Is Nvidia Too Big to Fail? We don't know what we don't know

In this episode of The Money Runner, David Nelson dives into Nvidia's latest earnings and the broader implications for the AI ecosystem. Are companies like Nvidia and the AI industry as a whole too big to fail? We also explore the challenges of market valuations, the rise of small caps, and what the 2024 S&P 500 targets mean for investors. Plus, the unexpected shifts in Fed policy, BRICS’ growing influence, and why “we don’t know what we don’t know” could be the most important investment lesson yet. Don’t miss this insightful analysis! 🚀

Disclosure: "At the time of this article I currently hold shares in some of the companies mentioned as part of investment portfolios in funds I manage for Belpointe. Additionally, I may discuss other securities that are under consideration for future investment; however, discussing these securities is not a recommendation to buy, sell, or hold. My mention of these securities reflects my personal opinion and analysis at this moment and may change without notice. Please remember that all investments involve risks, including the possible loss of principal."

Transcript

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Welcome to the Money Runner. I'm David Nelson, your host. I had an entirely different theme for the start of this show. I wanted to talk about my target for the S&P 500 next year, where the rest of the street is coming out on this. Goldman Sachs, Morgan Stanley, Bank of America up. But I thought I would just pivot for a moment and talk about Nvidia's earnings, which were released Wednesday evening. Stock was initially down. All in it was a it was a really great quarter. But the stock is, you know, come so far in the last couple of years, I guess, investors were looking for a little bit more. When I dig down into the quarter, look, almost every metric was a standout. Certainly a top and bottom line beat. However, the growth is slowing, as you can see in this in this table right here. If you can call that slowing is slowing down to about 50% growth. Top and bottom line growth next year, but that's certainly down from over 100%. Some key things I heard in the call and maybe the the one the one statement coming from the CFO that probably held up the stock more than anything else. BLACKWELL Demand, which is their newest product, their newest chipset exceeds supply for the next few quarters. So that was that was good news. Some other good news was that data center growth or what they call data center compute was up 22% sequentially. So all of this on the surface sounds good. But we were sitting on the desk and asking ourselves the question, is Nvidia too big to fail? Or maybe more important, is the A.I. ecosystem itself too big to fail? Are we hearing too much on it? Because it is certainly a major force in the engine of growth for our economy. The markets were certainly pricing a lot in. I'm using it every day. And maybe the most notable thing on the call was the CFO saying that virtually every S&P 500 company in one way or another is a customer of Nvida, either directly or indirectly, with, say, a large hyperscalers that spend billions of dollars with Nvidia every year helping companies build out their A.I. footprint. Nevertheless, this better work because we are really putting an awful lot of capital into this. The CapEx spend at these large hyperscalers is gargantuan, and I guess what we're going to need to see is the return on investment, what they call the ROI or are they being rewarded for this capital investment? Nevertheless, these are questions that that need to be answered, because when you look at this chart here, you're looking at the S&P 500 and at top, I guess, what you call orange line going back two years, you can see that's that's earnings. That's earnings estimates. Blended blended earnings, which is looking six months forward, six months backwards. And as long as that line is going up, generally the direction of the market will be up and to the right. Right. However, when we expand that a little further and we add some more data here, you can see that during that time frame, that two year time frame, which is really the entire bull market from the bottom of 2022, earnings have grown about 18% but valuations that PE on the bottom have grown about 28%. So we're getting a lot of what I call multiple expansion. We're paying more and more for each dollar of earnings. And therein lies an important question for ourselves are we overpaying for this growth? And that's a question we're going to have to answer. There are some things that could cause that back or that rather could support that. Rates could be coming down. The alternative asset class risk free rate, is that coming down? That was part of the thesis for the last couple of years seems to have stalled. There could be the productivity boom that I brought up on this show that could be driving valuations higher or at least supporting valuations at a higher level. I think that's in fact happening. But the more likely scenario is the market is getting pretty excited about the Trump trade and the idea of deregulation and what that's going to mean for profitability of companies. And the whole idea that we're going to probably up and on up in Washington and get rid of a lot of waste and fat. You know, DOGE the DOGE factor, which I've talked about, which is Elon Musk and Vivek Ramaswamy, they laid out in The Wall Street Journal how they are going to do this pretty exciting stuff. And I think in part is part of the reason the market is is is pushing as hard as it is to the upside, nevertheless. When you invest capital, you have to understand where you've been and where you're going. So all in you're going to have to answer this question what's working, what isn't, and what's next? Welcome to the Money Runner. I'm David Nelson. All you had to do was stay invested. I wish I said that. But that actually came from David Kostin, who's one of the strategists at Goldman Sachs, came out in a recent research note. And it's a true statement. You know, despite all the concerns we had this year and all the various things that could have gone wrong, whether it was Ukraine, China, you know, the potential for recession, the jobs market rolling over, which didn't happen, inflation roaring back, which didn't happen. All of those concerns you could have pushed off to the side. All you had to do was stay invested and ride it through. And it's it's not that easy sometimes. So we had a call recently here at Belpointe and one of my good friends, Neil Azoue, who's portfolio manager and founder of Rareview Capital, he pointed out as a portfolio manager, sometimes one of the hardest things to do is to do nothing and just let your investments ride. And clearly that was the better the better choice this year. Hard to do, but it's pretty easy in hindsight. So let's talk targets. I said I wanted to talk about my target, which I put out a couple of weeks ago. You can see on this list here, I probably come in at number two. My target was for 6850 next year and I base that on a really simple fact. I took the estimate of the S&P 500 at the time, which was 274. I put a 25 multiple on that 25 times 2774. I hope that's the right number. That's fine. Now let me get out my trusty calculator. But 274. Yep, 6850 All right. That was my target. And I base that on, on, on on the multiple rising because productivity the productivity boom that I think is taking place in large part because of artificial intelligence I'm using it here at Belpointe. You're probably using at home. You can bet every Fortune 500 company has a project going on right now that's going to help boost their productivity. That's how I got there. Are the strategists use a different metric? I think Ed Yardeni is above me. He's at 7000. Brian Belsky at BMO comes in is 60 what is it, 6700. And David Kostin, who I just mentioned, it's a 6500 bill, all adjusted is these numbers as as the year goes on. But let me just share a little insight. I've been doing this for a while and over the last couple of decades, I hear 100 targets every year from analysts. And the best thing I can say about it is it's just this side of meaningless, because in the end, We don't know what we don't know. All right. That's my statement. Any number of things can go wrong over the next year, something we haven't even considered. It could be something in in Ukraine. It could be a nuclear event. I mean, Putin just put out a new nuclear doctrine. Hypersonic missiles are now being fired over. There could be something in Washington that we haven't even considered the inability of the Trump administration to get through some of these exciting programs that they're they're about to initiate. A lot of things can go wrong. And they they always seem to do so. You have to have a plan of action. What do you do? Sometimes you have to respond and you have to respond quickly, sometimes waiting weeks for an event to pan out. By the time you make the decision and pull the trigger, it's too late to do anything. But all of those things are things they could go wrong, so it's fun to put a target together. I do it. They do it. I guess we all do it to a certain extent. But you have to understand that your plan may just not work out. I guess I was. I'm only think of it right now. I'm thinking Mike Tyson, because I just watched that fight, which was maybe less than expected. But he did had a phrase that always stuck with me. He said, everybody's got a plan until you get punched, punched in the face, and you never know when that's going to happen. So sometimes it's better to be reactive rather than proactive, because if you're too early on, what you think might happen, that could be just as costly in here. So what are some of the things they could change? Well, here's one thing that's already changing. So much of our trading last year and the year before was really based on the idea that the Fed was going to going to go into a dramatic cutting cycle. Now, it took a long time, came later than expected. And we got the first Fed cut back in in September, 50 basis points, and hence we've got another $0.25. But just four weeks ago, we were pricing in about another 150 basis points of cuts between now and March next year, not that far from now. Right. You look today and you look at Fed fund futures and we're going to be get lucky to get 25 markets are pricing in maybe 25 maybe maybe 50 could happen. That's a lot less. And that takes out one of the legs of the stool because we said one of the things that permits us to spend more on stocks or to increase the multiple that we pay for earnings is lower interest rates. Well, what if those interest rates don't go any lower? We're going have to be prepared for that. We have to ask ourselves the question, why is that? Is that happening? Because growth is really accelerating. That's the good news or is there something else going on? And it's probably a little bit of both. I think what you're going to look at for a normal year, your yield curve between now and the end of next year, I think I think the short end of the curve, I think the Fed will cut rates somewhat, but perhaps they're only going to get to maybe four. That might be it. And if they get to four, then you could be looking at five and a half percent on on ten year yields, possibly even a little bit higher. I think the demand for four for U.S. treasuries has fallen. I think a lot of foreign actors, a lot of foreign countries, a lot of sovereign states that were traditional buyers of U.S. Treasuries are less likely to do so. Certainly, China would fall into that that matrix. And the fact that BRICS nations are, you know, are are contesting the US dollar as the world's reserve currency. They have their own their own mindset of what they want to do increasingly we're seeing a lot of non dollar transactions. BRICS is becoming a formidable force and right now the combined GDP of BRICS surpasses that of the United States. So it's not something we can we can just ignore. Here are other things that are changing. And maybe this was the biggest surprise for me this week. I put so much stock maybe over the last couple of years in the health of these large cap secular growers. You know, the Magnificent Seven and ten stand, they deliver they've they've had an enormous performance in the last couple of years. And we've seen some stabs at the rotation trade of small cap stocks starting to outperform for a period of time. Mid cap stocks would outperform, but it always seemed to fall, you know, to the back of the bus. It just didn't last in here. Trump trade came around and yeah, we could see here since the Trump trade rather since the Trump since the election rather happened. And, you know, under the mindset that the Trump trade would mean more cyclical growth, better news for small caps. Small caps certainly did rally. But you look on a year to day basis, certainly the S&P 500 is the hands down winner of this next chart expands that chart by just a couple of months. All right. I'm only taking it back to Thanksgiving. Last year, I looked at this picture. I said, Mike, that's got to be wrong. I actually we did this chart three times before. I was convinced what I was seeing was true. And what you can see here is small caps are now the leader. All right. From laggard to leader. Just two months ago, this was the back of the bus. Now it's at the front of the bus. Right. And we have to recognize that and understand that the the earth is literally shifting under our feet and we're seeing new trades develop here. So we're going to have to judge whether or not this is a sustainable course, because if if we don't recognize it, we might as portfolio managers start to underperform. What about what our competitors are doing? So I'm taking this to heart and I'm going to have to really dig down into it. I'm probably going to have to bring my market cap down or I'm probably going to, since I run predominantly a large cap portfolio, I'm probably going to ship my market caps down and start looking for some smaller names because that this trade seems seems to have legs. But it's something we're going to have to examine over over over the next days, weeks and months. I expect next week to be something of a quiet week, maybe the first day or two, but by Wednesday, it's going to wind down pretty hard. And then, of course, we're into the Thanksgiving break, a shortened day on a Friday and then back in earnest on, you know, we'll be trading in December and we'll close out this year and hopefully we can close out this year. On a good note, I'm going to leave it for now because I really added charts out of time. But if you'd like more information on the Money Runner and David Nelson or just would like access to the chart you saw on today's podcast or if you'd like access to maybe some of the network appearances that I have on some of the various networks like Bloomberg, CNBC or Fox Business. etcetera. Or go to my substack site dcnelson123@substack.com. I'm David Nelson and this is the Money Runner.