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Jeremy Owens: Hello and welcome to On Watch by MarketWatch. I’m Jeremy Owens. The stock market is at fresh record highs thanks to a company that had mostly been known for making video games look pretty. Nvidia produced one of the most astounding financial years in history. And while that success may seem sudden, it’s actually the product of years of building. We’ll tell you how Nvidia got here and talk about where the AI revolution and the market could head next.
Then as Black History Month draws to a close, we’ll take a look at reparations. California has reached a new stage in the largest reparations effort in American history and other states are looking to follow its path. We’ll talk with the chair of the State’s reparations task force about the process. Plus, we’ll take a quick look at the news stories we’re watching right now and how they will affect your wallet. First, let’s talk about Nvidia.
The word I always use to describe my first impression of Nvidia is cute. Since founding the company in 1993, Chief Executive Jensen Huang has loved to evangelize the tiniest of improvements in how awesome video games look while wearing his signature black leather jacket that would make Fonzie jealous. In the stuffy semiconductor sector that gave Silicon Valley its name, Nvidia was the closest thing to cool, but nothing to be taken too seriously.
That changed for me in 2016 when an earnings report sent Nvidia stock to records that would’ve made it worth $35 billion for the first time. When I tuned in the conference call, I was surprised to hear Jensen not talking about how dope Overwatch looked on an Nvidia graphics card. Instead, he was telling the story of a breakthrough in artificial intelligence that he described as “Thor’s hammer falling from the sky.”
The breakthrough that originated in the college students project showed that Nvidia’s core product, graphics processing units or GPUs, could be used to greatly accelerate image recognition. In Jensen’s retelling of the origin story, Nvidia’s researchers were able to pick up Thor’s hammer and harness its power in GPUs that would infuse AI into data centers around the world.
There was reason to be skeptical. Nvidia had a data center business, but it had pulled in just $350 million the year before. That looked puny next to a giant like Intel, but Jensen wasn’t bluffing. Nvidia’s server business would double that year and again the next year. It kept growing until rivaling Intel with $15 billion in sales in 2022. The stock multiplied by a factor of 20 in that time making Nvidia the most valuable chip maker in the world.
But even those accomplishments now look cute in retrospect. Imagine this dream scenario. What if the richest companies in the world were all desperate for something only you could provide? That is precisely what happened to Nvidia last year after ChatGPT sparked massive interest in generative AI. Big Tech promised AI and needed Nvidia to deliver at any price. The results were phenomenal.
Nvidia tripled its own data center business and Intel’s as well last year. I could hit you with a parade of jaw dropping figures from this earnings report, but I think just one of them sums it up well. Nvidia produced more profit last year than it had made into revenue in any year prior. According to Dow Jones market data, no company has ever done that at the scale of Nvidia.
With that historic success comes historic pressure though. Wall Street now expects Nvidia to surpass $100 billion in revenue this year, a level that Intel has never even approached, and analysts expect more than half of that to be pure profit. That leads us to the future for not just Nvidia, but the entire market. As we discussed a few weeks ago, the success of the stock market is now predicated on the success of just a handful of high performing tech companies and some say Nvidia may now be the most important.
What does that mean for the market moving forward? I sat down with Philip van Doorn, MarketWatch’s Deep Dive investment columnist to talk about that question. Phil, we saw that Nvidia near $2 trillion in market valuation last week after earnings. Now usually when a stock pops like that, you see a big rise as well in its price to earnings ratio because the price is going up so fast. But that actually hasn’t happened to Nvidia. How has that moved and what does the PE ratio look like writ large for the S&P 500?
Philip van Doorn: Well, the forward price to earnings ratio is the current price divided by the sum analysts estimates for earnings per share over the next 12 months. So it’s a rolling 12 months and it’s updated very often, almost every day for a company such as Nvidia. So we can compare it to the direction of this ratio for the S&P 500. Now S&P 500 had a bad year in 2022 and it recovered in 2023.
Over the past year through Friday, it returned about 21% and during that time, the indexes weighted forward price to earnings ratio increased to 20.6 from 17.8. But at the same time, shares of Nvidia more than tripled in price, but Nvidia’s forward price to earnings ratio bell to 31.3 from 17.7. Now, 31.3 may sound high as a valuation for a stock.
Jeremy Owens: Especially compared to roughly 20% for the S&P 500.
Philip van Doorn: Yeah, but most companies are not growing as quickly as Nvidia. Nvidia is growing so much more quickly than the index that one might argue if we’re still at an early phase of the artificial intelligence build out, that Nvidia is a cheap stock.
Jeremy Owens: And I can understand that because the company continues to put forward even greater earnings than expected by the market, which seems to be hard at this point because they continue to grow so fast and change their estimates moving forward and then Nvidia beats it again, puts out a new forecast. That is still higher than was expected, so they continue to try to catch up.
My main concern and what I try to stress to investors is that semiconductors can be a very cyclical industry. There’s a lot of demand for these products, but at some point, demand and supply hit the same level and then all of a sudden it falls off. And we just don’t seem to have that coming immediately for Nvidia. But it is a concern and as we continue to see that Wall Street can’t quite grasp the great rate of growth for Nvidia, that it might also have trouble timing when that growth comes to a stop.
Philip van Doorn: And we don’t know how long this phase will go on or the effect of Nvidia’s continual improvement. So there are many moving parts here. We can look back and keep in mind that Amazon has always traded very high on a price to earnings basis, but if you shied away from it for that reason, you missed out on massive gains over the years.
So it’s just something to keep in mind. And if an investor has a huge profit on Nvidia and is wondering how long this will continue, they can take some of their profit off the table now. They can also set stops so that their broker will automatically sell the shares if they fall a certain amount. So there are different ways to protect yourself if you’re sitting on a huge gain. And if you are picking individual stocks, you’re looking for growth, you still have to consider Nvidia at this time.
Jeremy Owens: And we can definitely see that investors are looking for growth elsewhere outside of Nvidia. You did kind of screen some of the other AI companies that could see some gains here that at least Wall Street believes will gain from here. What did you really take from that? What should people who are looking to get into AI but maybe looking beyond Nvidia, what should they be looking for?
Philip van Doorn: I think they should go with broad exchange traded funds that track indexes unless they are expert on various aspects of AI and the equipment deployment to support it. So if an investor holds an S&P 500 index fund, the Nvidia component is more than four and a half percent. And maybe an investor shouldn’t put more than four and a half percent at risk in any individual stock.
If an investor wants to play the semiconductor industry, they can go with the SOXX ETF, S-O-X-X. The iShares Semiconductor ETF, Nvidia makes up 11% of that portfolio. So there are some ways to broaden your risk, lower your risk, and still ride the Nvidia wave assuming it continues.
Jeremy Owens: When it comes to that risk in investing in Nvidia, one thing to really think about is we may just be at the beginning or even in the middle of a cycle and knowing how to approach these cycles is how veterans semiconductor stock traders have approached the sector for years. They try to stay six months to a year ahead of the cycle, get in and get out well before it’s very apparent that the cycle is beginning or ending.
Philip van Doorn: Well, I suggest that they don’t try to play any cycles. What I do with broad index investments on my own is I just keep pouring money in and when they crash, I pay lower prices. And when the market recovers, I have more than I would’ve had if it hadn’t crashed.
Jeremy Owens: And are there concerns just about the larger market, how much of this is being fed by AI? How should we look at this? I try to kind of clue people in that we may be at another dot-com boom period, and that could happen again here. Any concerns near term, long-term along those lines that you’d like to make sure people are aware of as we enter record market (inaudible) as we’re in record market territory again?
Philip van Doorn: Well, this is a whole new world, the AI deployment. At this point, the AI enablers including companies such as Nvidia, Microsoft, Amazon, and Alphabet, which are providing the cloud services that also backup up companies, AI deployment are at the fore. But we don’t know when the next phase will begin. And that’s when companies such as Adobe make good use of AI to improve their products that people are buying.
I don’t know when that’s going to take. I do not know how long the enabling cycle will last or when the adaptation cycle begins or how long it will last. We still seem to be ahead of the adaptation cycle, so that’s when some software companies will come to the fore by deploying AI effectively. I don’t know when it begins. I don’t know how effective they will be or how long that phase will last.
Jeremy Owens: We’ll continue watching for it. We’ll continue to cover these tech earnings and try to show you any money we see that could back up the current AI boom. Thank you so much for joining us, Phil, and please come back and join us again.
Philip van Doorn: Thanks, Jeremy.
Jeremy Owens: We’re going to take a quick break. Coming up, reparations. Stay with us. Welcome back to On Watch by MarketWatch. Before the break, we talked with Philip van Doorn about the stock market and its crown jewel, Nvidia. Now let’s talk about the biggest reparations effort in American history. Reparations for enslaved people and their descendants have been an issue in the US since Union General William Sherman promised 40 acres and a mule as the Civil War came to a close. President Andrew Jackson rescinded that offer within a year and efforts to pick it back up since have largely proved fruitless.
But in California, a path to true reparations is being paid. A task force established by the state legislature spent two years examining what reparations might look like here. The result was a report spanning more than a thousand pages that totals up more than $800 billion in harms done to black people in the golden state just through housing discrimination and mass incarceration.
But now comes the real task, turning that report into policy. This month, California’s legislative black caucus submitted the first round of proposed bills based on the report. To discuss those bills, we talked to the leader of the task force, Kamilah Moore. She’s an entertainment lawyer in Southern California who put her hand up to lead the panel after studying repertory justice in law school. We called her to discuss the current legislation and what other states should expect as they begin their own efforts
As the chairperson, you led basically two years of meetings around the state where you heard from economists, historians, all kinds of people who have experience trying to figure out what reparations look like. You also heard from typical Californians who showed up to these meetings and talked about what they would expect from reparations, what they were looking for. Could you tell me maybe what surprised you the most? What did you experience that actually you were not expecting to when you started this journey?
Kamilah Moore: I think in part hearing from folks who gave public comment and public testimony, learned about the early history of California, how many people living today are descendants of those who were enslaved in California or were one of the first black Americans in the state of California who had their lands stolen either via eminent domain that was racially motivated or just through extrajudicial violence. And so those types of stories we think are just kind of specific to the South, but it was interesting to hear parts of folks’ testimony pretty much saying otherwise.
Jeremy Owens: This is a 1100-page report that the task force went out. Can you boil it down to just exactly what was recommended by the task force at the end of two years of meetings and discussions?
Kamilah Moore: We produced over 115 final recommendations to the state legislature for them to essentially translate into legislation and pass into law. And so many of these recommendations or all of them were aimed to eradicate the lingering badges and incidents of slavery that the task force identified.
Through our two years of work, 13 major areas of systemic discrimination or what we call the 13 major badges and incidents of slavery that still exists in this country and in the state of California and disproportionately impact descendants of slaves in this state from racial terror to the wealth gap to political disenfranchisement to housing segregation to racism in the environment and infrastructure, in inequality and labor and employment and discrimination in arts and technology. These are some of the kind of wide-ranging areas that the task force studied over the course of two years and recommended policies that again, were to eradicate lingering discrimination in these areas as well.
Jeremy Owens: And your hope now is that there will be law created from what you’ve done. What’s your take on what has been introduced so far?
Kamilah Moore: I applaud the California Legislative Black Caucus for taking the initiative to introduce some of the first set of reparations legislation based on the task force’s final report, coming together over a course of months to come up with a package that at least starts to address some of the lingering badges and incidents of slavery that the task force identified under international human rights law.
There are five forms of reparations and you really can’t call a reparations program full and effective unless it encompasses all five of those forms. And so compensation is one of the necessary forms of reparations under international law. There’s also restitution, rehabilitation, satisfaction and guarantees of non repetition. And so some of the headlines around these bills is that their bill package omits cash payments.
And so again, from a perspective of someone who is an international human rights law scholar, then critiquing the bill package in that sense, it does fall short. But this is a multi-year program and effort. I’ll just conclude by saying the chair of the California Legislative Black Caucus, Lori Wilson, was just on a local radio show and I was actually encouraged by her response around cash payments or at least to understanding. She and the CLBC seems to understand cash payments is not a handout, it’s not a gift. It’s a debt owed for state sanctioned wrongs, atrocities, and policies against descendants of slaves.
Jeremy Owens: Yeah. And that really is the most controversial part of this, is cash reparations to descendants of slaves. And that is not part of this first round of bills, though it doesn’t preclude it from coming later. And it seems to me like if I’m trying to bucket what the actual first round of bills is, there are some that seek specific apologies for atrocities done in the past.
There are some that look to address the symptoms of institutional racism, putting more money into criminal justice reform, education and health in black communities and others. And then there is the actual restitution part, as you mentioned, looking at specifically housing related harms. There’s one about eminent domain being used to take black homes. And this seems to be one of the most fruitful areas so far for the reparations pushes that have been made in the United States.
Evanston, Illinois has one of the biggest reparations programs that has been instituted. It was specifically aimed at housing discrimination and people losing their homes. One of the bills in California looks at specifically eminent domain seizures. Did you feel that was the most fruitful out of the ones that came? And can you just talk us through the difference between general reparations that looked to address a wide range of ills versus specific restitution for specific economic harms?
Kamilah Moore: So Senate Bill 1050 is a bill that was introduced by Senator Bradford and it would provide restitution for what they’re calling in the legislation, race-based eminent domain. And so it would allow for black Americans, those who descend from slaves to go through a process of getting their land back. So that is, to the point of your question, a very promising bill, one of the, if not the most promising bill in the CLBC’s bill package.
Jeremy Owens: The other bills that are included look to do a few other things, right? Official apologies from the state for specific atrocities, looking at the symptoms of institutional racism over the years, trying to address criminal justice reform, improve education and health opportunities and programs in black communities. But really is just the housing restitution one that looks to offer any type of remuneration to black people for what has been done to them from what I saw. Did you see others that would fit under that?
Kamilah Moore: That’s a good observation. I think so. I mean, you could say tangentially, maybe AB 1929, which was introduced by assembly member Tina McKinnor that would expand access to career technical education by creating a competitive grant program to increase enrollment of descendants in STEM related CTE programs at the high school and college levels.
The language in that bill is pretty brief, so still needs to be spelled out what that means, but that could be considered a form of restitution as it relates to education. I think there is a bill that was introduced that would create or fund career educational financial aid for those living in redline communities. But yeah, to your point, I think Senate Bill 1050 I think is the most potent.
Jeremy Owens: There are similar commissions dealing with reparations popping up in cities and states around the country, as we mentioned in New York and Illinois, but also in other places. To learn more, you can research what is being done in your community, your state around this, or check out one of the many organizations that are working for reparations on the federal level. Thanks so much for joining us, Kamilah.
Kamilah Moore: Thank you so much.
Jeremy Owens: Before we go, it’s time for what we are watching, a look at the news you need to know for the rest of the week and beyond. This morning we got the latest reading of the Federal Reserve’s preferred inflation metric and it indicated the central banks fight may not be over just yet. The PCE index rose 0.3% for January, which was in line with economists’ expectations, but represented the fastest pace of inflation in four months. The yearly rate of inflation fell slightly to 2.4%, still above the fed’s stated goal of stable 2% annual inflation.
All taken together, it means the Fed will be less likely to cut interest rates until later in the spring or summer. The housing trap we talked about a few weeks ago is not getting any better. Mortgage rates have stubbornly stayed higher than 7% and recent data shows mortgage applications continue to decline as homeowners stay put with their lower rates. The Case-Shiller index also showed this week that home prices are still hitting record highs.
With prices and mortgage rates elevated, the real estate industry looks like it is headed for another rough year. Yesterday, congressional leaders announced they reached a tentative agreement on a funding bill. The short-term extension will halt a government shutdown, which would’ve begun taking effect on Saturday morning. The agreement extends funding for some federal agencies until March 8th with others receiving funding through March 22nd. The House and Senate will vote on the bill by Friday’s deadline and we’ll continue to cover this.
So check back for more on marketwatch.com. And that’s it for this episode. Thanks to Philip van Doorn and Kamilah Moore. If you’re interested in learning more about California’s reparations effort, former MarketWatch reporter Levi Sumagaysay covered the task force and his report extensively and you can find that coverage on marketwatch.com. You can also find much more about Nvidia and the stock market records it helped produce as well. You can subscribe to the show wherever you get your podcasts and please do.
If you like what you heard, please leave us a rating and a review. It really helps others discover the show. And let us know what you want to hear from us. You can reach us at onwatch@marketwatch.com. If you’re a listener on Spotify, be sure to answer this week’s poll. The show is hosted by me, Jeremy Owens, and produced by Meadow Lutzhoft and Katie Ferguson who also mixed this episode. Melissa Haggerty is the executive producer. We’ll be back next week with a new episode and until then we’ll be watching.
