Sometimes, stocks get everything they need-and even though the market barely moved at all, this may have been one of those weeks.
Yes, the S&P 500 rose by just 0.5%, and is still just flat over the past three weeks. But if the index is going to add to the stellar 22% rally it's built over the past five months, this week showed us how.
It starts with Nvidia, which, well, Nvidia'ed. This is a company that grew sales by 106% year-over-year, but still held its gross margin at 75%. Management expects the strong revenue growth to continue into next year, forecasting a 70% rise in the fiscal year starting in late January, well ahead of investors' expectations. The stock jumped 9% on Thursday, the first trading day after the release.
The report didn't end the debate about Nvidia-which gave back about half its gain on Friday. Some still argue that it will be impossible for Nvidia to keep up superfast revenue growth while retaining superhigh margins. But, as my colleague Adam Levine convincingly argues, it's far easier to look at the world's biggest stock, which trades at just 15 times next year's earnings, and call it cheap.
"A lot of people are skeptical," says Stephanie Link, chief investment strategist and equity portfolio manager at Hightower Advisors. "But Nvidia is growing simply because there's so much demand. I do think the growth is more sustainable than the valuation suggests."
Just as encouraging: Artificial intelligence's success doesn't seem to be coming at the expense of software anymore. Strong earnings this week from Salesforce and cybersecurity firm CrowdStrike were met with equally strong gains, and Salesforce also announced a partnership with Anthropic, which is significant insofar as it points to ways AI can bolster existing software products, rather than replace them.
Federal Reserve Chairman Kevin Warsh's Jackson Hole speech turned out to be a bigger test, but one that the market seems to have passed. Warsh remains focused on inflation, saying that a few mellow inflation readings "do not tell me that underlying trends have meaningfully improved," and that unless the Fed is confident that inflation is moving toward 2%, "we have work to do." That work presumably entails hiking rates. Traders now see a 61% chance of the Fed raising interest rates in September per the CME FedWatch tool, even though the only hikes Warsh talked about on Friday were literal ones through the wilds of Wyoming.
But with S&P 500 companies growing earnings by an incredible 52% in the second quarter per FactSet, a 0.25% increase in the federal-funds rate shouldn't exactly derail the rally.
Importantly, Warsh also made his policy framework a bit more transparent and finally provided a cogent explanation for his allergy to forward guidance. He wants to avoid living in a "House of Mirrors," where the Fed is watching markets and markets are watching the Fed, and no one is watching the actual economy, he said. After two rocky post-Fed decision news conferences, Warsh is on his way to earning investors' confidence.
That's not to say there aren't risks out there. Dreadful earnings from Dick's Sporting Goods led to broader concerns for companies like Nike, and a Friday report showed that consumer sentiment declined in August, albeit not as much as economists expected. The strength of the labor market is also a concern: After the July jobs report showed a surprising loss of 23,000 jobs, there will be a great deal of attention on the August report, which comes out this coming Friday.
But the market narratives are starting to solidify. AI spending continues to stun, the Fed is preparing to hike, and the U.S. consumer remains on solid footing despite lingering concerns. It's a modestly bullish recipe. And in fact, the S&P's summer somnolence is rather refreshing. Considering how strong the market had been, breakout gains could easily reignite concerns that the stock market may be in a bubble.
So let's not be greedy here. If the year ended now, the S&P 500's 12.5% gain would go down as a good, not exceptional, year for stocks. But a strong gain, along the lines of 20%, is now looking reasonably likely. If that means a few more weeks when the market just churns in response to good news, so be it.
You can't always get what you want. But if you try sometimes, you just might find, you get what you need.
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