Receive free updates on US Treasury bonds: Sign up for our myFT Daily Digest email to stay informed about the latest news and developments in the US Treasury bonds market. Good morning! After a period of optimism, the market is feeling anxious again. The S&P 500 has dropped 3% from its recent peak, as investors worry about the lackluster price response to earnings beats. Tech stocks are particularly unstable, with Microsoft down 11% since mid-July and Nvidia down 14%. Email us at [email protected] and [email protected].
Is Nvidia the Cisco of 2023?
I have put together a chart that illustrates the percentage price appreciation of Nvidia over the past four years, compared to the share price appreciation of Cisco in the four years leading up to August 11, 2000. The chart is not only alarming because of the rapid rise of these two tech companies, but also because the narratives behind their stocks are remarkably similar. Cisco was seen as the key infrastructure provider for the internet revolution, while Nvidia is positioned as the crucial infrastructure provider for the artificial intelligence revolution. However, the price return of Cisco since August 2000 has been disappointing, with the stock barely breaking even. Despite Cisco’s positive financial results, the stock was overpriced at the start, leading to its downfall. Comparing the trailing PE ratios of the two companies during these periods, Nvidia appears to be even more expensive than Cisco was in 2000.
Nvidia’s management suggests using a non-GAAP calculation of earnings per share, which Wall Street analysts obediently follow. However, excluding share compensation and merger-related costs from earnings is not recommended. Considering GAAP earnings, Nvidia is trading at around 60 times earnings, making it cheaper than Cisco in 2000. But it’s not that simple. Is the current fiscal year an exceptional one or a new earnings plateau for Nvidia? The chip industry is cyclical and competitive, but Nvidia holds a technological advantage over its peers. The market seems to believe that this is just the beginning for Nvidia, with Wall Street consensus estimating $19 per share in GAAP earnings by 2028.
What if bonds are no longer a safe asset?
Bonds took a hit in 2022, but the worst is likely behind us. As inflation subsides, the higher yields on 10-year Treasuries become attractive. However, a growing number of financial writers argue that bonds’ risks should be reassessed. They highlight four risks: the end of the bond bull market, volatility and higher rates affecting short-term volatility-dampening benefits, the prospect of negative real returns due to higher inflation and a challenging US fiscal outlook, and the potential for bond-stock correlation to increase during market downturns, diminishing bonds’ long-term upside.
If bonds are no longer considered safe and reliable, what alternatives are there? Cash becomes more appealing, as stated by Ray Dalio. Cash offers better yields than long-term bonds, without the associated equity risk. Cash also provides optionality value, serving as a funding source if stocks decline. Holding bonds to maturity in a higher-inflation, rising-rate environment poses an opportunity cost, as rebalancing out of bonds into stocks risks realizing paper losses. Bonds and stocks are still different asset classes with potential diversification benefits, but a shift in investment approach is necessary if bonds lose their safe, unexciting status.
Of course, this assumes that fears of sustained inflation are accurate. Some bond bulls believe that the economy will gradually return to 2% inflation by next year, allowing rates to normalize. In this scenario, the yield on cash would decrease, benefiting bond investors who locked in higher yields. It would also offer capital appreciation potential for bond investments.
There is much more to explore on this topic, and we are eager to hear your thoughts. (Ethan Wu)
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