The equity market is in the early innings of a stock market bubble, in our view. For bubbles to form there is normally a new generation of investors, excess liquidity, and an underlying development, discovery, or invention, which makes the economic backdrop “different this time.” The concept of being “different this time” is important since it is at the crux of how the equity market can disconnect from underlying fundamentals.

In the current environment the most obvious new “invention” is generative artificial intelligence, or AI. Today’s economic backdrop is seen as accommodative for equities based upon the consensus opinion that inflation is trending toward a benign 2% level, a pivot in monetary policy from tightening to easing is ahead, and there is no significant recession on the horizon. Any challenges in any of these areas could derail the bubble. However, of these three criteria Federal Reserve policy is the least important. It is likely that investors can, and will, adjust to the fact that a Fed rate cut may not materialize any time soon.

Eyes on Nvidia

What would be a shock to the market would be if generative AI does not become the earnings driver that analysts expect it to be. This helps to explain why earnings results for chipmaker Nvidia Corp. (NVDA – $694.52), which controls 80% of the high-end chip market, will be a critical barometer for the market and for the bubble. Nvidia earnings are released on Wednesday which makes this the most important day of the week. The 40% gain in Nvidia’s stock price this year has driven NVDA’s market capitalization past that of, Inc. (AMZN – $167.08) and Alphabet Inc. (GOOG – $142.20), placing the stock in third place behind Microsoft Corp. (MSFT – $402.79) and Apple Inc. (AAPL – $181.56) in terms of size. The company has also replaced Tesla, Inc. (TSLA – $193.76) as Wall Street’s most traded stock by value after $30 billion worth of its shares changed hands, on average, over the last 30 sessions. This turnover was greater than Tesla’s average of $22 billion per day in the same period. With a forward PE ratio of 32 times, many analysts expect a blow-out earnings quarter for NVDA.

While in the World

The focus on Nvidia’s earnings release has overshadowed a number of other events this week including the $80 billion merger of Capital One Financial (COF – $137.39) and rival Discover Financial Services (DFS – $124.42), Walmart Inc. (WMT – $175.86) buying smart-TV maker Vizio Holding Corp. (VAIO – $11.08) for $2.3 billion, Russia taking over the Ukrainian town of Avdiivka in a chaotic bloody battle, the United States being the only veto to a United Nations Security Council resolution demanding an immediate humanitarian ceasefire in the Israel-Hamas war, and the US announcing a major package of sanctions against Russia in response to the death of opposition leader Alexei Navalny while he was in prison.

Economic Results

The National Association of Home Builders confidence index rose 4 points in February to 48, driven entirely by expectations which rose 1.3 points to 78.4. These results are up nicely from recent lows but remain well below pre-Covid-19 levels. The Census Bureau released data showing total housing starts fell 14.8% YOY in January, while single-family starts rose 22% YOY. Similarly, new housing permits rose 8.6% YOY and single-family permits rose a much stronger 35.7% YOY. This data seems to suggest that the boom in multi-family construction may be slowing. See page 3.

In January and on a seasonally adjusted basis, total retail and food services sales increased a modest 0.6% YOY. Excluding motor vehicles & parts, retail sales rose a slightly better 1.2%, and excluding motor vehicles & parts and gas stations, sales rose 2.2% YOY. However, based on 1984-84 dollars, retail sales fell 2.4% YOY, making January the 11th time in 15 months that real retail sales were negative on a year-over-year basis. This has been one of the longest stretches of negative real retail sales not accompanied by an economic recession. See page 4.

In the post-COVID-19 era there have been only two components of retail sales that consistently gained market share, and these are nonstore retailers and food services & drinking places. In other words, in a period of negative real retail sales coupled with gains in nonstore retailers and food services & drinking places, many other areas of the retail sector have been suffering greatly. Auto sales are a large component of total retail sales; and while autos had a healthy rebound from their COVID lows, it was not sustained, due in large part to increases in interest rates, gas prices, and auto insurance costs. See page 5.

The University of Michigan sentiment index for February was 79.6. This was little changed from January’s 79.0 reading, but it was up nicely from November’s 61.3 survey. Expectations led the gain, rising from 77.1 to 78.4. Current conditions fell from 81.9 to 81.5. The University of Michigan often includes political affiliation in its sentiment surveys, and this can be interesting to monitor. What is seen on page 6, is that one’s confidence tends to rise or fall depending upon which party you favor, and which party is in power. Democrats have displayed higher levels of consumer confidence during President Biden’s term in office, although even Democrats have shown less confidence in recent years than during President Trump’s term. Nonetheless, in February, sentiment improved substantially for Republicans and Independents, but fell for Democrats. See page 6. It will take time to see if this sentiment shift has any meaning for the November election.


After slight declines in both the S&P 500 index and consensus earnings estimates, the trailing operating PE for the SPX is 23.3 X this week and remains above all short and long-term PE averages. The sum of the S&P’s 12-month forward PE of 21.2 and January’s CPI of 3.1% YOY equals 24.3, which is above the fair value range for equities, i.e., more than 23.8. In short, the market is richly valued. We are focused on this year’s earnings forecasts, but it is curious to note that the LSEG IBES consensus earnings estimate for last year was lowered by $2.71 to $221.84 this week. The S&P Dow Jones 2023 earnings estimate is unchanged at $211.10. See page 8.


The S&P 500 and Dow Jones Industrial Average continue to make new highs while the Nasdaq Composite index inches closer to its November 2021 high of 16,057.44. Meanwhile, the Russell 2000 remains the most interesting index as it struggles to better, and stay above, the key 2000 resistance level and move out of the 1650 to 2000 range that has contained prices for two years. If the Russell can stay above this range successfully, it would be bullish for the overall equity market. Conversely, if the Russell fails to stay above the 2000 level and/or if the Nasdaq fails to move into new high ground, it could be a negative for the broader market. See page 9. The 25-day up/down volume oscillator is at 0.43 this week and neutral. However, it is rising from the lower end of the neutral range. This indicator should reach and remain overbought for a minimum of five trading sessions to confirm new highs in the marketplace. The last string of overbought readings ended on January 5.

Gail Dudack

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PLEASE NOTE: Unless otherwise stated, the firm and any affiliated person or entity 1) either does not own any, or owns less than 1%, of the outstanding shares of any public company mentioned, 2) does not receive, and has not within the past 12 months received, investment banking compensation or other compensation from any public company mentioned, and 3) does not expect within the next three months to receive investment banking compensation or other compensation from any public company mentioned. The firm does not currently make markets in any public securities.

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