While the S&P has broken out to new all time highs and technicians are in a frenzy, things might have gotten a little ahead of themselves according to Goldman Sachs Chief Equity Strategist David Kostin. Kostin has a 5200 year end price target for the S&P 500 based on fundamental analysis of economic growth, earnings growth and money flow. (You can watch a short Bloomberg interview with him making this case on Tuesday here).
I’m even more bearish than Kostin based on fundamental factors. Consider Applied Materials (AMAT) earnings out last night. AMAT makes capital equipment involved in the manufacturing of semiconductors. As semiconductors continue to take on increased importance in the global economy due to Artificial Intelligence, AMAT’s shares have soared. But the fundamentals haven’t kept up as far as I can tell.
AMAT reported flat revenue growth and 4.5% EPS growth in its 1Q24 earnings report out last night. It guided 2Q24 to 3.8% revenue growth and 5.8% EPS growth, respectively. And yet AMAT trades at 26x my full year EPS estimate of $8.25. Based on these numbers and valuation, it’s really hard for me to see how AMAT shares can trade higher on a fundamental basis. At best, they could trade sideways. At worst, they’re overvalued and have room down to the 200 DMA at $167.
AMAT shares are a microcosm of the entire market IMO. Valuations are full at best and it’s hard to justify anything other than a sideways consolidation from here at best.
Next Wednesday afternoon, the current most important stock in the market, Nvidia (NVDA), will report FY1Q24 earnings. Like AMAT, NVDA’s fiscal first quarter ends at the end of April, not March which is why it is reporting on May 22. While I am a believer in NVDA, my problem here is once again valuation. I have written extensively on NVDA’s valuation in the past (for example, see “How Much Is NVDA Worth? Markets Are Auctions, Valuation Is An Art”, February 22, 2024).
For the purposes of this blog, my focus is the reaction to NVDA earnings. NVDA hit $975 on the morning of Friday March 8 but then revevsed hard to the downside. While the stock has recovered nicely the last few weeks after a correction, it is yet to surpass that level from the morning of Friday March 8. If it can’t do so in the wake of earnings next week, I’m struggling to find where any subsequent gains for the S&P are going to come from with so many stocks extended but struggling to make new highs.
In sum, based on a study of many individual stocks’ fundamentals and charts I can’t help but harbor the suspicion that we may be looking at a double top similar to that which occurred in 2007.
