Evanna Hampton: welcome Investment insights. I’m your host, Ivanna Hampton. Market and economic expectations are shifting. Inflation strengthened then weakened again. The Federal Reserve is predicting an interest rate cut, the stock market is waiting, and bond investors are too. But the promise of artificial intelligence is stoking optimism. Tom Lauricella joins the podcast to discuss the biggest headlines of the first half of the year. He’s Morningstar’s Global Markets Editor and Smart investor Newsletter editor. Here’s our conversation.
Welcome back to the podcast, Tom.
Tom Lauricella: I’m happy to be here.
How is the market reacting to the Federal Reserve’s interest rate forecast?
Hampton: The Federal Reserve has scaled back its forecast for interest rate cuts this year from three to one. We discuss how markets are reacting to this change in policy.
Lauricela: The market is reacting in an interesting way. On the one hand, you expect the Fed to scale back the rate cuts. You would think that would be bad for stocks. You would think that would be bad for bonds. But the market seems to take it in stride and doesn’t seem to think the Fed is going to do that. Stocks are holding up. Bonds are recovering from their worst levels this year. So at this point, the market seems to be betting that inflation is going to turn out better than the Fed expects. And maybe the Fed will cut rates more than they have planned.
Can the economy achieve a soft landing?
Hampton: Inflation spiked in the first quarter and has since started to fall again, while job growth accelerated in May. How will this data affect hopes for a so-called soft landing?
Lauricela: Here are some of the interesting trends that are happening. On the inflation front, it looks like the CPI inflation numbers have improved a little bit over the last two months after a very tough first quarter that had everyone worried. The consensus seems to be that inflation should improve over the course of the year. The question is how much improvement, and whether it will be enough for the Fed. But most seem confident that inflation is on the right track.
The employment front continues to be very strong, defying expectations month after month. Economists expect a much larger slowdown than it actually is. That means job growth remains strong. There are some interesting trends, for example, immigration plays a big role in supporting job growth in this country. There are other factors at play, but of course, strong employment means consumers continue to spend, which supports the economy. That means that despite the significant interest rate hikes that began in 2022, the economy is doing well and there are no signs of a recession. So some are saying we’re seeing a soft landing, or maybe no landing at the moment.
Nvidia leads stock market bull run
Hampton: AI leader Nvidia NVDA is driving the bull market in the stock market. Can you tell us if this is a positive or negative thing?
Lauricela: It seems like we’re always talking about Nvidia. In some ways, there’s a good reason for that. So, this is an amazing story that’s unfolded over the past year, really the past 12, 13 months, since Nvidia released an earnings report last year that showed unexpectedly significant growth in AI revenue. At this point, it seems like Nvidia’s AI business is real. There’s a lot of hype around AI stocks, but Nvidia has actual products and they’re building a network for developers. So the stock has been driving a lot of the upside. There are a lot of people who are concerned that the market is too narrow on this upside. Again, this seems to go against a lot of predictions that it’s going to end. But at this point, Nvidia seems to be on a solid trajectory. Like any stock, it could easily be bumpy. But for now, it’s powering a good chunk of the stock market’s upside.
Nvidia stock outlook
Hampton: The chipmaker’s market cap recently hit $3 trillion for the first time in history, putting the company on par with Microsoft (MSFT) and Apple (AAPL). What is the team hearing from analysts about Nvidia’s prospects?
Lauricela: Nvidia has hit the $3 trillion mark. And it has quickly become a household name. Not long ago, the company was primarily known for making chips for computer games, but now it’s powering much of the AI revolution. Our analysts are very positive on Nvidia’s prospects. Brian Colello thinks it’s a real company with really solid fundamentals. Valuation-wise, it’s considered a fair valuation at the moment. But given the strength of the company’s business, Brian thinks it’s a stock worth owning for investors. And he expects the company to continue to grow strongly in the future.
Why stock splits will increase in 2024
Hampton: One more question about Nvidia: Nvidia and several other companies have split their stock or announced plans to split their stock. Why do you think we’ll see more of this in 2024?
Lauricela: Well, these stocks have risen in value to pretty astronomical amounts. Nvidia went over $1,000, and Broadcom AVGO went up about the same amount. For investors, as we’ve written, stock splits don’t matter much in the long run. But they make the stock look more attractive by making it easier for the more typical retail investor to buy a few shares. Buying a few hundred dollars worth of Nvidia is different than paying $1,000 for a single share. So, this is just a consequence of the incredible rally we’ve seen in some of these big companies. And we’ve seen stock splits in other periods when tech stocks have soared. The fundamentals of the company don’t change, and neither does the Morningstar rating of the stock. It’s just a function of math and vision. It’s really a matter of vision.
New dividends from mega-cap tech companies
Hampton: Now, another trend this year is mega-cap tech companies announcing new dividends. Meta META, Salesforce CRM, and Alphabet GOOGL surprised Wall Street. Should investors be excited?
Lauricela: Well, that’s an interesting development that we’ve seen in the last few months. It’s not new that tech stocks are paying dividends. There are a lot of companies that have been paying dividends for quite some time, but as you pointed out, companies have announced them in a surge. The important thing for investors to remember about these stocks is that the actual dividend yields, or the dividends per share, are very low. I mean, less than 1% for all of those that you mentioned, Salesforce, Alphabet, Meta. 0.5%, 0.6%. These are very low dividends. But this changes the face of the dividend growth strategy, which is a strategy of looking for stocks that are going to pay more money over time. These are growth stocks, they’re generating a lot of cash, so the dollar amount of the dividends can grow. So we’re seeing a lot more tech stocks in dividend growth strategies, whereas before it was mostly financials and utilities and energy companies and stuff like that. So these strategies can certainly get a little volatile and a little bit more interesting. This is definitely a trend that we’re going to be watching going forward.
What is driving the bond market?
Hampton: From stocks to bonds, it’s been almost four years since the bond market hit record highs. We discuss the pressures bonds are facing and what’s driving the bond market.
Lauricela: It’s been a pretty tough ride for the bond market as interest rates have risen and stayed high ever since. There was some relief at the end of last year, but that relief has faded as the economy has turned out to be stronger than expected. And as I said, the Fed is now considering a much smaller rate cut than people thought at the beginning of the year. At this point, the key thing for investors to consider is the level of interest rates in the bond market. Yields probably aren’t going to get back to very low levels anytime soon. As long as growth is solid and inflation stays somewhat high, yields are going to stay at relatively high levels. That means you might not make as much money in terms of bond price appreciation. So it’s a different situation.
Why investors should still hold bonds
Hampton: And why should people still hold bonds?
Lauricela: Well, there’s the flip side to that. Yields are the highest they’ve been in a long time. We’re talking 5.0% on a very safe bond investment. Even if inflation goes down to 2.5%, that’s a real yield that people can invest in. As our folks say, there are still plenty of reasons to hold bonds. Bonds diversify your portfolio. They can produce a decent yield. And if inflation goes down a little bit, you can make a little bit of money in terms of total return from price appreciation. But at the very least, you can expect a decent yield that can bring some income to people for the first time in literally decades.
Key Takeaways
Hampton: Great. So let’s wrap up our conversation with some key takeaways for investors in the second half of 2024. Tom, what’s on your list?
Lauricela: I think the most important thing is that this year has been a year that has defied a lot of expectations so far. Investors can think about their expectations and take away a lesson on why it’s really good to think long term. If I told most people that the Fed was going to cut rates just once this year instead of the five or six that people thought at the beginning of the year, you might have expected stocks to go down a lot more. But we’ve seen solid earnings growth. And, as I mentioned, we’ve seen the boom in AI technology. So as we move towards the second half of the year, all eyes will, of course, be on the Fed and whether they can actually cut rates. But the other thing that’s important for the stock market is whether corporate earnings continue to be solid. They’ve bounced back this year. Will this AI technology story continue? And, of course, we have the election coming up. So there’s a chance of volatility in that respect. But for long term investors, the story is the same. Looking for undervalued stocks and thinking long term can make a big difference no matter what the short term moves are.
Hampton: Well, Tom, thank you so much for being on this Mid-Market Check podcast.
Lauricela: Thank you so much. I’m glad to be here.
Hampton: subscribe Smart investor Join us every week for Tom’s market commentary in our newsletter. Thanks for watching! Investment InsightsWe’d also like to thank our Senior Video Producer, Jake VanCarsen, and our Associate Multimedia Editor, Jessica Bevel. To watch new videos on investment ideas, market trends, and analyst insights, subscribe to Morningstar’s YouTube channel. I’m Evanna Hampton, Morningstar’s Lead Multimedia Editor. Take care.