Mark LaMonica: Welcome to another edition of Market Minute, joined by Ameya today. And one of the things last week that investors were very focused on was Nvidia earnings. So maybe a recap of how those earnings came in and then how the market reacted.<\/p>\n
Ameya Hattangadi: Nvidia reported last week on their quarterly results. Their quarterly earnings were up 85% year on year. One of the biggest standouts was their results from the data center revenue that was up, you know, $75 billion. So a very strong result for Nvidia over the quarter. But I thought what was most interesting was the market reaction to this. You saw not a very large move over last week.<\/p>\n
And this is instructive because it really indicates the market\u2019s sense or the market\u2019s feeling for valuations in that AI space. I think what\u2019s happening is that markets are becoming sensitive to valuations, particularly in AI. So even though you\u2019re seeing very strong results from these market leaders, it isn\u2019t really impacting prices as much as maybe in the past. One way to interpret this is that markets are or investors are thinking less about these micro factors and a bit more about broader macro themes.<\/p>\n
There\u2019s a lot going on in the markets at the moment, and there is a dispersion between the mega cap AI names and the smaller companies. So you\u2019re seeing this big dispersion. And I think what\u2019s driving this dispersion is of course what\u2019s happening in the AI space, but also what\u2019s happening more globally.<\/p>\n
Mark: So where do you think we go from here? Because you know, we obviously, you know, you\u2019re pointing out that this is a narrow market. It\u2019s been a narrow market rally. Those individual results aren\u2019t moving things as much. So is it maybe these macro factors? So you know just today there\u2019s been more news out of Iran. There certainly is a lot of talk about inflation and interest rates.<\/p>\n
And where do you think things are going to go from now? What\u2019s going to be the driver of markets going forward?<\/p>\n
Ameya: In the short term, of course, there\u2019s a lot of volatility, and I think a lot of that\u2019s been driven by what\u2019s happening, of course, in Iran and the flow-on impacts of inflation and also how that impacts interest rates and expectations for central bank action in terms of what might happen in the near term. I think, frankly, it\u2019s anybody\u2019s guess and we\u2019re more focused on the long term.<\/p>\n
But if you look at the possible scenarios of what could happen, I think we\u2019re at a moment where the cone of outcomes is very wide. So you could see a scenario where everything is really good. Things go back to normal. We revert to a scenario where AI and earnings tend to dominate market prices. And we basically forget about what\u2019s happened in Iran.<\/p>\n
And things could get really rosy. But at the same time, I could envision a scenario where things get really bad from here, where the supply shock that we\u2019ve seen in Iran at the moment, or currently seeing, gets much worse, continues to impact inflation, and then that\u2019ll have a flow-on impact to rates and equities as well. You know, what\u2019s most interesting to me is that if you look at the S&P 500 today, it\u2019s at or close to all-time highs.<\/p>\n
It seems like there\u2019s a bit of a disconnect between how the markets are reacting to what\u2019s happening in the AI space, but also what\u2019s happening in this more macro thematic space at the moment. So with respect to Iran and interest rates and those sorts of expectations.<\/p>\n
Mark: So this seems very challenging. You know, you\u2019ve talked about high valuations. You\u2019ve talked about obviously all of these macro things going on in the world. What should an investor do? What should an investor focus on when you have so many headlines and worries? And yet, as you said, the market is doing well. What should an investor do with this environment?<\/p>\n
Ameya: I think there\u2019s a bunch of things that investors can do. One of the main things that we tend to focus on here at Morningstar is this idea of diversification. And you want to be intentional about your diversification. So in the past, having a broadly diversified portfolio with equities and fixed income might have been perfect. It would have helped you.<\/p>\n
Bonds would have behaved in a way that you might have expected, and in the past would have provided that negative correlation to equities. I think where we stand today, it\u2019s not that simple because as we\u2019ve seen in 2022, as we\u2019ve seen earlier this year, you\u2019ve had periods where bonds and equities sell off together. So this idea of diversification from bonds is more nuanced today than it has been.<\/p>\n
So the way that we\u2019re approaching this and would recommend investors think about diversification is to broaden out what they include in their portfolios, to ensure that portfolios in the long term meet their target objectives. So that\u2019s one of the key things. And I think the other aspect investors should focus on is thinking about the long term.<\/p>\n
Volatility is part and parcel of being invested. Of course, there are times when volatility is higher, as we\u2019re seeing now, compared to other periods where volatility is lower. And so when you consider stocks, for example, that we include in our portfolios, they have been some consumer-facing stocks. And these stocks are currently underpriced, we think, because they\u2019ve been hit by a lot of concerns on, you know, what\u2019s happening with geopolitics, inflation, cost of living pressures, and a slowdown in China.<\/p>\n
But if you look at the underlying earnings capacity of these businesses, these are well-branded businesses. They are known brands \u2014 LVMH, Burberry, Nike \u2014 that we think over the long term will remain as such and will ride out that volatility and in the end benefit investors.<\/p>\n
So diversification and thinking long term and focusing on underlying fundamentals we think are some of the key things to think about.<\/p>\n
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