Investors who relied too heavily on the Federal Reserve cutting interest rates this year are missing the technology sector boom. REITs dropped sharply YTD in reaction to January’s high inflation rates. Realty Income (O), for example, is down 8.9% in 2024 as of last week.
The fall of income stocks and the rise of the super bubble stocks in tech are still interconnected. High interest rates decrease the attractiveness of overpriced stocks.
Nvidia (NVDA), before it posted quarterly results, more than doubled its stock price in the last year. Arm Holdings (ARM) traded as high as $164 when it reported $338 million in operating income. It set a $1.20 - $1.24 EPS target for the year. When ARM stock traded at $130, its forward P/E multiple of 105 times did not raise alarm bells. This suggests the super bubble in both Nvidia and ARM is firmly in place.
Stocks often price the forward earnings into today’s stock price. It leaves no room for firms to post a small slowdown in revenue growth. For now, markets will reward companies that beat analyst expectations. However, analysts have the flexibility to adjust estimates lower at any time. This lowers the bar and allows companies to exceed forecasts. The headline “beat” would fuel a stock rally.
Your Takeaway
Nvidia and AMD are in a super bubble that ignores valuation. It will continue to do so until market sentiment turns negative. Invariably, this will eventually happen.
