to lose as much as $5.5 billion in 2024 alone.

As Ford reverses its vehicle strategy — at least as far as EVs go — not only will it cost a pretty penny to adjust, it could be a repeat of all those years ago when the company failed to generate profits on passenger cars.

What’s Ford doing?

Ford announced this week that it’s canceling plans for three-row electric crossovers entirely, and delaying its full-size electric pickup by 18 months as it pulls back on billions in EV spending to help curb losses. It’s a move that could cost up to $1.9 billion, including a $400 million noncash charge. EVs will now account for 30% of Ford’s capital expenditure, down from a planned 40%.

Ford finds itself between a rock and a hard place. It could ignore EVs until costs come down and be ostracized for arrogance and a lack of vision for the future — similar to when foreign automakers introduced more fuel-efficient vehicles into the U.S. market. Or, the company can suffer losses with EVs with an eye on the future, and subsidize EV development with its traditional lineup of gasoline-powered SUVs and trucks.

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The iconic Detroit automaker has chosen the latter, but the risk for investors is that the longtime gravy train of juicy SUV and truck margins will never be the same once the transition to EVs gains massive traction. That’s a major problem for a company that in recent years has produced record profits and gained zero traction with a lagging stock price.

What’s an investor to do?

For Ford, delaying some of its EV projects, and replacing EVs with its massively popular and lucrative Super Duty trucks at its Canada plant, is the right move. But for investors, it’s imperative for the automaker to prove a checklist of things before it can be considered a long-term holding.

Ford must prove it can curb losses from the profit black hole that its EV division currently is. It also must prove it can develop a low-cost EV platform and make money on the vehicles — or get close to breakeven, as EVs at that price point may always be a money loser. Then it must prove the juicy margins on SUVs and trucks can exist as battery costs are reduced. And then, perhaps most importantly, it must prove it can take those low-cost EV customers and step them into the more profitable vehicles.

As the world transitions to EVs, it’s clear the company can’t operate the way it did recently when it phased out nearly all passenger cars. But if it can’t generate profits on those affordable EVs, it could be déjà vu all over again. Investors would be wise to keep track of those boxes Ford needs to check before buying shares for the long haul. Ford’s entire investing thesis is changing.

Should you invest $1,000 in Ford Motor Company right now?

Before you buy stock in Ford Motor Company, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Ford Motor Company wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $792,725!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of August 22, 2024

Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.

Déjà Vu: Is Ford Repeating One of Its Biggest Mistakes? was originally published by The Motley Fool

Warren Buffett hasn’t seen a lot to like in the stock market recently. He’s sold more stock than he bought for Berkshire Hathaway‘s (NYSE: BRK.A) (NYSE: BRK.B) equity portfolio in each of the last seven quarters. But last quarter Buffett made his biggest stock sale in the history of the company.

Berkshire unloaded 389,368,450 shares of Apple (NASDAQ: AAPL). Those shares are valued around $88 billion at the time of this writing. Berkshire received less for the shares as Apple traded below its current level throughout the second quarter.

That makes the third straight quarter Buffett sold shares of Apple, but last quarter’s sale was by far the largest. He sold 10 million shares in the fourth quarter followed by 116 million shares in the first quarter, and the 389 million in the second quarter.

At Berkshire’s most recent shareholder meeting, Buffett said the sales of highly appreciated assets like its Apple investment take advantage of the current tax code. Still, the tax bill will be quite hefty for Berkshire this year.

Here’s how big the tax bill could be

Apple shares traded between $165 and $216 during the second quarter. The average closing share price during the period was $186.49. If we assume Buffett received the average share price on the sale, just so we can do some that, that would be proceeds of $72.6 billion.

Berkshire accumulated the bulk of its Apple position between 2016 and 2018, paying an estimated $36.51 per share on a split-adjusted basis. If every single share sold last quarter came from that lot of purchases and sold at the Q2 average, Berkshire Hathaway would have produced a gain around $150 per share for the 389 million shares sold. That’s a $58.4 billion gain.

Berkshire also sold a big chunk of Apple shares in the first quarter, when the stock traded for an average price of $181.83. The estimated gain on that sale is $16.9 billion. That would be a total gain of $75 billion on Apple stock sales alone, and we’re only halfway through the year.

Using these calculations, at the current federal corporate tax rate of 21%, Berkshire would have to pay Uncle Sam about $15.8 billion out of the proceeds from the stock sale. Nebraska currently charges a corporate tax rate of 6.5%, so Berkshire will have to pay its state government an additional $4.9 billion.

That said, the current tax code saved Berkshire shareholders a lot of money compared to several years ago. The 2017 tax cuts lowered the corporate tax rate from 35% to 21%. Under the old law, Buffett’s sale would’ve cost an additional $10.5 billion. President Joe Biden has proposed a 28% corporate tax rate to go into effect when the 2017 tax cuts expire after next year.

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How will a massive tax bill impact Berkshire shareholders?

Berkshire Hathaway shareholders may be wondering how this tax expense will impact the company’s earnings. The good news for investors is that Berkshire accounts for its tax liability on unrealized capital gains each quarter as a deferred tax expense. In other words, the bulk of the tax on Apple’s gains has probably already been accounted for during previous quarters’ earnings reports. That’s why investors didn’t see a sudden surge in tax expenses on Berkshire’s second-quarter report.

As a result, earnings won’t be affected by the stock sale (other than the missed earnings from any continued rise of Apple’s shares). That said, the sale will result in a real cash expenditure, which management warns will impact cash flows. “Operating cash flows over the remainder of 2024 will be reduced by significant income tax payments derived from taxable gains on disposals of equity securities,” management wrote in its second-quarter earnings release.

Despite the hefty tax bill, Berkshire has more than enough cash on hand to pay the government. As of the end of June, it held $277 billion in cash and short-term Treasury bills. A measly $20.7 billion in taxes won’t change the fact that Buffett has more cash than he has good investment options for Berkshire.

Should you invest $1,000 in Berkshire Hathaway right now?

Before you buy stock in Berkshire Hathaway, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Berkshire Hathaway wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $792,725!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of August 22, 2024

Adam Levy has positions in Apple. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool has a disclosure policy.

Warren Buffett Just Made His Biggest Stock Sale Ever. Here’s What the Tax Bill Could Be. was originally published by The Motley Fool

With $1.4 million in your IRA at age 65, you have a robust nest egg that could potentially fund a secure retirement of 25 years or more. However, making sure that money lasts will require prudent planning. You’ll need to assess your income needs, balance investment risk and return, secure supplemental insured income streams, account for required minimum distributions (RMDs) and their tax impact, and thoughtfully tune withdrawal rates for sustainability. But you don’t have to go it alone. A financial advisor can help you plan for retirement and manage your nest egg.

Retirement Funding Primer

One way to increase the chances that your savings will endure an extended retirement is to use a safe withdrawal rate. The 4% rule, for instance, suggests limiting annual withdrawals to about 4% of total savings in your first year of retirement and then adjusting withdrawals in subsequent years for inflation.

For example, if you retire this year with $1.4 million in an IRA, you would withdraw 4% or $56,000. Your withdrawal next year would account for inflation – say 2.5% – meaning you would withdraw $57,400. Conservative analyses indicate that using this rule will allow your savings to last for 30 years or more and provide for increasing income to accommodate inflation.

Though the 4% rule is a commonly referenced rule of thumb, critics contend that it’s overly simplistic and doesn’t account for evolving income needs. Your specific situation may warrant a different plan. The keys are thoughtfully balancing withdrawal rates, investment returns, taxes, inflation and your life expectancy. Investing appropriately to achieve solid returns while managing risk is also vital. A financial advisor can help you balance these different variables and estimate how much you can afford to withdraw from your savings.

Know Your Situation

Thoroughly assessing the financial landscape of your life, as well as retirement lifestyle goals can help ensure your $1.4 million IRA adequately supports your needs over the long term. To kick off this assessment, ask yourself:

• What are my basic and discretionary spending estimates?

• What large outlays might I need to make?

• What other income streams do I have?

• How risk-averse am I?

• Do I have an estate plan?

• How will RMDs and taxes impact me?

Your answers to these questions can help inform how you approach withdrawal rates, investments, insurance and contingency reserves.

Forecasting Retirement Needs

Now put some effort into budgeting your expected living expenses and accounting for any other sources of income. Social Security payments, pension benefits, annuity payments, part-time work and investment interest can all supplement your IRA withdrawals.

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After conservatively estimating these other streams of income, you may plan to use them to cover as much of your living expenses as possible. You can then use IRA withdrawals to cover any leftover costs. You may also want to build in buffers to account for market volatility and rising costs of goods and services in the future. Lastly, you’ll want to regularly review your expenses and income needs and adjust your plan accordingly.

Risk Management

Balancing investment risk across a long retirement while also addressing longevity risk is critical. You can smooth market volatility through broad diversification and holding fixed-income assets like bonds, cash and annuities in addition to equities.

You can potentially mitigate longevity risk by maintaining flexibility in your spending and withdrawal plans. Aim to be able to reduce withdrawals during extended market declines. To address other uncertainties, review your insurance needs for health, property, liability and long-term care coverage. Depending on your health, it may be particularly important to identify Medicare gaps and secure supplementary policies.

As you can see, there’s a lot to consider when planning for retirement but a financial advisor can help you navigate the process.

Accounting for RMDs

RMDs also play an important part in retirement planning. These mandatory withdrawals are dictated by the IRS starting at age 73. On a $1.4 million IRA, RMDs would likely start at nearly $53,000 annually. Failing to take your RMDs can trigger a 25% tax penalty on the amount you were supposed to withdraw, so don’t neglect this obligation.

RMDs can push you into a higher income tax bracket and significantly increase your obligation to the IRS. RMDs are taxed as ordinary income, so ensure your tax planning addresses their impact. For example, a $56,000 RMD could create a $4,736 federal tax bill in 2024 after taking the standard deduction.

Strategically using Roth conversions can reduce the size of your RMDs, or eliminate them altogether, giving you more tax flexibility in retirement. However, you’ll have to pay taxes on the money you convert, which will increase your tax liability in the year a conversion is completed. A financial advisor can help you execute a Roth conversion and even manage your IRA for you.

Bottom Line

With $1.4 million in your IRA at age 65, sustainable lifetime withdrawals are feasible if you plan well, control risk and stick to prudent withdrawal rates. Plan to pay your expected costs with other income streams first before tapping IRA funds. Model the impact of portfolio volatility, required distributions and taxes over time, adjusting asset allocations and spending downward when markets decline. Don’t forget to account for health costs and insurance needs, as well.

Retirement Planning Tips

• Social Security benefits are an important component of income planning for most people. Estimate your future benefit now with SmartAsset’s Social Security calculator.

• Consider meeting with a financial advisor to review your evolving retirement income plan and withdrawal strategy. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.

Photo credit: ©iStock.com/insta_photos, ©iStock.com/skynesher, ©iStock.com/Nutthaseth Vanchaichana

The post I’m 65 With $1.4 Million in an IRA. How Do I Make Sure This Money Lasts the Rest of My Life? appeared first on SmartReads by SmartAsset.

Microsoft (NASDAQ: MSFT) is a king of reliability, known for its consistent financial and stock growth. Over the last five years, the company’s share price has risen 200%, while free cash flow has climbed 92%.

Microsoft’s steady growth has secured it a market cap above $3 trillion, allowing it to remain in the world’s top three most valuable companies. In fact, from about February to June of this year, Microsoft temporarily surpassed Apple and Nvidia (NASDAQ: NVDA) in market cap, taking the top spot.

Market fluctuations have seen the world’s top five most valuable companies reshuffle multiple times in 2024. Even throughout August, Nvidia and Microsoft have been duking it out for second place on an almost weekly basis. Meanwhile, Amazon (NASDAQ: AMZN) appears to be on a bull run that could surpass the Windows company in the coming years.

Nvidia and Amazon have been on exciting growth paths thanks to skyrocketing earnings. These companies dominate their respective industries and are profiting from consistent investment in the lucrative artificial intelligence (AI) market.

While Microsoft is known for consistency, Nvidia and Amazon are expanding at a rate that could allow them to overtake the company. So, here are two growth stocks I predict will be worth more than Microsoft in five years.

1. Nvidia: A meteoric rise that is unlikely to slow any time soon

Nvidia’s business has delivered record growth since the start of 2023, with its stock up 779%. Its meteoric rise has seen it steadily climb through the ranks of the world’s most valuable companies, as seen in the chart below.

As of this writing, Nvidia’s market cap is above Microsoft’s. Their positions switched multiple times this month, suggesting could swap again by the time you read this. However, Nvidia is included in this list as I’d argue that it will have surpassed Microsoft for good and gained a solid lead within the next five years.

Nvidia massively outperformed Microsoft in 2024, with its stock up 159% compared to Microsoft’s 10% rise. Meanwhile, Nvidia’s quarterly revenue is up 18% year to date, with Microsoft’s up 4%. At this rate, Nvidia could even secure its spot ahead of Microsoft much sooner than five years.

Nvidia’s stellar gains are primarily thanks to its dominance in AI. The company is responsible for between 70% and 95% of all AI graphics processing units (GPUs), the chips necessary for training AI models. Competitors like Advanced Micro Devices and Intel are working to catch up, launching rival GPUs this year. However, Nvidia’s head start and $39 billion in free cash flow (compared to AMD’s $1 billion and Intel’s negative $13 billion) suggests it won’t have too much trouble maintaining its lead.

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In AI, Microsoft has a prominent role in cloud computing. However, fellow cloud giants Amazon and Alphabet are much closer competitors than Nvidia’s rivals in the GPU market.

Nvidia will report its second quarter of fiscal 2025 earnings on Aug. 28. After over a year of beating quarterly earnings, the company will likely continue recent trends and deliver another quarter of impressive growth. Its stock could soar, furthering its lead on Microsoft.

2. Amazon: Soaring earnings and the cash to surpass its rivals

Amazon and Microsoft are in steep competition in the cloud industry. As of Q2 2024, Amazon Web Services (AWS) cloud market share stood at 31%, while Microsoft Azure’s was at 25%. However, Amazon ramped up its cloud investment over the last year, which could allow it to hold onto its lead in the industry and eventually push its market cap above Microsoft’s.

Amazon consistently outperformed Microsoft over the last year. Solid growth in retail and AWS has seen Amazon’s profits soar, allowing it to sink billions into its AI efforts.

In March, Bloomberg reported that Amazon plans to spend nearly $150 billion on data centers over the next 15 years to expand AWS’ reach. The company anticipates an explosion of demand for AI applications and other digital services, requiring a more extensive cloud network. The news aligns with multiple reports in recent months that announced Amazon’s data center investment in U.S. locations including Ohio, Indiana, and Virginia, as well as international spots such as Singapore, Spain, Saudi Arabia, India, and Taiwan.

The expansion will increase Amazon’s cloud and AI capabilities. Meanwhile, a vast network will allow it to boost other areas of its business with the generative technology, such as e-commerce, grocery, digital advertising, and more.

Amazon’s market cap currently sits at $1.8 trillion. However, its earnings and stock are expanding at a rate that will likely see it overtake Microsoft in the coming years.

Should you invest $1,000 in Nvidia right now?

Before you buy stock in Nvidia, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $792,725!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of August 22, 2024

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Microsoft, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2026 $395 calls on Microsoft, short August 2024 $35 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Prediction: 2 Growth Stocks That Will Be Worth More Than Microsoft in 5 Years was originally published by The Motley Fool

A big shake-up just hit Chipotle Mexican Grill (NYSE: CMG). Longtime chief executive officer (CEO) Brian Niccol just announced a surprising departure to Starbucks. Niccol has been instrumental in delivering a turnaround for Chipotle after its foodborne illness outbreaks, leading the stock to 800% returns since joining in 2018, making it one of the best-performing stocks in the world over that time.

Leaving a company — especially for a competitor — will always upset investors. It is no surprise, then, to see Chipotle stock falling on this news. In fact, the stock has taken a 25% dive since its recent stock split in June. This is not the worst drawdown ever for Chipotle, but one of the most significant in the last 10 years. Here’s my prediction for what comes next with the Brian Niccol era over.

A surprising CEO exit

On Aug. 13, Starbucks announced it had hired Brian Niccol away from Chipotle as its CEO, effective immediately. This was a shocker for two reasons. First, Starbucks had not previously told investors it was looking for a new CEO. Second, Chipotle’s valuation was similar to that of Starbucks at the time of the announcement, with a market cap range of $75 billion to $100 billion. It also has a clearer path to store expansion and has put up much better performance over the last few years compared to the coffee giant.

So why did Niccol leave for Starbucks? We may never know the real details, but it seems like Niccol may have thought Chipotle was in a great place and was now looking for his next big project. After Niccol arrived at Chipotle in 2018, he righted the ship after the terrible foodborne illness outbreaks at its restaurants.

The stock has returned over 800% for investors since he had taken over the reins, crushing Starbucks’ returns over that same time period. Niccol may see more ways to improve the Starbucks business and feels comfortable with the culture he has built. Or, it might just be the money.

Either way, this shouldn’t be taken as a knock on Chipotle’s business. In fact, it says the opposite. Chipotle’s business has thrived over the past few years, posting positive same-store sales growth every year since Niccol took over, even during the COVID-19 pandemic. This is why the stock trades at a price-to-earnings ratio (P/E) above 50. Investors are optimistic about the future for Chipotle.

The new CEO hire is a vital decision

The new CEO hire will be a big moment for Chipotle investors. Management changes always come with uncertainty, especially with delicate operations such as restaurants. The new leader won’t be in as difficult as a spot as Niccol in 2018, with Chipotle’s business firing on all cylinders at the moment while Niccol had to rebuild the brand after the food poisonings. In fact, the biggest risk is that the new CEO changes up Chipotle’s strategy and makes things worse. You might say it is impossible to mess up its burrito and Mexican bowl formula, but you’d be surprised how often management can impair a once-loved business.

We’ve seen it happen many times before. Starbucks has struggled multiple times in the past when longtime CEO Howard Schultz left the company. Even outside the restaurant industry, Disney has gone through bouts of inconsistent managers that have hampered operations. There’s no guarantee the new CEO will break Chipotle’s momentum. But there’s no guarantee they will succeed, either. There is uncertainty today as opposed to with Niccol, who investors had high certainty was a strong leader.

CMG Revenue (TTM) data by YCharts.

What comes next for the stock?

There are three possible outcomes for Chipotle and its new CEO. Either they improve, maintain, or impair Chipotle’s restaurant operations. Given that Brian Niccol might be the best leader in the entire restaurant industry, I have doubts a new CEO can meaningfully improve Chipotle’s business can from here. It can keep growing the number of restaurants in operation (3,530 at the end of last quarter) for a long while, but there is only so much you can do to optimize the restaurant business, especially if the company has exhausted its possibilities of opening new restaurants in prime locations. It is a simple model at the end of the day.

So, Chipotle will either maintain its stellar performance or get worse under the new CEO. However, even if Chipotle maintains its excellence, I think investors should be cautious about the stock. It trades at a P/E of 53, which is around double the S&P 500 index average.

Assuming sales and net profit grow by 100% over the next five years (the former grew at the same pace over the last five years), it’s hard to argue the stock is worth owning. Assuming consistent profit margins, that would only bring down Chipotle’s P/E to 26.5, which is not cheap on a five-year forward basis.

Add it altogether, and it looks like Chipotle stock is pricing in a ton of growth and high expectations for the next few years, no matter who the CEO would be. Despite its strong historical performance, this indicates investors should stay away from buying Chipotle stock. Keep this one on the watch list for now.

Should you invest $1,000 in Chipotle Mexican Grill right now?

Before you buy stock in Chipotle Mexican Grill, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Chipotle Mexican Grill wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $792,725!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of August 22, 2024

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

Most investors have probably heard of Bill Gates, best known as a billionaire philanthropist and co-founder of Microsoft (NASDAQ: MSFT).

After heading up the technology company he founded for more than 25 years, the former CEO stepped down to focus on his charity work. Gates is worth an estimated $132.6 billion (as of this writing), according to Forbes, making him the ninth richest person in the world. However, the fabled billionaire has pledged that “the vast majority of my wealth would go toward helping as many people as possible.”

The vehicle he uses to support that goal is the Bill & Melinda Gates Foundation Trust. “Our mission is to create a world where every person has the opportunity to live a healthy, productive life,” the Gates Foundation website declares. The foundation has made grant payments of $77.6 billion since its inception, “taking on the toughest, most important problems.” As a result, holdings of the Trust tend to vary from quarter to quarter.

While the Trust continues to own stakes in more than two dozen companies, 83% of its portfolio was comprised of just four stocks at the close of the second quarter.

1. Microsoft: 33%

Of all the holdings in the Gates Trust, Microsoft is by far the largest. This shouldn’t be a surprise, given that Gates set up the foundation with his own holdings. The Trust owns roughly 35 million shares of Microsoft stock valued at $14.7 billion.

Yet this isn’t the Microsoft of old. The company has expanded beyond its browser and operating system software, with Azure Cloud becoming the fastest-growing cloud infrastructure provider. It’s up 29% year over year in the most recent quarter, outpacing both Amazon Web Services (AWS) and Alphabet‘s Google Cloud.

However, it was Microsoft’s early move into generative AI that has investors most excited. Management noted that Azure’s cloud growth included “eight points from AI services,” helping illustrate the upside. The company’s AI-powered digital assistant — Copilot — and other AI tools could generate incremental revenue of $143 billion by 2027, according to analysts at Evercore ISI.

The Trust also benefits from Microsoft’s quarterly dividend, which the company has paid out consistently since 2004 and increased every year since 2011. The current yield of 0.7% might seem inconsequential, but that’s a function of the impressive stock price gains of more than 200% over the past five years. Furthermore, with a payout ratio of less than 25%, there are likely many more dividend increases on the horizon.

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2. Berkshire Hathaway: 21%

Fellow billionaire Warren Buffett, CEO of Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), has similar plans to donate the bulk of his wealth to charity. He joined Gates in the “Giving Pledge” in 2006 and has since donated roughly $43 billion to the Trust, including a bequest of $4 billion in June. As a result, the Gates Foundation currently holds nearly 25 million Berkshire Hathaway Class B shares worth $11 billion.

Given Berkshire’s portfolio of profitable businesses and successful stock holdings, it isn’t surprising that the Trust continues to keep so much of the stock on hand. The portfolio provides built-in diversification and is expected to rake in billions in dividend income over the coming year. Furthermore, Berkshire just pared down its stock holdings and boosted its cash pile to a record high. It’s now holding roughly $277 billion in cash.

Given the company’s history of success and massive cash pile, it isn’t surprising that it’s still one of the Trust’s largest holdings.

3. Waste Management: 16%

Gates has a soft spot for boring companies with strong recurring revenue, which is the very definition of Waste Management (NYSE: WM). If you have any doubt, consider this: The Gates Trust has a stake of more than 35 million shares of Waste Management stock worth $7.3 billion.

Beyond just trash collection, Waste Management owns a number of reclamation stations that recover glass, paper, metal, and plastics and redirect them for recycling. The company also operates a number of landfills where it collects landfill gases to generate electricity and power vehicles.

In the second quarter, revenue grew 5.5% year over year, while its adjusted operating EBITDA increased 10%.

Let’s not forget the dividend. Waste Management has increased its payout for 15 consecutive years, with a current yield of 1.43%. And with a payout ratio of 46%, there’s plenty more where that came from.

4. Canadian National Railway: 13%

Another area where Gates and Buffett share common ground is enduring faith in railroads. Buffett was clear when he bought out Burlington Northern Santa Fe in 2009, saying that railroads transported goods “in a very cost-effective way… they do it in an extraordinarily environmentally friendly way… [releasing] far fewer pollutants into the atmosphere.” Gates clearly shares this mindset, as the Trust holds nearly 55 million shares of Canadian National Railway (NYSE: CNI) worth $6.2 billion.

What sets Canadian National apart is that it’s the only transcontinental railroad in North America, connecting the Atlantic coast, the Pacific coast, and the Gulf of Mexico. Regarding Buffett’s point, railroads reduce greenhouse gas emissions by 75%. This is primarily because they’re four times more efficient than long-haul trucks, making railroads a more cost-effective option. Add to that their high barriers to entry and significant economic moat, and it’s easy to understand the appeal.

Canadian National has a solid track record of dividend payments, with consecutive increases every year since it was initiated in 1996, and a current yield of 2.1%. The current payout ratio of 38% suggests there’s plenty of opportunity for future increases.

Should you invest $1,000 in Microsoft right now?

Before you buy stock in Microsoft, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Microsoft wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $792,725!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of August 22, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Alphabet, Amazon, Canadian National Railway, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Berkshire Hathaway, and Microsoft. The Motley Fool recommends Canadian National Railway and Waste Management and 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.

Billionaire Bill Gates Has 83% of His $48 Billion Portfolio in Just 4 Stocks was originally published by The Motley Fool

A version of this post was published on Tker.co. Subscribe here.

Liz Ann Sonders, chief investment strategist at Charles Schwab, compiled an outstanding list of quotes from history’s investing legends. (I recommend reading her post from start to finish.)

One quote that stuck out to me came from Edwin Lefevre, author of “Reminiscences of a Stock Operator”:

Some people try to make money trading the stock market over short-term periods. Some aim to build wealth by investing in the stock market over long, multi-year timeframes. Many do some combination of both.

All of these people seek out information and insights that might help them get an edge and improve their returns.

Unfortunately, trading tips and investment advice come with a lot of the same jargon that make it easy to confuse the two if you’re not paying careful attention.

When a markets expert starts talking, the first question you should ask is: “What is the timeframe?”

Is it one month? One year? Several years? One day?

Why? Because it’s possible that the same person who’ll tell you stocks will fall in the coming weeks will also tell you they expect prices to be higher in the coming years. In fact, I can almost guarantee you that the Wall Street strategists who expect the S&P 500 to fall this year will also tell you it’ll be much higher in three to five years.

All this relates to Step 4 of TKer’s “5-step guide to processing ambiguous news in the markets and the economy”: “Beware the motivations of those communicating the information.”

The hot shot hedge fund manager on financial TV may present a compelling, eye-catching case for why the stock market could tumble from here. However, reporters don’t always follow up and ask what to expect when you stretch the timeframe, which may be more relevant to long-term investors. This lack of temporal context is common in the news industry, which tends to focus on the recent past and the near future.

This doesn’t mean that investors should completely ignore what the pros are saying about what could happen in the coming weeks or months. While expectations for volatility in the near-term might not affect how you position your long-term investments, they can serve as valuable reminders to keep your “stock market seat belts” fastened.

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After all, the odds that stocks fall are relatively high when you look at short timeframes.

As my friend Joseph Fahmy says: “The majority of arguments on FinTwit have to do with timeframe. One person could be selling a stock because they think it will go down over the next 2 days and another could be buying because they think it will go up over the next 2 years. Don’t assume everyone trades like you.”

FinTwit, the community of people posting about finance on X, sees lots of heated bulls vs. bears debates about markets that come to no resolution. And it’s often the case that one side may be making the case for a short-term trade whereas the other side is making the case for a long-term investment — but the two sides aren’t aware of the disconnect. They’re not necessarily in disagreement; they’re just arguing about different things.

Zooming out 🔭

TKer Stock Market Truth No. 1 says: “The long game is undefeated.“ In other words, the stock market usually goes up over time.

Meanwhile, TKer Stock Market Truth No. 2 says: “You can get smoked in the short-term.” That is to say long-term investors should be prepared to experience a lot of sell-offs on the way up.

When I compiled this list of truths, I deliberately put these two next to each other because I wanted to make clear that bearish market developments can occur within a bullish long-term framework.

All of this is to say that it’s possible to be bullish and bearish simultaneously. The nuance is in the timeframe.

Related from TKer:

Reviewing the macro crosscurrents 🔀

There were a few notable data points and macroeconomic developments from last week to consider:

🏛️ “The time has come”: “The upside risks to inflation have diminished,” Fed Chair Jerome Powell said on Friday. “And the downside risks to employment have increased.”

Speaking at the Kansas City Fed’s economic symposium in Jackson Hole, Powell acknowledged how the unemployment rate had risen to 4.3% in July, saying: “We do not seek or welcome further cooling in labor market conditions.“

“The time has come for policy to adjust,” he added. “The direction of travel is clear.“

Fed watchers see this language as a signal that the central bank’s first rate cut could come as soon as its September 17-18 Federal Open Market Committee meeting.

For more on what this means and how we got here, read: Fed Chair Powell: ‘The time has come’ ⏰

🏚 Home sales rose. Sales of previously owned homes increased by 1.3% in July to an annualized rate of 3.95 million units. From NAR chief economist Lawrence Yun: “Despite the modest gain, home sales are still sluggish. But consumers are definitely seeing more choices, and affordability is improving due to lower interest rates.”

For more on housing, read: The U.S. housing market has gone cold 🥶

💸 Home prices cooled. Prices for previously owned homes declined from last month’s record levels, but they remain elevated. From the NAR: “The median existing-home price for all housing types in July was $422,600, up 4.2% from one year ago ($405,600). All four U.S. regions posted price increases.”

🏘️ New home sales rise. Sales of newly built homes jumped 10.6% in July to an annualized rate of 739,000 units.

🏠 Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.46%, down from 6.49% last week. From Freddie Mac: “Although mortgage rates have stayed relatively flat over the past couple of weeks, softer incoming economic data suggest rates will gently slope downward through the end of the year. Earlier this month, rates plunged and are now lingering just under 6.5%, which has not been enough to motivate potential homebuyers. Rates likely will need to decline another percentage point to generate buyer demand.”

There are 146 million housing units in the U.S., of which 86 million are owner-occupied and 39% of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.

For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖

⛽️ Gas prices fall. From AAA: “Reaching a price point last seen on March 6, the national average for a gallon of gas fell six cents to $3.38 since last week. According to new data from the Energy Information Administration (EIA), gas demand crept higher last week from 9.04 million b/d to 9.19. Meanwhile, total domestic gasoline stocks fell from 222.2 to 220.6 million barrels, but gasoline production increased, averaging 9.8 million daily. Mild gasoline demand, steady supply, and low oil costs may cause pump prices to slide further.”

For more on energy prices, read: Higher oil prices meant something different in the past 🛢️

🛍️ Spending behavior is normalizing. From Apollo’s Torsten Slok: “During the pandemic, households increased spending on goods because they were shopping online, and services spending was lowered because they couldn’t go to restaurants and travel. The chart below shows that consumers have significantly increased spending on services over the past two years, and the current share at 68% is now close to pre-pandemic levels. The bottom line is that we are getting to the end of the catch-up effect for companies in the consumer services industry.“

💼 Unemployment claims ticked higher. Initial claims for unemployment benefits rose to 232,000 during the week ending August 17, up from 228,000 the week prior. While this metric continues to be at levels historically associated with economic growth, recent prints have been trending higher.

For more on the labor market, read: The labor market is cooling 💼

💵 People want more money to change jobs. From the New York Fed’s July SCE Labor Market Survey: “The average reservation wage—the lowest wage respondents would be willing to accept for a new job—increased to $81,147 from $78,645 in July 2023, though it is down slightly from a series high of $81,822 in March 2024.“

For more on why wages matter right now, read: Revisiting the key chart to watch amid the Fed’s war on inflation 📈

🌎 Immigration has helped boost growth. From Barclays: “Almost half a million people immigrated into the US in December, a record that was just the latest in a series of elevated inflows stretching back to spring 2022. While the surge has caused a public backlash and prompted political measures to curtail it, immigration has helped boost economic growth. It has helped relieve post-pandemic labor shortages and has been one of the factors behind the strength of the US economy. … Immigrants likely contributed nearly a third of economic growth. We estimate that new immigrants accounted for three quarters of the increase in private payroll employment over the past year. Their contribution of additional hours worked to output growth more than offset a drag from US-born workers.“

🐢 Survey signals growth, but cooling growth. From S&P Global’s August Flash U.S. PMI: “The solid growth picture in August points to robust GDP growth in excess of 2% annualized in the third quarter, which should help allay near-term recession fears. Similarly, the fall in selling price inflation to a level close to the pre-pandemic average signals a ‘normalization’ of inflation and adds to the case for lower interest rates.”

Keep in mind that during times of perceived stress, soft data tends to be more exaggerated than actual hard data.

For more on this, read: What businesses do > what businesses say 🙊

🇺🇸 Most U.S. states are still growing. From the Philly Fed’s July State Coincident Indexes report: “Over the past three months, the indexes increased in 36 states, decreased in 13 states, and remained stable in one, for a three-month diffusion index of 46. Additionally, in the past month, the indexes increased in 26 states, decreased in 17 states, and remained stable in seven, for a one-month diffusion index of 18.”

For more on economic growth, read: Economic growth: Slowdown, recession, or something else? 🇺🇸

Putting it all together 🤔

We continue to get evidence that we are experiencing a bullish “Goldilocks” soft landing scenario where inflation cools to manageable levels without the economy having to sink into recession.

This comes as the Federal Reserve continues to employ very tight monetary policy in its ongoing effort to get inflation under control. Though, with inflation rates having come down significantly from their 2022 highs, the Fed has taken a less hawkish tone in recent months, even signaling that rate cuts could come later this year.

It would take a number of rate cuts before we’d characterize monetary policy as being loose, which means we should be prepared for relatively tight financial conditions (e.g., higher interest rates, tighter lending standards, and lower stock valuations) to linger. All this means monetary policy will be relatively unfriendly to markets for the time being, and the risk the economy slips into a recession will be relatively elevated.

At the same time, we also know that stocks are discounting mechanisms — meaning that prices will have bottomed before the Fed signals a major dovish turn in monetary policy.

Also, it’s important to remember that while recession risks may be elevated, consumers are coming from a very strong financial position. Unemployed people are getting jobs, and those with jobs are getting raises.

Similarly, business finances are healthy as many corporations locked in low interest rates on their debt in recent years. Even as the threat of higher debt servicing costs looms, elevated profit margins give corporations room to absorb higher costs.

At this point, any downturn is unlikely to turn into economic calamity given that the financial health of consumers and businesses remains very strong.

And as always, long-term investors should remember that recessions and bear markets are just part of the deal when you enter the stock market with the aim of generating long-term returns. While markets have recently had some bumpy years, the long-run outlook for stocks remains positive.

For more on how the macro story is evolving, check out the the previous TKer macro crosscurrents »

A version of this post was published on Tker.co. Subscribe here.

Artificial intelligence (AI) is poised to be one of the biggest disruptive secular growth trends of all time. Most sources project the global AI market to have a compound annual growth rate (CAGR) in the 30% to 40% range through 2030, with 2030 market sizes ranging from over $800 billion to more than $1 trillion.

The AI revolution had been underway in recent years but just kicked into high gear in early 2023. This occurred following the advent of generative AI, which greatly expanded the potential use cases for AI. Generative AI wowed the tech world when OpenAI released its ChatGPT chatbot in late 2022.

There are several main ways to invest in AI. This article focuses on companies that are largely developing and supplying semiconductors, or “chips,” and other technology to enable AI capabilities.

Best AI chip/technology stocks

Data sources: Yahoo! Finance and YCharts. Data to Aug. 23, 2024. P/E = price-to-earnings. EPS = earnings per share. *Arm held its initial public offering (IPO) in September 2023.

Let’s put the 10-year percentage gains in monetary terms. Here’s how much $1,000 invested a decade ago in each of the following would be worth now:

• Broader market (S&P 500): $3,410

• Nvidia: $283,200 (yep, more than a quarter of a million dollars)

1. Nvidia

To call Nvidia “dominant” in the AI chip space is an understatement. The company’s graphics processing units (GPUs) are the gold standard for accelerating the processing of AI workloads in data centers.

By all accounts, Nvidia has well over a 90% share of the market for AI GPU chips for data centers and over 80% share of the overall data center AI chip market. Advanced Micro Devices CEO Lisa Su projects the fast-growing data center AI chip market will reach $400 billion in revenue by 2027, which equates to an average annual growth rate of about 73%.

Nvidia isn’t a pure play on AI, but it’s as close as you can get in the semiconductor space. Its data center market platform accounted for 87% of its revenue in its quarter ended in late April, and this business largely supplies chips and related technology (including networking tech and software) for enabling AI and high-performance computing.

AI is also enhancing Nvidia’s offerings in its other platforms, which include computer gaming (10% of last quarter’s revenue), professional visualization (1.9%), and auto and robotics (1.5%).

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Nvidia is scheduled to report its results for the second quarter of fiscal 2025 (ended late July) on Wednesday, Aug. 28, after the market close. Management guided for revenue to grow 107% year over year to $28 billion. It also guided (indirectly by providing a bunch of inputs) for adjusted earnings per share (EPS) of $6.22, or 130% growth.

2. Arm Holdings

Arm, based in the U.K., designs architectures for central processing units (CPUs) and licenses those designs and related intellectual property (IP) to customers. Its customers include many of the biggest names in consumer technology and semiconductors, including Apple, Nvidia, and Qualcomm.

Arm, founded in 1990, was critical in enabling the smartphone revolution. Its chip architecture is very energy-efficient, allowing smartphones to have good battery performance, which led to their fast adoption. Arm-based chips are found in about 99% of smartphones, as well as in countless other small form-factor products.

In recent years, the company has expanded into higher-value markets, such as data center servers, AI accelerators, and smartphone applications (apps) processors. AI is driving growth in all these markets. The company said in its most recent earnings report that “AI’s substantial energy requirements are driving growth in Arm’s compute platform, which is the most power-efficient solution available.”

In late July, Arm reported its results for its first quarter of fiscal 2025, which ended in late June 2024. Revenue surged 39% year over year to $939 million, sprinting by the $908 million Wall Street consensus estimate. License revenue rocketed 72% to $472 million, and royalty revenue jumped 17% to $467 million.

The even better news for investors is that Arm’s profit grew even more than its revenue, which means its profit margin continued to expand. Adjusted for one-time items, its net income was $419 million, or $0.40 per share, up a whopping 67% year over year. That result easily beat the $0.34 analysts had expected.

I included the adjusted net income figure to highlight how extremely profitable Arm is. Its adjusted profit margin in the quarter was 44.6% ($419 million divided by $939 million).

What about valuations for Nvidia and Arm stocks?

Nvidia stock is trading at 47 times its projected earnings for the current fiscal year. That’s high in a vacuum — but reasonable for a company that Wall Street expects to grow earnings at an average annual rate of 46.4% over the next five years. Moreover, Nvidia regularly exceeds earnings estimates easily, so 46.4% is likely to prove too low.

Arm’s stock is incredibly pricey. It’s trading at 86 times its projected earnings for the current fiscal year. This is very high not only in a vacuum but also for a company that Wall Street projects will grow earnings at an average annual pace of 31.2% over the next five years.

So, why do I consider Arm stock the second-best (behind Nvidia) AI tech stock to buy now? I’m working on a full article on why it’s worth paying up for Arm stock, so suffice it to say that there are good reasons to believe that Wall Street is significantly underestimating Arm’s earnings growth potential. In each of the company’s four quarters as a public company, it has cruised by the analyst consensus earnings estimate.

That said, before making an investment decision, some investors might want to watch Arm for another couple of quarters to see whether it keeps churning out robust top- and bottom-line growth and sailing by Wall Street’s estimates.

Should you invest $1,000 in Nvidia right now?

Before you buy stock in Nvidia, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $792,725!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of August 22, 2024

Beth McKenna has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, and Qualcomm. The Motley Fool has a disclosure policy.

2 Best Artificial Intelligence (AI) Stocks to Buy Now: AI Chip Edition was originally published by The Motley Fool