As Thanksgiving draws near, it’s my customary practice to pause and reflect on the aspects of life deserving of gratitude. If you’ve been following this weekly column, you’ve likely concluded that I’m an unabashed optimist. It’s a rarity for me to advocate selling during market upswings or overlooking potential buying opportunities amid stock price downturns. That fundamental stance isn’t about to shift – call it a steadfast commitment. Based on this week’s trading action, persistence will prevail as the year comes to a close.
Throughout Friday’s session, the major averages couldn’t make up their minds, bouncing between positive and negative territory, indicating the level of uncertainty investors continue to have about the fourth quarter. The muted trading action doesn’t diminish the bullish sentiment investors have established over the past few weeks, particularly as inflation indicators suggest the Fed will take no further action. In fact, investors are betting on a less than 10% chance that the Fed will hike at its next policy meeting in December.
Although optimism still remains that the Federal Reserve would become more dovish regarding interest rates, investors lacked conviction on Friday to sustain the momentum. Nevertheless, the Dow Jones Industrial Average see-sawed but eventually closed in positive territory, adding 1.81 points, or 0.01%, to close at 34,947.28. The S&P 500 index rose 5.78 points, or 0.13% to close at 4,514.02, while the tech-heavy Nasdaq Composite Index rose 11.81 points or 0.08%, to end the session at 14,125.48.
Following the sharp rally enjoyed last week, all three major averages logged a third consecutive weekly gain. The Nasdaq enjoyed the largest gain, rising 2.4% for the week. The S&P 500 added 2.2%, while the the Dow closed the week with a 1.9% rise. Both the Dow and S&P 500 logged their first three-week win streak since July. This was the Nasdaq’s first three-week win streak since June. Will the the holiday-shortened trading schedule extend the rally into this week? That remains to be seen. But given the improved inflation data, staying in the market is still the best strategy as we head into the fourth quarter. And on the earnings front, here are the stocks I’ll be watching:
Baidu (BIDU) – Reports before the open, Tuesday, Nov. 21
Wall Street expects Baidu to earn $2.29 per share on revenue of $4.74 billion. This compares to the year-ago quarter when earnings came to $2.49 per share on revenue of $4.8 billion.
What to watch: Navigating the rough waters of the Chinese tech market hasn’t been a stroll in the park. Post-global pandemic repercussions have left even the seemingly undervalued stocks of Chinese Internet companies in the doldrums. But the attractiveness of Baidu, which looks grossly undervalued, is hard to ignore. The stock has fallen 20% over the past six months, including a 13% decline in just the past thirty days. The shares are down 5.5% year to date, compared to a 17.6% rise in the S&P 500 index.
China’s regulatory crackdown on tech companies has been one of the main reasons for Baidu’s struggles. China’s SAMR has demanded better corporate governance, anticompetitive practices and improved political posture, all of which sparked fears among U.S. investors that Baidu’s core marketing business won’t grow as expected, nor will it be able to accelerate its growth in the cloud. But now could be a good time to bet on a recovery. The company’s Q3 revenue is expected to rise on a year-over-year basis, which will mark the third consecutive quarter of revenue growth. Revenue surged 15% in the second quarter. Baidu’s AI investments, and its efforts to establish leadership in China’s AI sector is another reason for optimism.
The company has also shown a commitment to return capital to shareholders via buybacks. Baidu’s board of directors earlier this year approved a $5 billion buyback program, effective through 2025, and this is certain to reward long-term investors. For any of this perceived value to matter however, on Tuesday the company must speak positively about its growth potential for the next year and beyond.
Nvidia (NVDA) – Reports after the close, Tuesday, Nov. 21.
Wall Street expects Nvidia to earn $3.10 per share on revenue of $14.89 billion. This compares to the year-ago quarter when earnings came to 58 cents per share on revenue of $5.93 billion.
What to watch: What can be said about Nvidia that has not already been said? With year-to-date stock gains of close to 240%, crushing the 17% rise in the S&P 500 index, the market has run out of superlatives. Expanding that horizon by one year and three years, the graphics chip giant has skyrocketed 210% and 265%, respectively. For investors who are thinking of taking profits, consider that despite the strong stock performance, the shares still somehow appear cheap. This is because as the stock has risen, the company has continued to raise its profit forecast, proving that the euphoria surrounding artificial intelligence (AI) and generative AI is more than hype.
Nvidia’s second quarter numbers and Q3 guidance suggests there is a sort of relentless demand for AI, especially in the datacenter, where the company’s revenue surged three-fold on a year-over-year basis. As a result, analysts are projecting NVDA stock to go even higher. The stock has a consensus price target of $580; from current levels of $493, that assumes additional premiums of close to 20%. In the second quarter, Nvidia reported adjusted EPS of $2.70, which breezed past analysts expectations by a whopping 30%. For some context, Nvidia not only blew away its own guidance of $2.07, the consensus estimate for this quarter a year ago was a modest $1.07 per share. Q2 revenue also crushed Street estimates by a staggering 22%, coming in at $13.51 billion while the Street was looking for $11.1 billion.
Unveiled in 2022, Nvidia’s generative AI accelerators have already seized market share from competitors who are only in the development stage. But to continue to the stock’s upward trend, the company on Wednesday must continue to tout its growth prospects for the next quarter and beyond.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.