Nvidia Corp. NVDA-Q delivered another blockbuster quarterly earnings report this week, but you’re not alone if it left you feeling a little queasy.
The company, which makes the chips that power our artificial intelligence aspirations – and counts the likes of Microsoft Corp. and Meta Platforms as its customers – recently surpassed Apple Inc. as the world’s most valuable company. It is worth more than US$3.5-trillion based on the combined value of its shares.
Much of Nvidia’s third-quarter report, released Wednesday, supported this lofty status: Revenue increased 94 per cent from the same period last year to US$35.1-billion, and net income increased 100 per cent to more than US$20-billion, underscoring not only tremendous growth but fat profitability as well.
“The age of AI is in full swing,” Jensen Huang, Nvidia’s founder and chief executive officer, said in a release.
To be sure, a number of observers embraced the results.
Daniel Ives, an analyst at Wedbush Securities, called the results “eye popping.” Atif Malik, an analyst at Citigroup, said he expects sales will rise in January as the company’s new Blackwell chips gain traction.
And Thomas Mathews, a markets commentator at Capital Economics, argued that the results supported his view that continuing AI-hype will propel U.S. stocks through next year.
So why are some investors feeling uneasy?
Nvidia is emblematic of a U.S. stock market that is looking increasingly overstretched – to the point where it is becoming impossible to ignore notes of caution from various sources, especially as the prospect of tariffs, trade wars and tighter immigration become more meaningful under a second Donald Trump presidency.
Warren Buffett, the chief executive officer of Berkshire Hathaway Inc. and one of the greatest investors ever, was sitting on US$325-billion of cash at the end of September – a record high for the company. That’s up US$48-billion in the last quarter alone, which suggests he might not be seeing terrific investment opportunities right now.
Goldman Sachs strategist David Kostin argued in October that the annualized returns from the S&P 500 could shrink to an average of just 3 per cent over the next decade, owing to stretched valuations, and likely trail the returns offered by safe U.S. Treasury bonds. Though Mr. Kostin raised his 2025 target this week for the blue-chip index, implying a 10-per-cent gain, that’s just one year.
The U.S. market also looks lopsided. Analysts at Bank of America noted this week that Nvidia has driven 25 per cent of the gains in the S&P 500 over the past year.
It would be tempting to ignore this hand-wringing if stocks were cheap and unloved. That’s not the case: The S&P 500 has been hitting record highs this year and popped after the U.S. election earlier this month raised hopes for corporate tax cuts and lower regulations.
Small investors, who often join equity rallies late in the game, are showing particular enthusiasm for stocks.
This week’s survey by the American Association of Individual Investors, which polls members on their short-term market outlook, showed that bullish sentiment – while down from last week – has been above its historical average for 54 out of the past 55 weeks.
Contrarians see this as a negative indicator that points to a rally that is getting old.
The easiest approach for worry-warts who can’t take joy from Nvidia’s success is simply to do nothing.
Most of us, after all, are lousy market timers. Getting out of risky stocks at the top of the market is only half the struggle; market timers also have to jump back into stocks near the bottom to ride the next upswing.
Still, there’s something undeniably attractive about socking away a little extra cash in guaranteed investment certificates (GICs) or even money market funds, which offer a risk-free way to ride out the uncertainty. Even as yields fall with interest rates, the income is still decent.
Yes, cash is supposed to be a reason to invest in stocks: As yields on GICs and money market funds decline, the theory goes, investors will move cash from the sidelines and into the stock market.
But there’s an interesting counterargument here. Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors, noted that while cash holdings among U.S. investors have risen since 2019, equity exposure has risen considerably more.
“As a result, cash allocations are below long-term average levels while stock allocations are at all-time highs,” Mr. Suzuki said in a note.
Maybe the stock market will continue to rise, with Nvidia driving the gains. And maybe threats of tariffs and trade wars will subside. For the maybe-not crowd, though, cash offers a compelling alternative.