Nvidia unequivocally owned the first half of the trading year. The huge demand for the organisation’s high-quality chips from tech giants such as Amazon, Microsoft and Meta powered the company’s share price 150% higher, underpinning the S&P 500’s climb to a series of new highs in the first half of 2024.
Even after Nvidia’s spectacular gains, the stock continues to dominate market sentiment on the conviction that artificial intelligence (AI) will transform the way businesses use and process data.
Except now each notch-up in the share price seems to attract more sceptics about the benefits AI and other revolutionary technologies will have on business and industry. A growing number of money managers are adamant that investors should mitigate their risk by trimming exposure.
Nvidia CEO Jensen Huang remains impervious to these claims. After the release of quarterly results on May 23 that far exceeded analyst forecasts, Huang declared that “the next industrial revolution has begun”, illustrating how AI would enable industries to handle complex reasoning and planning tasks.
It appears far too early to gauge how AI will affect our lives, and, like other ground-breaking developments in the past, it is not uncommon for investors to position themselves for returns that could occur in the years ahead. But for investors fortunate enough to have Nvidia in their portfolios, choosing the next course of action has become a source of considerable mental anguish.
Bombarded by advisers quoting stock market aphorisms like “no-one ever went bankrupt taking a profit” or “quitting is not a sign of defeat; it is a sign of recognising the path to victory is elsewhere”, they’re paralysed by indecision, unsure of which road to take.
My counter is an adage from the scandalous Mae West: “Too much of a good thing is wonderful.”
Stay the course
Simple translation: stay the course. If you sell, your challenge is to find a quality business equal to the promise of Nvidia whose growth would also have to make good the considerable capital gains tax liability owed to the SA Revenue Service.
Further, if you put the proceeds into another counter in the AI supply chain, you’d be taking on a similar risk. And, if Nvidia comes under pressure because of slowing demand for semiconductors, so too will other associated firms. Nor will the S&P 500 sustain a major tech sell-off. Even vaunted value and defensive stocks will feel the squeeze.
As things stand, analysts at the major investment houses have turned more positive on the outlook for markets. Many believe that the asset bubble around AI has further to inflate. Outside this dominant theme, strategists are confident that major central banks will follow the EU and Canada and begin lowering interest rates.
The US Federal Reserve remains guarded about its monetary policy, but according to surveys, higher interest rates are now considered more of a threat than inflation. With saving rates declining and the manufacturing and housing sectors slackening, the market is positioning itself for at least two rate cuts in the US in 2024. Moreover, a resilient jobs market and reduced fears of a global recession augur well for corporate earnings, an added plus for stronger equity performances in the next six months.
The master of overindulgence, Oscar Wilde, warned that moderation was a fatal thing, and that nothing succeeds like excess. So, sit back and enjoy Nvidia’s ride, recognising that it will end sometime, but probably not just yet.
• Shapiro is chief global equity strategist at Sasfin Wealth.
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