Rachel Winter discusses quarterly results from NVIDIA, Walmart’s comments on the US consumer, and the latest UK inflation data.
Rachel Winter
Partner, Investment Management
Good morning and welcome to the Killik & Co market update.
Markets have continued to hold up well as we approach the end of quarterly earnings season. Over 95% of S&P 500 companies have now reported, and the results have broadly been ahead of expectations.
Here’s the S&P 500 – still trading close to that record high it hit last week. In terms of earnings growth, or profit growth, this quarter has been the best since 2021 when the economy was bouncing out of Covid.
Arguably the biggest event on the earnings calendar is NVIDIA’s results. NVIDIA tends to report a bit later than other companies, and there’s always a lot of anticipation as it’s the biggest company on the stock exchange.
Here are some of the key numbers. The column on the left shows the most recent numbers, and the column on the right shows the equivalent numbers for the same quarter last year. The central column shows the rate of growth. Revenues were up 85%, gross margin went up from just over 60% to 75%, expenses were 49% higher and yet operating income which is a measure of profit, still went up 147%.
Despite the big increases in the numbers, NVIDIA shares actually dropped a little, just over 1%, when the results came out, which in part shows how high the expectations have become for NVIDIA.
The company announced that it plans to return some capital to shareholders buy buying back $80bn of its own shares. This can be a sign that a company is moving out of an intense growth phase and into a more established phase, which might make it a little less appealing to some investors and more appealing to others. To put the size of that $80bn into context, here are the top ten companies in the UK’s FTSE 100 index and there market capitalisations in dollars. The spare cash that ndivia is giving back to its shareholders is enough to buy more than half of BP.
In other technology news this week, the US Department of Commerce has just announced it will be awarding $2 billion to American quantum-computing companies — half of which will go to IBM -to try and give the US a bit more of an edge in this area. Needless to say, shares IBM responded well to the news and gained over 12% yesterday.
In other news, we also had results from Walmart this week. The shares have had a fantastic runover the last five years – they’ve more than doubled, as you can see from this chart here. However, they dropped 7% when their results came out, and part of the reason for this was a comment they made in their earnings call that suggested the US consumer is starting to struggle a bit.
Here’s the comment: “We see with our customers that the high-income customer is spending with confidence into many categories, while the lower income consumer is more budget conscious and perhaps navigating financial distress… we have a large fuel business and we see that in the most recent period, the number of gallons that customers fill up with when they come to our fuel stations fell below 10 for the first time since 2022. That's an indication of stress.”
Last week we talked about the rise in US inflation. Today, new chair of the federal reserve, Kevin Warsh, starts his job, so hopefully we’ll soon be hearing more about his current views on where interest rates should go next.
On the subject of inflation, we also had the latest UK inflation data this week. The headline CPI rate for the UK unexpectedly dropped to 2.8% which was a pleasant surprise.
Looking within the data, there has clearly been significant inflation in motor fuels and therefore transport.
On this chart we’re showing the headline rate of CPI over the last ten years in the black. The green shows the inflation rate for transport, and the pink break that down further and just shows inflation for motor fuels. Motor fuels gained over 40% during the oil price spike of 2022, and they’re now heading back in that direction again. If this carries on we would expect to see a higher headline rate of inflation in future.
Next week – it’s the very tail end of earnings season and we’re expecting results from Salesforce, Costco, and SSE.
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