Markets Brief: What’s Next for Nvidia, AI, and Semiconductor Stocks?

Tech Stocks Diverge

The Morningstar US Market Index fell 1.2% last week. Large companies dropped more than small companies, slightly reducing the cavernous gap in valuation between the two categories. Communications services fared the best at a sector level.

Although returns for index heavyweights Meta Platforms META and Alphabet GOOG exceeded analyst expectations, investors reacted quite differently to each, with Alphabet rising 3.6% and Meta falling 1.1%. Commentators explained this as disappointment with Meta’s plans for continued large capital investment in artificial intelligence, given the disappointing returns on the firm’s investment in “the metaverse.”

The AI Outlook

AI was prominent during a week dominated by earnings announcements from large technology-driven companies like Amazon AMZN, Apple AAPL, and Microsoft MSFT. Morningstar CEO Kunal Kapoor and equity analysts Brian Colello and William Kerwin discussed the outlook for Nvidia, AI, and the semiconductor industry in a webinar.

Moats for All Seasons

While a growing industry like AI offers the potential for greater revenue and profits, excess capital spending tends to lower future returns as competition erodes profit margins. A business needs a long-term competitive advantage to protect these margins and access profitable growth. Warren Buffett called this advantage a moat, and this insight has been adopted by Morningstar equity analysts, who assign the companies they cover moat ratings.

Moats are hard to build, difficult to maintain, and frequently undervalued when industries are thriving, but they reveal their importance when investors or consumers lose enthusiasm. It’s impossible to know in advance when this change in sentiment will happen for AI, but when it does, investors who can shelter behind moats will be glad of it. Morningstar has developed a series of indexes for companies with moats.

Fed Rate Cut Expected

Last week’s economic releases were disappointing, with most measures weaker than expected. The employment data dropped Friday exemplified this, but it’s of limited importance to investors, as Morningstar multi-asset strategist Dominic Pappalardo explained. Although the PCE measure of core inflation (which excludes volatile food and energy prices) was a little higher than expected at 2.8%, there remains an overwhelming expectation that the Federal Reserve will announce a 0.25% interest rate cut on Thursday. An additional cut is anticipated in December.

You can keep on top of all upcoming events and earnings with our calendar. For a deeper dive into the economy, markets, and investing universe, download our quarterly Markets Observer report.

Elections Increase Risk

Despite how busy earnings season will be this week, with over 100 large companies expected to report, plus the Fed meeting, these events are likely to pass almost unnoticed amid election news. Elections are dangerous since they encourage investors to focus on the short term, and price volatility can be unsettling and cause mistakes that can derail our long-term financial success.

To help investors through this week, Emelia Fredlick has created a compendium of articles Morningstar has produced on this topic over the last few months. Similarly, Morningstar Wealth’s Danny Noonan applies Warren Buffett’s investing wisdom to the election.

Highlights of This Week’s Market and Investing Events

• Monday, Nov. 4: Earnings from Palantir Technologies PLTR
• Tuesday, Nov. 5: October ISM Services PMI, Election Day
• Wednesday, Nov. 6: Earnings from CVS Health CVS, Energy Transfer ET
• Thursday, Nov. 7: FOMC decision on interest rates, September Consumer Credit, earnings from Albemarle ALB
• Friday, Nov. 8: November Preliminary University of Michigan Index of Consumer Sentiment, earnings from Paramount Global PARA

Check out our full weekly calendar of economic reports, consensus forecasts, and corporate earnings.

For the Trading Week Ended Nov. 1

• The Morningstar US Market Index fell 1.19%.
• The best-performing sectors were communication services, up 1.97%, and financial services, down 0.24%.
• The worst-performing sector was real estate, down 2.91%.
• Yields on 10-year US Treasury notes rose to 4.37% from 4.25%.
• West Texas Intermediate crude prices fell 3.58%% to $69.45 per barrel.
• Of the 699 US-listed companies covered by Morningstar, 416, or 60%, were down, two were unchanged, and 281, or 40%, were up.

What Stocks Are Up?

Paycom Software PAYC, VF VFC, Exelixis EXEL, Garmin GRMN, Roblox RBLX

What Stocks Are Down?

Qorvo QRVO, Huntington Ingalls Industries HII, Estee Lauder EL, Sabre SABR, Aptiv APTV