What Happened:
Shares of leading designer of graphics chips Nvidia (NASDAQ:NVDA) jumped 5.2% in the morning session as markets roared back after an initially muted response to the Fed's rate cut, which sparked a renewed appetite for risk assets. While investors were expecting a reduction in rates from the US central bank, there was a bit of back and forth on whether the cut would be 25bps (a quarter percent) or 50bps (half a percent).
The Fed ended up slashing its policy rate by 50bps (0.5%) to 4.75%-5.00%. This marks the first rate reduction in roughly four years. As a reminder, the Fed--under Chair Jerome Powell--began raising rates to tackle inflation coming out of the COVID-19 pandemic when a confluence of supply chain disruptions, labor shortages, and stimulus spending caused inflation to run hot.
Looking forward, the Fed signaled that more cuts are possible in 2024/25. Putting it all together, the announcement and outlook provided a breath of fresh air and a clearer view of the Fed's monetary policy stance, which the market has been waiting for with bated breath. If there's anything the market doesn't like, it's uncertainty.
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. The result of lower interest rates, all else equal, is higher stock valuations. This is especially true for higher-growth stocks such as those in the technology sector, where the current value depends more on cash flows many years out in the future.
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What is the market telling us:
Nvidia’s shares are very volatile and over the last year have had 24 moves greater than 5%. In context of that, today’s move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 8 days ago, when the company gained 6.8% as markets rebounded (Nasdaq up 1.8%, S&P 500 up 0.8%) after shaking off the initial negative reaction to the August inflation report by the Bureau of Labor Statistics. The report revealed that CPI (Consumer Price Index - a gauge of the average price consumers pay for goods and services) for the month of August 2024 came in line with expectations, growing 0.2% month on month.
A concerning aspect of the report lies in the core CPI (which excludes food and energy prices), which revealed a 0.3% increase from the previous month, slightly exceeding the expected 0.2% increase. Despite this, annual inflation seemed to be easing, rising by 2.5%, the lowest level since February 2021.
Nvidia is up 147% since the beginning of the year, but at $119.19 per share it is still trading 12.1% below its 52-week high of $135.58 from June 2024. Investors who bought $1,000 worth of Nvidia’s shares 5 years ago would now be looking at an investment worth $26,945.
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