Ivanna Hampton: Welcome to us Investment Insights. I’m your host, Ivanna Hampton. Expectations are changing in markets and the economy. Controls on inflation were tightened before being loosened again. The Federal Reserve predicted interest rate cuts to come, the stock market is on hold and so are bond investors. However, the promise of artificial intelligence is inspiring optimism. Tom Lauricella is joining the podcast to discuss the biggest headlines of the first half of the year. He is Morningstar Inc.’s global markets editor Smart investor newsletter editor. Here is our conversation.
Welcome back to the podcast, Tom.
Tom Lauricella: I’m glad to be here.
How is the market reacting to the Federal Reserve’s interest rate forecast?
Hampton: The Federal Reserve cut its interest rate forecast from three cuts to just one this year. Talk about how the markets are reacting to this pivot.
Lauricella: It’s been an interesting reaction out there in the markets. On one hand, you have the Fed saying it expects to cut rates less. You’d think that wouldn’t be good for the stock market. You’d think that wouldn’t be good for the bond market. But the markets seem to be taking it in stride, almost as if they don’t believe that this is what will happen to the Fed. Stocks are well maintained. Bonds have rebounded from their worst levels of the year. So at this point, it appears that the markets seem to be betting that inflation will turn out better than the Fed expects. And that maybe they will lower rates more than they say they will.
Will the economy have a soft landing?
Hampton: Inflation rose hotly in the first quarter and began to cool again. Meanwhile, job growth accelerated in May. How does this data affect hopes of a so-called soft landing?
Lauricella: That’s part of the interesting dynamic going on there. On the inflation side, the CPI inflation numbers have looked a little better the last two months after that very hot quarter that worried everyone. The consensus seems to be that inflation should improve during the year. It’s really all a matter of how much and if it will be enough for the Fed. But most people seem to be convinced that inflation is on the right track.
The jobs front has remained very strong, defying expectations consistently every month. Economists are calling for more of a slowdown than is actually happening. So job growth remains strong. We’ve seen some interesting dynamics there where, for example, immigration has played a big role in supporting job growth in this country. There are other factors at play, and of course, strong jobs mean consumers like to keep spending, which keeps the economy moving. So despite the fact that we had these very significant interest rate hikes starting in 2022, the economy is doing well and there is no sign of a recession. So you have people saying that a soft landing – or no landing, really, at this point – is very much in the cards.
Nvidia is driving the stock market
Hampton: Artificial intelligence leader Nvidia NVDA is driving the stock market higher. Can you talk about whether this is positive or negative?
Lauricella: We seem to be talking about Nvidia all the time. In a sense, for a very good reason. I mean, it’s really been a remarkable story that’s unfolded over the last year, really just the last 12, 13 months since Nvidia released its earnings report last year that showed this massive sudden increase in AI income. At this point, the AI business for Nvidia just seems to be real. There’s a lot of hype around AI stocks, but Nvidia has real products, is building a network for developers. And so, the stock has powered a lot of gains. There are many people who are concerned that the market width is too narrow when it comes to this rally. Again, it’s another thing that seems to be defying many predictions that this will end. But at this point, it looks like Nvidia is on a solid trajectory. It’s like any stock, it can easily have its bumps. But for now, it is supporting a good amount of stock market gains.
Nvidia Stock Outlook
Hampton: The chip maker’s market value recently topped $3 trillion for the first time ever. It is in the company of Microsoft MSFT and Apple AAPL. What is the team hearing from analysts about Nvidia’s outlook?
Lauricella: Nvidia hit $3 trillion valuation. And indeed it has become one of these popular companies very quickly. Not so long ago it was mainly known for the production of chips for computer games. And that’s where the AI revolution is really powering. Our analysts are very positive about the outlook for Nvidia. Brian Colello thinks it’s a real business with real solid foundations. In terms of evaluation, at this point it is considered to be evaluated correctly. However, given the strength of this company’s business, Brian thinks it is a good stock for investors. And they expect continued strong growth from the company in the future.
Why we’re seeing more stock splits in 2024
Hampton: I have another question about Nvidia. Nvidia and several other companies have split their shares or announced plans to do so. Why do you think we’ll see more of this in 2024?
Lauricella: Well, we had these stocks rise to some pretty astronomical dollar amounts, Nvidia over $1,000, Broadcom AVGO rising in the same neighborhood. For investors, as we’ve written, stock splits don’t really matter in the long run. But what they do is make a stock look more attractive because it makes it easier to afford certain stocks for your more typical individual investor. Buying a few hundred dollars worth of Nvidia is different from buying over $1,000 a share. So it’s really just a function of a tremendous rally that we’ve seen in some of these really big names. And we’ve seen this in other time periods when tech stocks have gone higher, they come out with stock splits. It doesn’t change the fundamentals of the company, it doesn’t change how Morningstar views the stock. It’s just a function of math and optics, really. It’s really just about optics.
New Dividends from Mega-Cap Tech Companies
Hampton: Well, another trend this year is mega-cap tech companies announcing new dividends. Meta META, Salesforce CRM and Alphabet GOOGL surprised Wall Street. Should investors get excited?
Lauricella: Well, this is an interesting development that we have seen in the last few months. It’s nothing new for technology stocks to offer dividends. There are many that have been around for quite some time, but we had the momentum of companies announcing them as you noticed. The main thing investors need to remember about these stocks is that the current dividend yield, which is the amount of dividend they pay per share, is really low. So we’re talking about less than 1% for all the names you mentioned – Salesforce, Alphabet, Meta. We are talking 0.5%, 0.6%. These are very low dividends. What this does do, however, is change the complexity of dividend growth strategies. So these are strategies where you’re looking for stocks that will pay more money over time. Because these are growth stocks, because they are generating a lot of money, the dollar amounts of the dividends are likely to increase. So now you’re seeing a lot more tech stocks in dividend growth strategies, whereas before, it might have been a lot of financials or utilities, energy companies, that sort of thing. So it certainly makes those strategies potentially a little more volatile, a little more interesting. It’s definitely a trend we’ll be watching going forward.
What can provide a rise in the bond market?
Hampton: From stocks to bonds, it’s been almost four years since the bond market hit a new all-time high. Talk about the pressure bonds are facing and what a rally in the bond market could provide.
Lauricella: It’s been a rough road for the bond market as interest rates rose and then stayed high. We had a little bit of relief at the end of last year, but that faded as the economy turned out to be stronger than expected. And as we mentioned, the Fed is now looking to cut interest rates much less than people thought at the beginning of the year. At this point, the main thing that investors should think about is the level of interest rates in the bond market. Yields will certainly not return to the low and low yields we saw anytime soon in the foreseeable future. As long as growth remains strong, inflation remains somewhat elevated, you will see yields remain relatively high. And that means, perhaps, you won’t make as much money in terms of price appreciation in bonds. So it’s a different dynamic there.
Why investors should still own bonds
Hampton: And why should people still own bonds?
Lauricella: Well, there is the flip side. Yields are higher than they have been in a long, long time. You’re talking 5.0% for very safe bond investments, with inflation even up to 2.5%, which is a good, real yield that people can invest in. As our people say, there’s still a very good reason to own bonds. They diversify your portfolio. They can pay a good yield. And, if anything, if inflation comes down a little bit, then you might make a little bit of money in terms of total return on price appreciation. But at the very least, we’re looking at some decent yields that could generate some income for people for the first time in literally decades.
Get the main
Hampton: Wow. Well, let’s wrap up our conversation with some key investor recommendations for the second half of 2024. Tom, what’s on your list?
Lauricella: I think the main thing is that this has been a year that has so far defied many expectations. So investors can think about what their expectations are, and we can see lessons about maybe why it’s really good to think long term. I think if you had told most people that the Fed would only cut interest rates once this year as opposed to the five or six times people had thought at the beginning of the year, you might have expected stocks to fall a lot more that they are. But we have seen strong revenue growth. And as we mentioned, we’ve seen this boom in AI technology. So as we move into the second half of the year, of course, all eyes will be on the Fed and whether they will be able to cut interest rates. But the next big thing for the stock market is whether corporate earnings will remain strong. We had a comeback this year. Will this AI technology story continue to unfold? And of course, we have elections coming up. So there is potential volatility around that. But for long-term investors, the story is the same. By looking for those undervalued names, long-term thinking will make all the difference, no matter what short-term moves.
Hampton: Well, thanks, Tom, for coming on the podcast for this mid-year market check.
Lauricella: Thank you very much. I’m glad to be here.
Hampton: Register at Smart investor newsletter to read Tom’s market reviews every week. Thank you for watching Investment Insights. Also thanks to Senior Video Producer Jake VanKersen and Multimedia Editor Jessica Bebel. Subscribe to Morningstar’s YouTube channel to see new videos about investment ideas, market trends and analyst insights. I’m Ivanna Hampton, senior multimedia editor at Morningstar. Take care.
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