The Most Important EPS Report Ever!

Over the last week, you have heard many superlatives about yesterday's NVDA earnings report.

The financial commentators and press have been pushing the idea that this is the most important earnings report and company in the stock market—one of the quarter's most important (if not THE most critical) events.

Was it as important as everyone says it is?

There is no doubt that NVDA is a big part of the stock market performance right now. It is the largest component of the S&P 500 at almost a 7% weighting.

It is also the largest component in the NASDAQ at an 8% weighting and over 20% of the semiconductor index.

It is also rightly considered the “bell weather” of the artificial intelligence (“AI”) trend that is key to the recent upward move in stocks.

In our thirty-year career, we have rarely, if ever, seen a stock garner this much attention.

The closest we can recall is the time of the Internet Bubble in the late 1990s. Back then, Cisco Systems, Inc. (NASDAQ: CSCO) was similarly considered a bell weather of the internet build-out.

The entire trading floor would fall silent as the initial results came out after the stock market's close.

It was a much different period back then, though, as our access to media was a fraction of what it is today. We have one hundred times, if not one thousand times, more access to information now.

We think the positioning of NVDA and its importance to the stock market is similar to those stocks. It feels more significant because of the magnification effect of modern digital media, but it also plays a similar role.

We think that looking back at what happened to those stocks and the stock market overall can also give us a good framework for what could happen in the next couple of years.

CSCO was a tremendous stock during the late 1990s and peaked in early 2000. From there it fell precipitously. CSCO has yet to see the high it saw back then.

Was the market wrong about the future of the Internet?

Obviously, the answer is "no." If anything, the market underestimated the impact tenfold.

What happened was that the excitement in the stocks was well ahead of the reality of the earnings.

This excitement also played out in the real economy. Spending on fiber infrastructure, networking equipment, and internet start-ups accelerated economic growth.

The issue, though, was there was too much infrastructure built too fast. They built a giant network that would eventually be used (and increased one hundred-fold), but in the early 2000s, there was too much capacity and insufficient demand.

When this happened, sales for companies like CSCO plummeted, as did their earnings and stocks.

What happened to the stock market?

If you look at the major stock market indices in 2000, you will see a bad year. The S&P 500 was -9%, and technology-heavy NASDAQ Composite was down almost -37%. Terrible.

Technology stocks had become a huge part of the indices – almost as big as they are today. When they fell, it dragged the entire stock market down.

Did you know, though, that in the year 2000, more stocks in the S&P 500 were UP than down?

The equal-weighted index was +9% for the year.

While it was a terrible year for the stock market indices, it was one of the best years ever for stock pickers. As technology crumbled, the rest of the market saw a strong rally.

This is something we think we can see happen again.

Without a doubt, NVDA is essential to one of the strongest trends driving this particular BULL market.

That is only ONE of the trends, though, in the market. There are many other drivers.

When the AI investment cycle slows down materially (and it is a “when”) it may or may not slow down the whole economy. We shall see…

For now, NVDA is an important piece of the stock market "mosaic," but it is still only a piece.