SUMMARY: NVDA beat earnings (resoundingly) and is up +14% overnight, hitting a new all-time high. It’s now responsible for 1.5% of the S&P’s 4.5% YTD gain. NVDA’s strength is likely to lift some of the smaller AI names that came under pressure over the past few days. The Value portion of the GARP basket has outperformed recently and the Growth portion should rebound today. Early Cyclicals (Tech, Disc, Comm) are down –1.9% vs Deep Cyclicals (Energy, Materials, Industrials) WoW and –3% MoM equally weighted. Those are unusually large moves historically, so expect a significant bounce. The seesaw battle between Value and Growth will continue if we remain in a normal economic expansion. We like GARP as both Value & Growth should do fine.
Investors who push back against our long small cap call frequently site profitability of the mag 7 vs. small/SMID caps (plus AI). It is important to stress that 1) we wouldn’t go long small and Mid Caps vs a concentrated short of the mag 7 (we like equally-weighted top 100), and 2) small/Mid cap PEs are depressed even relative to large caps ex megas. We also covered the effectiveness of a simple screen for profitability within small caps HERE.
DEEP CYCLICALS: Deep Cyclicals have been outperforming Early (on an equally-weighted and cap-weighted basis) behind the scenes for the past month. And it’s not just Energy. Deep Cyclical performance has had a lot to do with a strong earnings season. Deep Cyclical earnings beat rates were better than normal. All in, the group has had an 81% beat rate, better than its 73% historical median, and better than the S&P’s 75% beat rate ex Deep Cyclicals.
As the quant team noted HERE, beats were rewarded less than normal, and misses punished more for the broad market. Deep Cyclicals were the only cohort where beats were rewarded more than normal. Misses, however, were punished dramatically more, which is consistent with a better-than-normal beat rate.
The risk to Deep Cyclicals (all Cyclicals, but deep Cyclicals the most at risk) is the same as it has been. Financial conditions that tighten more to slow economic demand/inflation. That risk is still elevated, unfortunately. As Peter Williams pointed out following the FOMC minutes yesterday, “On net, the after-June/‘never cutting’ (at least in 2024) tail continues to grow because the Fed may get spooked by any near-term upside surprises in inflation, its medium-term growth expectations remain too pessimistic, and inflation risks being sticky at a bit too high of levels.”
Full report below…
MARKET VIEWS: NVDA beat earnings (resoundingly) and is up +14% overnight, hitting a new all-time high. It’s responsible for 1.5pp of the S&P’s 4.5pp YTD return. NVDA 4Q revenue was $22.1B vs $20.4 exp (+265% y/y). Gross margins expanded to 76.7%, beating estimates and up from 66.1% a year ago. EPS was $5.16 vs $4.64 expected.
Source: Bloomberg, 22V Research
Investors who push back against our call to be long small caps frequently site the profitability of the mag 7 vs small caps (plus AI). It is important to stress that 1) we wouldn’t go long small caps vs a concentrated short of the mag 7 (we like equally weighted top 100), and 2) small caps PEs are depressed even relative to large caps ex the megas. We also covered the effectiveness of a simple screen for profitability within small caps HERE.
DEEP CYCLICALS: Deep Cyclicals have been outperforming Early (on an equally-weighted and cap-weighted basis) behind the scenes for the past month. Energy has been the best performer as oil prices bounced, but Industrials and Materials have outperformed too. The hotter-than-expected activity data helps the earnings outlook, but the hotter-than-expected inflation data increases tail risk and has been a tailwind to mega cap Early Cyclicals. Deep Cyclical performance has had a lot to do with a strong earnings season.
Deep Cyclical earnings beat rates were better than normal. All in, the group has had an 81% beat rate, better than its 73% historical median, and better than the S&P’s 75% beat rate ex Deep Cyclicals.
As the quant team noted HERE, beats were rewarded less than normal and misses were punished more than normal for the market broadly. Deep Cyclicals were the only cohort in which beats were rewarded more than normal. Misses, however, were punished dramatically more, which is consistent with a better-than-normal beat rate.
Going forward, Deep Cyclicals need the Jan inflation data to be volatility, not a trend. As Peter Williams pointed out following the FOMC minutes yesterday, “On net, the after-June / ‘never cutting’ (at least in 2024) tail continues to grow because the Fed may get spooked by any near-term upside surprises in inflation, its medium-term growth expectations remain too pessimistic, and inflation risks being sticky at a bit too high of levels.” Meaningfully tighter FCI would be a significant headwind.
