The S&P 500 index posted a solid return of 24% in 2023. While many Wall Street analysts are now projecting slower economic growth in 2024, the possibility of a recession seems to be quite low. Coupled with improving earnings projections for the S&P 500 stocks, analysts now expect the index to gain 8% to 9% in 2024 -- a little lower than the index's long-term historical average annual return of 10%.
Traders do not expect the Federal Reserve's interest rate cuts to start until May 2023 due to stronger-than-expected economic data and indications of a continued battle with inflation. However, once the central bank starts cutting rates, it is expected to continue to do so five times in late 2024. Subsequently, the stock market and the S&P 500 will most likely start rallying meaningfully in the latter part of 2024.
That's why now may be a good time to start taking up small positions in growth stocks such as Nvidia (NVDA 6.18%) and Palantir Technologies (PLTR 3.73%), which are expected to grow faster than the overall market.
Nvidia
Last year was a rewarding one for Nvidia, with shares surging 246%. Much of this rally is attributed to Nvidia's undisputed leadership in the artificial intelligence (AI) market. A diverse array of clients such as consumer internet firms, cloud service providers, and enterprises now rely on Nvidia's comprehensive suite of CPUs, GPUs, networking technologies, and AI-optimized software to build AI infrastructure and run enterprise AI applications.
Nvidia's future looks even brighter with data centers focusing on transitioning from CPU-based to GPU-based or accelerated computing-based infrastructure. This is driven by data centers focusing on increasing productivity and running power-hungry high-performance computing, data analytics, and AI workloads. CEO Jensen Huang estimated that data centers will be spending nearly $1 trillion on these investments in the next four years, translating into nearly $250 billion in capital expenditures annually. With its cutting-edge GPUs optimized for training and inferencing or real-time running of large language models and for running generative AI applications, Nvidia seems positioned to capitalize on the trend. The acquisition of Mellanox Technologies, a leading provider of high-performance networking technologies, in 2020 further strengthened the company's position in the data center market.
Nvidia is also seeing solid demand for its AI chips and software from major enterprises like Snowflake, ServiceNow, Adobe, and Databricks integrating AI assistants into their platforms. This broader trend across industries toward developing customized AI applications can prove to be a major tailwind for the company.
To leverage these opportunities, Nvidia is focusing on accelerating the pace of new architecture release for data center chips from every two years to every year. The company is also making significant inroads in the software segment and can reach an annualized revenue run rate of $1 billion by the end of fiscal 2024 (ending Jan. 31, 2024) for its recurring software, support, and service offerings. Nvidia's software solutions are playing a major role in enabling enterprises to leverage generative AI and other AI technologies.
There is no doubt that Nvidia seems pretty expensive, trading at 34 times trailing 12-month sales. However, considering the huge potential of the AI opportunity and Nvidia's forte in this ever-evolving market, the company can still prove to be a smart pick in 2024 even at the elevated share price levels.
Palantir Technologies
Data analytics specialist Palantir's stock surged an impressive 167% in 2023, despite a pullback following a skeptical report from William Blair analyst Louie DiPalma. The report highlighted the decrease in the renewal value and period of the company's contract with the U.S. Army, citing "data ownership" issues as one of the pain points. Despite this issue, Palantir's forte in helping various government and commercial entities efficiently analyze extensive datasets and uncover hidden insights continues to be a major competitive edge.
Palantir's focus on providing products and services that help combat violent and immoral actors has helped foster brand recognition and trust among its government client base. The company recently launched Palantir Government Web Services to support emerging and existing defense technology companies in scaling their mission-critical capabilities. Hence, while Palantir's government revenue grew by only 12% year over year to $308 million in the third quarter, there is still huge growth potential in this relatively stable business.
Palantir also saw its third-quarter commercial revenue rise 23% year over year to $251 million, while the commercial business reached a $1 billion annualized run rate in the third quarter.
Furthermore, the recently launched AIP (Artificial Intelligence Platform), which integrates the company's existing machine learning capabilities with large language models, is also proving to be a major growth catalyst. The company opted for AIP Bootcamps, which allow potential clients to work on real workflows with actual client data in five or fewer days. This is a significant improvement from the traditional pilot-based go-to-market strategy, which may require one to three months. Since customers get real-time experience working with AIP, it results in faster negotiations and improved unit economics.
Although Palantir is trading at 17.7 times the trailing 12-month sales ratio, far higher than the software industry median of 2.3, it is still an attractive buy based on its robust growth potential.
