Finimize - 😍 Why Goldman loves US stocks

👀 WHAT JUST HAPPENED?

US

• Goldman Sachs nudged up its 2024 forecast for the S&P 500 index yet again, with the index hitting record after record.
• Nvidia’s quarterly results blew past expectations, driving home the notion that AI demand just keeps getting stronger.

Europe

• HSBC – Europe’s biggest bank by assets – saw its profit tumble by 80% last quarter.

Asia

• Foreign direct investment into China collapsed last year.
• Travel and spending during the Lunar New Year holiday boomed, surpassing pre-pandemic levels.

✍️ WHAT DOES ALL THIS MEAN?

Goldman Sachs has already made two revisions to its full-year forecast – and it’s not even March. The investment bank now sees the S&P 500 hitting 5,200 by the end of 2024, one of the most optimistic calls on Wall Street. Now, that’s a whopping increase over the 4,700 prediction it made back in November, but with the index already trading near 5,100, that new goal isn’t too far off. The upgrade was triggered mainly by stronger economic growth and higher profit expectations for S&P 500 companies, particularly within the tech sector. See, the bank now expects the index’s 2024 earnings-per-share to come in at $241, which would represent roughly 9% growth over last year – a big improvement from the stagnation seen in 2023.

Nvidia just keeps dropping people’s jaws to the floor, like the AI technologies its computer chips power. Its sales more than tripled from a year ago, hitting $22.1 billion in the fourth quarter and trouncing consensus estimates. And the next round of results will be even more eye-popping, the company said, sending analysts back to their forecasts with pencils and erasers. The earnings and the outlook suggest there’s no slowing down Nvidia’s streak of overachievement, driven by firms’ relentless demand for its AI chips.

HSBC saw its fourth-quarter profit tumble to $1 billion – just a fifth of what it was a year ago. The plunge was mainly driven by several one-off accounting charges, including a huge loss on its stake in a Chinese bank, a hefty hit from selling its French lending business, and a whack of cash it set aside to cover potential losses from China’s slumping real estate sector. That overshadowed what was otherwise a good year, with rising interest rates globally elevating HSBC’s full-year earnings to a record high. And despite a newly announced $2 billion in share buybacks, investors – fixated on the bank’s troubles in China – sent HSBC’s shares tumbling.

China’s troubles were on full display last week after a report showed foreign direct investment (FDI) in the country crumbled to a 30-year low. This isn’t a case of shrinking speculative investments: FDI captures all the investments – initial and continuing – in China by multinational firms with ongoing operations in the country. Total FDI into the nation was just $33 billion last year – 82% less than the previous year and the lowest since 1993. There’s probably never a good time for this kind of dropoff in the economy, but this one comes at a particularly inconvenient moment for China, which is dealing with a property crisis, anemic domestic demand, and paltry investor confidence.

But the country got some good news last week, with a new report showing travel and spending during the Lunar New Year holiday topped pre-pandemic levels. Tourist trips increased by 19% and spending by 8% this year, compared to 2019. Though, to be fair, this year’s festival was eight days long, instead of seven. Still, the nation’s most important holiday is a key barometer of consumer spending, and the upbeat spending does suggest a potential rebound in domestic demand.

🔍 This week’s focus: A rosy outlook

There’s no question that Goldman is optimistic about the prospects for US stocks, and that outlook extends beyond this year. Its economists estimate that AI could add a chunky 1.5 percentage point to US productivity growth every year over the next ten years. And based on the historical relationship between productivity growth and corporate profitability, this boost could lift S&P 500 profit margins by roughly four percentage points over the next decade, all else being equal. In other words, that’d take S&P 500 profit margins from around 12% today to 16% in a decade. That’s massive: on an annualized basis, that would represent a 3% boost to earnings growth, which alone could push up stock market returns by a similar amount.

And it’s all booming big for the US. Its market is, after all, home to many AI-focused software and hardware firms. That said, the buzz surrounding the technology has already driven US shares to record highs, leaving their valuations way above historical averages. And that suggests you might find more attractive, affordably priced investment opportunities in other places that are positioned to benefit from the latest tech revolution. The UK stands out here: it’s expected to get the third-biggest uplift from AI, according to a Capital Economics report that ranked 33 different countries based on how much they stand to benefit from the technology. What’s more, the UK’s stock market valuation is sitting below its historical average.

📅 THE WEEK AHEAD

• Monday: US new home sales (January). Earnings: Zoom.
• Tuesday: Japan inflation (January), US consumer confidence (February), eurozone M3 money supply (January), US durable goods orders (January).
• Wednesday: Eurozone economic confidence (February). Earnings: Baidu, Salesforce, Snowflake.
• Thursday: Japan industrial production and retail sales (January).
• Friday: Japan unemployment rate (January), eurozone inflation (February), eurozone unemployment (January), China PMIs (February).

Stay classy ✌️

Your Finimize Analyst team

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