Image Source: Pixabay

Something happened that had not been seen in years. Microsoft (MSFT) and Apple (AAPL) lost their rankings as the number one companies by market capitalization to a relative newcomer. Nvidia (NVDA) overtook both before dropping to third by market close on Friday.

Nvidia’s rise has been astounding. The corporation’s market capitalization grew from roughly $12 billion in 2015 to $145 billion in 2020, a greater than tenfold increase. However, it rose 30X since then to $3.11 trillion. Currently, Nvidia is the third most valuable company.

It is well-known that Apple’s rise was due to the smartphone. Microsoft grew to prominence with its operating system, enterprise software, and cloud. Alphabet (GOOGL) is the leader in search, advertising, and mobile phone software. Amazon revolutionized online shopping and retail. Meta Platforms (META) rose to become the leader in social media. However, why did Nvidia become so valuable?

The firm has its roots in graphics processing units (GPU). They worked with central processing units (CPU) to accelerate graphics and image processing. GPUs have been used in high-end computers and gaming units for many years. However, increasing video demand and software advances made GPUs critical in computers, smartphones, cars, and servers.

Importantly, GPUs can perform non-graphic calculations. They often conduct repetitive tasks in parallel better than a CPU. As a result, they are important for cryptocurrency mining, AI, and machine learning.

This ability gives Nvidia its edge. The other differentiator is the effective leadership of Jensen Huang. He is the CEO and one of the three founders of Nvidia. The combination of the two has resulting in Nvidia’s astounding rise. Interestingly, Huang’s cousin is the CEO of Advanced Micro Devices (AMD).

I do not directly own Nvidia because it paid a minuscule flat dividend for many years. That said, Nvidia increased the dividend by 300%, but the yield is still meager. I do not expect Nvidia to become a dividend growth stock.

The semiconductor industry is notoriously capital intensive. It takes a significant amount of money to design and manufacture chips. Also, leadership changes often. Just look at Intel (INTC). The firm lost its leadership, and eventually, Intel cut its dividend.

The Stock Market This Week – Saturday, June 22

Recent data from Stock Rover showed that the stock market had another solid week. The Dow Jones Industrial Average (DJIA) was the top index. It was followed by the S&P 500 Index, Russell 2000, and the Nasdaq Composite.

Eight of the 11 sectors had positive returns this week. The Consumer Cyclical, Energy, and Financial Services sectors were the top performers. However, the Real Estate, Technology, and Utilities sectors were the worst performers of the week. Sentiment has seemingly turned against Technology, with many stocks struggling. In addition, for income investors seeking deals, Utilities, and regional banks remain a good place to look. Although, neither are near their lows.

Oil prices rose to ~$80.60. The VIX climbed nearly 3.5% to roughly 13.1, still well below its long-term average. Gold ended the week at ~$2,335 per ounce, lower than at the start of the month.

(Click on image to enlarge)

Image Source: Stock Rover

The American bull market continues because of the strength of its economy. Unemployment remains at 4% or below, job growth is still robust, and it seems like manufacturing has bottomed. On the downside, geopolitical situations have stabilized, especially after multiple aid packages were passed at the end of April. The bottom line is that investors are still driving share prices up.

The Nasdaq Composite has led the way thus far, followed by the S&P 500, the DJIA, and the Russell 2000. Small-cap stocks have continued to struggle in this era of large-cap tech dominance. Ten of the 11 sectors have seen positive returns overall. The top performers in 2024 have been Technology, Communication Services, and Utilities, while the Basic Materials, Consumer Cyclical, and Real Estate sectors have been trailing so far.

(Click on image to enlarge)

Image Source: Stock Rover

Our dividend growth investing strategy started the year down, but it has since recovered. Overall, larger market capitalization stocks have been performing better than smaller ones. The table below shows their performance by category. It should be noted that dividends and passive income streams have continued to grow.

(Click on image to enlarge)

Image Source: Stock Rover

Stock Market Valuation This Week

The S&P 500 Index trades at a price-to-earnings ratio of 28.40X, and the Schiller P/E Ratio is about 34.58X. These multiples are based on trailing twelve months (TTM) earnings. The long-term means of these two ratios are approximately 16X and 17X, respectively. 

Overall, the market is still overvalued despite the recent correction, the bear market, and the recent rebound seen in the markets. Earnings multiples of more than 30X are overvalued based on historical data.

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