Valuentum Exclusive Analysis for the Discerning Investor

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By Brian Nelson, CFA

The first week of trading in the new year wasn't very welcome, but we think it is far too early to draw any conclusions about how the rest of the year will be. The Dow Jones Industrial Average (DIA), S&P 500 (SPY), and NASDAQ (QQQ) faced selling pressure in the first week due in part to investors waiting until the new year to book the huge gains garnered during 2023. The market continues to digest critical employment data, as it watches movements in the 10-year Treasury closely, a key benchmark rate for asset pricing that now stands just north of 4%. Many bulls are saying 2024 may be a difficult year after the worst start in the S&P 500 for a new year since 2008, but we remain bullish on our positioning in the newsletter portfolios.

Aside from the recent move in the 10-year Treasury higher, Apple (AAPL) has taken center stage. The company is facing a patent dispute with Masimo Corp (MASI) regarding its new Apple Watch, and some are saying that iPhone and Mac sales have been lackluster and will remain so throughout 2024. Apple is a huge weighting in major indices, so any movements in the tech giant will have an outsized influence on overall stock market performance. That doesn't mean that the market still can't advance while Apple stagnates, however. There have been periods in the past where Apple has traded sideways while the market has continued to move higher. We remain excited about Apple's pipeline of new products including the Watch X and Vision Pro, as well as any announcement on how it intends to monetize artificial intelligence [AI].

Also putting a damper in risk assets has been legal action against Microsoft (MSFT) regarding its use of New York Times' (NYT) intellectual property to train ChatGPT. Non-fiction authors are also suing. The crux of the matter is that large language models are training on data to build their platforms that may go beyond fair use. Whatever the outcome of these lawsuits, we think it will be just a blip in society's broadbased adoption of AI across myriad industries. In the past Alphabet's (GOOG) YouTube faced similar problems, and the firm's video platform now accounts for a meaningful portion of Alphabet's intrinsic value. We remain bullish on the long-term prospects of AI, though we admit recent newsflow hasn't been great. Through the course of 2024, we expect many companies to announce how they will monetize AI for their business.

There has also been big news impacting our coverage universe. Bank of America recently noted that AI could drive as much as $100 billion in incremental free cash flow at Nvidia (NVDA) over the next couple years. Our free cash flow estimates are in the ballpark, too, and we value shares of Nvidia north of $600 each, materially higher than where they are trading. In other news, the Wall Street Journal recently reported that Synopsis (SNPS) is in advanced talks to acquire Ansys (ANSS) for ~$35 billion in a cash and stock deal. The takeout price, if the deal materializes, would be substantially higher than our standalone fair value estimate, and we think investors in Ansys should take the money and run. Our report on Ansys will be updated to reflect the proposed deal price, and as of yet, we're not aware of any other potential suitors at this time.

All told, the first week of 2024 took many an investor by surprise, but the selloff can be reasonably explained as profit taking in the new year following a very strong fourth quarter of 2023. The employment markets remain strong and the huge wage increases reaped by workers over the course of the past couple years should continue to fuel consumer spending and stock market gains. That said, some investors may be coming around to the view that the Fed may not begin any rate cuts until the back half of 2024 to avoid any action that may cause inflation to rear its ugly head again. This could create increased volatility in the coming months. We weren't happy with the trading during the first week of the year, and we'll continue to monitor market trends closely to see if this profit-taking selloff turns into something of greater concern.

NOW READ: 12 Reasons to Stay Aggressive in 2024

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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson's household owns shares in HON, DIS, HAS, NKE, DIA, QQQ, SCHG, and RSP. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.    

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