Nvidia Beats Expectations

Here are some of the biggest stories from last week:

• Foreign direct investment into China collapsed last year.
• Travel and spending during the Lunar New Year holiday surpassed pre-pandemic levels
• Goldman Sachs boosted its year-end price forecast for the S&P 500 (again).
• Nvidia’s results blew past expectations in a sign that demand for AI is stronger than ever.
• The world’s largest uranium producer warned of supply shortfalls.

Dig deeper into these stories in this week’s review.

Macro

China has been one of the biggest recipients of foreign direct investment (FDI) in recent years, which makes sense considering that FDI is a key aspect of international economic integration and is a vital driver of economic growth in emerging markets. But unfortunately for the country, those flows virtually dried up last year.

Just a quick 101: FDI measures investments from one country into business interests in another aimed at gaining a significant degree of influence over the foreign entity. This influence usually comes from acquiring a 10% or more ownership stake in the foreign company, setting FDI apart from speculative portfolio investments that lack such control. FDI typically involves the transfer of capital for establishing new operations, acquiring existing businesses, or reinvesting profits (earned from the overseas firm) for growth. The measure includes not only the initial transaction between the two entities but also any subsequent capital transactions between them.

Back to China: the country just reported its smallest annual inbound FDI in three decades, after companies in Japan, Taiwan, and South Korea slashed their investments in the world’s second-biggest economy. More specifically, a gauge of foreign capital flowing into China totalled about $33 billion in 2023 – 82% less than the previous year and the lowest amount since 1993. Note that this particular measure, by the State Administration of Foreign Exchange, is more volatile than other FDI indicators as it can also reflect trends in foreign company profits as well as changes in the size of their operations in China.

The plunge came as China’s economy struggled to recover from the pandemic amid a property crisis, weak domestic demand, and fading investor confidence. Not helping matters either is higher interest rates in other markets, which prompted foreign businesses to pull money out of China to chase higher yields elsewhere. There was one bright spot, however, with FDI into China by German companies reaching a record $13 billion. But whether that strong pace can continue remains to be seen. The European Union, after all, is stepping up scrutiny of these investments because of security concerns. Geopolitical tensions between China and the West, meanwhile, appear to be approaching a boiling point.

But at least the country got some good news last week, with new data showing travel and spending during the Lunar New Year holiday surpassed pre-pandemic levels. Some 474 million tourist trips were made around the country during the eight-day festival, which concluded on the 17th of February. That’s up 19% from the comparable period in 2019. Total tourism spending, meanwhile, climbed nearly 8% from that year on a comparable basis, to 633 billion yuan ($88 billion). But there is one catch: this year’s festival spanned eight days, compared to the seven days in 2019. Still, as the nation’s most important holiday, the Lunar New Year is a key barometer of consumer spending, and so the upbeat figures could suggest a potential rebound in domestic demand within China's economy.

Stocks

Wall Street has been scrambling to revise its predictions for the S&P 500 as the index continues to set new records. Goldman Sachs just raised its year-end target for the index to 5,200, marking its third revision in just a few months and positioning it among the most bullish banks on Wall Street. While that’s only slightly higher than the S&P 500’s value today, it marks a big increase from the 4,700 level Goldman had predicted back in November. The upgrade was mainly down to stronger economic growth and higher profit expectations for S&P 500 companies, particularly within the tech sector. Case in point: the bank increased its earnings-per-share forecast for the index to $241, which would represent around 9% growth on a year-over-year basis – a big improvement from the stagnation seen in 2023.

Speaking of strong tech earnings, Nvidia’s latest results on Wednesday blew past expectations once again. The world’s most valuable chipmaker saw its fourth-quarter revenue more than triple from a year ago to $22.1 billion, trouncing forecasts of $20.6 billion. And it said the next round of earnings will be even better, with expected sales this quarter of $24 billion, well above consensus of $22.2 billion. The outlook continues Nvidia's trend of surpassing expectations, driven by relentless demand for its AI accelerators. These highly sought-after chips process data for AI models, fueling the rapid expansion of chatbots and other generative AI services capable of producing text and graphics from basic prompts. The technology has hit a tipping point, according to Nvidia’s CEO, with demand surging worldwide across companies, industries, and nations.

With Nvidia’s expectation-busting results now behind us, the wider market could have the green light to continue rallying, with the "Magnificent Seven" stocks likely to keep leading the charge. The name refers to the seven biggest tech stocks in the US – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. And if you wanted to see just how magnificent the Magnificent Seven really are, then consider this. The group, based on 2023 year-over-year figures, saw strong sales growth of 15%, margin expansion of 5.82 percentage points, and very impressive 58% growth in earnings. The remaining 493 stocks in the S&P 500, meanwhile, saw modest sales growth of 3%, margin contraction of 0.56 percentage points, and a slight decline in earnings of 2%.

Commodities

An explosive rally in uranium has seen its price more than triple since the start of 2021 to a 16-year high. And now, investors are saying that the strong run could continue after Kazatomprom, the world’s biggest producer of the metal, warned of supply shortfalls in the coming two years. The Kazakh mining company, which accounts for more than a fifth of global output, recently warned that its production this year would fall short of expectations due to shortages of sulphuric acid – a crucial component in extracting uranium from ore. It also noted that its production targets for 2025 might similarly be impacted.

Kazatomprom’s warnings will only compound a growing mismatch between uranium supply and demand. After all, the metal’s blistering rally over the past few years mainly came down to the simple fact that there’s less of it around while demand is growing. See, governments are looking to build new nuclear plants to reduce their reliance on fossil fuels and secure greater energy independence – particularly after the Russia-Ukraine conflict broke out. Plus, nuclear power is considered a clean energy source, which might help countries reach their emissions targets and explains why the World Nuclear Association upped its forecasts for nuclear power use.

The problem is that uranium supplies are tight: mining tapered off over a decade ago because people got spooked after the Fukushima nuclear accident in Japan in 2011. It meant there were fewer new mining projects and less of the stuff pulled from the ground overall. A recent coup in Niger, a major uranium producer, and mining production challenges in Canada have also squeezed supply. And now, the world’s biggest producer of the metal is warning of shortfalls over the next two years. There isn’t a quick fix here: uranium projects take a long time to start, so the market will probably be tight for some time…

Next week

• Monday: US new home sales (January). Earnings: Zoom.
• Tuesday: Japan inflation (January), US consumer confidence (February), eurozone M3 money supply (January), US durable goods orders (January).
• Wednesday: Eurozone economic confidence (February). Earnings: Baidu, Salesforce, Snowflake.
• Thursday: Japan industrial production and retail sales (January).
• Friday: Japan unemployment rate (January), eurozone inflation (February), eurozone unemployment rate (January), China PMIs (February).