The S&P 500 has continues to edge higher.
A softer-than-expected inflation report for June fueled hopes that the Federal Reserve will start cutting rates in September. Several major investment advisory firms sifted their forecasts for Fed rate cuts and stock downgrades.
The CPI report showed only a slight 0.06% increase in core inflation, excluding food and energy prices. The data suggests a deceleration in inflation since the beginning of the year. A notable slowdown in the previously high housing services inflation hints at diminishing inflationary pressures.
The moderation in core CPI elements has led analysts to believe that the inflation trend is on a downward trajectory. Discrepancies exist between the CPI and the Fed’s preferred inflation measure, the core Personal Consumption Expenditures (PCE) price index. But, the overall pattern indicates a sustained reduction in inflation rates.
Earlier in the week, Federal Reserve Chair Jerome Powell shared his concerns about achieving a balanced economic ‘soft landing.’ This involves managing inflation without undermining the employment market.
The recent cooling of the labor market has lessened the threat of wage-driven inflation. But it also raises concerns about potential increases in unemployment. In the past, the robust labor market granted the Fed the leeway to wait for clear signs of easing inflation before making policy changes. However, current conditions suggest that delaying rate cuts could carry greater risks.
Wells Fargo (NYSE:WFC) economists project that the Federal Open Market Committee (FOMC) will reduce the federal funds rate by 25 basis points in September, followed by an additional 25 basis point cut in December. Evercore also expects a rate cut in September.
As a result of this improving macro backdrop, valuations are becoming stretched. And analysts are forced to cut ratings on the biggest winners, resulting in stock downgrades.
Super Micro Computer (SMCI)
Nomura (NYSE:NMR) adjusted its rating on Super Micro Computer (NASDAQ:SMCI), shifting from a buy to a neutral rating. The firm has maintained its price target for the company at $930.00.
The change in rating comes after Super Micro Computer offered strong guidance for the periods of CY4Q23 to CY1Q24. The analyst notes that the company’s position has evolved from easily surpassing modest market expectations in CY4Q23 to facing a tighter margin for exceeding the already elevated market expectations in CY1Q24.
This shift is attributed to two main uncertainties: the gradual easing of CoWoS-S supply in CY2024F and the potential transition period between Hopper and Blackwell GPUs in the second half of CY2024F.
Despite these uncertainties, the analyst acknowledges SMCI’s competitive edge with its liquid cooling solutions, which are expected to support the company’s gross profit margin (GPM). However, the limited order visibility, due to the aforementioned uncertainties, may challenge Super Micro Computer’s ability to achieve sales that surpass expectations, leading to stock downgrades.
Tesla (TSLA)
UBS Group (NYSE:UBS) analysts lowered the rating for Tesla (NASDAQ:TSLA) shares from neutral to sell, despite increasing the price target from $147 to $197. The analysts pointed out that Tesla is recognized for more than its automotive sector. It has promising developments in Energy and Full Self-Driving (FSD). However, the expectations for its core Auto business are declining.
TSLA is poised to report earnings on July 23rd, following a strong Q2 delivery performance. Analyst consensus estimates the Q2 earnings per share (EPS) at 47 cents. The last time Tesla exceeded EPS expectations was in Q2 of 2023, with a 13% surprise.
Analysts concluded that the current market valuation leaves a significant portion, over $500 billion, attributed to anticipated future growth. To rationalize the present stock prices, a future value of $1 trillion would need to be realized within five years.
The report further stated that Tesla’s investment in artificial intelligence (AI) technology is substantial. But the returns may be long-term and the rate of progress could decelerate. The concern is that if market interest in AI wanes, Tesla’s stock multiple might be affected.
Given these uncertainties and the potential for growth opportunities to emerge later than expected or not at all, coupled with the stock trading at 86 times next twelve months (NTM) price-to-earnings (P/E), the downgrade to sell was justified.
NVIDIA (NVDA)
NVIDIA (NASDAQ:NVDA) saw New Street Research cut its rating on the company’s shares last week. The research firm downgraded NVIDIA from buy to neutral, setting the price target at $135.00. Stock downgrades like this reflect growing concerns in the market.
The downgrade was prompted by the analyst’s view that NVDA’s upside potential is limited under the current conditions. The consensus among market participants suggests that GPU revenues are expected to rise by 35% by 2025, aligning with previous forecasts.
However, the firm sees little room for further growth based on the latest insights from the value chain. According to New Street Research, the likelihood of significant gains for NVIDIA’s stock hinges on a bullish scenario. That would be if the outlook beyond 2025 markedly improves.
Currently, there is no strong conviction that this scenario will unfold. Market projections indicate a revenue growth deceleration to mid-teens. And this might be threatened by a slowdown in hyperscale capital expenditures and increased competition from ASICs and AMD (NASDAQ:AMD).
The quality of NVIDIA’s franchise remains solid, and the firm would consider re-entering a buying position should the stock demonstrate prolonged weakness.
On the date of publication, Shane Neagle did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.