What’s Your Benchmark? | The Investors Edge

By John Stewart, chief investment officer at Farmers Trust Co.

Week in Review: Back to New Highs

Well, after a brief pullback in the stock market in April, we’ve bounced back in May to reach new all-time highs on the major market indexes.

Inflation has been the key focus of market watchers for some time now, and a cooler than expected report on the Consumer Price Index for April sent stocks rallying more than 1% to new all-time highs this past Wednesday.

The rise in stocks is being predicated on the fact that the Fed will ultimately cut interest rates this year, perhaps a couple of a times, and lower rates are usually a positive catalyst for stock valuations.

There is another side to this coin, however, which is that many of the components of inflation have been moving higher on this same expectation – so cooler inflation has driven investors to bid up things like copper and corn and housing because of the anticipation of lower rates, which actually increases the likelihood of higher inflation going forward – round and round we go!

Featured Insight: What’s Your Benchmark?

Most investors are aware that there are various benchmarks for performance, usually well-known market indexes like the S&P 500 or the Aggregate Bond Index.

While there is certainly a natural desire to “beat the benchmark,” most investors have financial goals that aren’t driven by what a particular market says they should be doing.

For example, if your only goal is to beat the S&P 500 index, that means you should be very happy if you lose 20% of your money when the S&P goes down 30%, but would that make you happy?

In addition, many of the market indexes like the S&P 500 have become quite concentrated, and don’t necessarily represent a well-diversified portfolio.  In fact, despite the fact that the index has 500 stocks, just seven companies make up more than 30% of the weighting.

All things to keep in mind when you’re deciding how you should evaluated investment performance.

Looking Ahead: All Eyes on NVIDIA

Another 3 months has come by, and investors are on pins and needles awaiting another earnings report from AI-chipmaker and market darling NVIDIA.

The stock is already up 90% so far this year after being up more than 200% last year.

Despite the fact that earnings expectations continue to rise at an unbelievable clip, NVIDIA has thus far been able to wow investors with even better-than-expected results on each of its past four earnings calls.

What investors would be wise to notice, however, is that the magnitude of the increase in forward expectations has been falling, from 100% to 50% to 25% to 20% over the past four quarters.  Should that rate of growth in earnings estimates continue to slow, it could be a sign that the stock is fully priced – at least for the time being.

With that being said, the company has pulled plenty of rabbits out of hats in the past.  It will be very interesting to see what they have up their sleeve this time.

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