Market Overview: What's Next for Nvidia, AI and Semiconductor Stocks?

Tech stocks diverge

The Morningstar US Market Index fell 1.2% last week. Large companies fell more than small companies, slightly narrowing the large valuation gap between the two categories. At the industry level, communications services performed best.

Although returns from index heavyweights Meta Platforms META and Alphabet GOOG beat analysts' expectations, investors reacted quite differently to each: Alphabet rose 3.6% and Meta fell 1.1%. Commentators explained this as disappointment with Meta's plans for further large capital investments in artificial intelligence, given the disappointing returns on the company's investments in “the Metaverse.”

The AI ​​outlook

AI played a prominent role in a week dominated by earnings releases from major technology-focused companies such as 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 increased sales and profits, excessive capital expenditures tend to reduce future returns as competition squeezes profit margins. A company needs a long-term competitive advantage to protect these margins and achieve profitable growth. Warren Buffett called this advantage a moat, and this insight has been adopted by Morningstar equity analysts, who assign moat ratings to the companies they cover.

Moats are difficult to construct, difficult to maintain, and are often undervalued when industry is thriving. However, they show their importance when investors or consumers lose enthusiasm. It's impossible to know in advance when this shift in sentiment around AI will occur, but when it does, investors who can hide behind moats will be happy about it. Morningstar has developed a series of indices for companies with moats.

Fed rate cut expected

Last week's economic releases were disappointing, with most metrics coming in weaker than expected. Friday's drop in employment data illustrates this, but is of limited importance to investors, Morningstar multi-asset strategist Dominic Pappalardo explained. Although the PCE measure of core inflation (which excludes volatile food and energy prices) came in slightly higher than expected at 2.8%, the overwhelming expectation remains that the Federal Reserve will announce a 0.25% interest rate cut on Thursday. Another cut is expected in December.

With our calendar you can keep track of all upcoming events and income. For a deeper look into the economy, markets and investment universe, download our quarterly Markets Observer report.

Elections increase risk

While earnings season will be busy this week with over 100 major companies reporting as well as the Fed meeting, these events are likely to go almost unnoticed amid the election news. Elections are dangerous because they encourage investors to focus on the short term, and price volatility can be unsettling and cause mistakes that can jeopardize our long-term financial success.

To help investors through this week, Emelia Fredlick has compiled a compendium of articles Morningstar has written on the topic over the past 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, November 4: Palantir Technologies PLTR results
• Tuesday, November 5th: ISM Purchasing Managers' Index for Services in October, Election Day
• Wednesday, November 6: CVS Health CVS, Energy Transfer ET results
• Thursday, November 7: FOMC decision on interest rates, September consumer credit, Albemarle ALB results
• Friday, November 8: University of Michigan Preliminary November Consumer Sentiment Index, Paramount Global PARA results

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

For the trading week ending November 1st

• The Morningstar US Market Index fell 1.19%.
• The best performing sectors were communications services, up 1.97%, and financial services, down 0.24%.
• The worst performing sector was real estate with a decline of 2.91%.
• The 10-year U.S. Treasury yield rose to 4.37% from 4.25%.
• West Texas Intermediate crude oil prices fell 3.58% to $69.45 per barrel.
• Of the 699 U.S. publicly traded companies covered by Morningstar, 416, or 60%, declined, two were flat, and 281, or 40%, increased.

Which stocks are in the black?

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

Which stocks are in the red?

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