By Connor Smith | Thursday, August 28

Sleepwalking. Perhaps the biggest surprise from Nvidia's earnings report  was just how little it impacted the major indexes today.

Despite essentially in-line results from the chip giant, the S&P 500 rose 0.3% to cruise to its 20th closing high of the year. The Dow Jones Industrial Average rose 0.2% to hit its second record this year. The Nasdaq Composite rose 0.5%, finishing a touch shy of its Aug. 13 high.

Technology stocks led the S&P 500 on a day when more stocks rose than fell. Five of the Magnificent Seven stocks—Meta Platforms, Microsoft, Apple, Amazon.com, and Alphabet—rose 0.5% or more. Tesla dropped 1%. 

Then there was Nvidia. Though the AI titan's fiscal second-quarter results beat expectations, the bar was fairly high given the stock's massive rally to a $4 trillion-plus valuation. After wobbling about, Nvidia finished the day down 0.8%.

It's notable that exchange-traded funds targeting growth, momentum, and risk all outperformed on the day -- without help from Nvidia.

Market headlines were otherwise fairly quiet, outside of the growing legal battle between Federal Reserve governor Lisa Cook and the Trump administration. The yield on the 2-year Treasury note rose to 3.63%, while the 10-year yield was down to 4.21%. 

August wraps up tomorrow with the release of the Federal Reserve's preferred inflation gauge. For now, traders were content to let the major indexes sleepwalk to record highs.

DJIA: +0.16% to 45,636.90
S&P 500: +0.32% to 6,501.86
Nasdaq: +0.53% to 21,705.16

The Hot Stock: Datadog +7.0%
The Biggest Loser: Hormel Foods -13.1%

Best Sector: Technology +0.8%
Worst Sector: Utilities -0.8%

Healthcare Chaos

With the U.S. public health apparatus under fire from Health Secretary Robert F. Kennedy Jr., it caught my eye that healthcare stocks are cheaper than they've been in decades.

The Trump administration was expected to help healthcare companies by pulling back on regulations, but Kennedy's attacks on vaccines and the Centers for Disease Control and Prevention, among other issues, have weighed on the sector, at the very least.

My Barron's colleague Ian Salisbury reports that this year's slide in the Health Care Select Sector SPDR ETF has cut the sector's average forward price-to-earnings ratio to 16.6, from 19.7 a year ago. Ian writes:

But price-to-earnings ratios aren’t the only way to value healthcare stocks. By another important measure, the sector looks cheaper than at any time since 2000, according to a note Thursday by independent market researcher Jim Paulsen.

Besides traditional valuation metrics, Paulsen argues, investors should look at healthcare stock prices relative to real, or inflation-adjusted, drug prices. The two have largely moved in sync, according to data going back to 1990.

The cost of drugs “is a central price that defines these stocks’ existence,” Paulsen told Barron’s. “It doesn’t fit all of the healthcare industry—but it gives you a sense of where they are going.”

Though inflation-adjusted drug prices have fallen, the price of healthcare stocks have fallen faster, Ian writes.

Paulsen’s P-D, or (stock) price-to-drug (price) ratio, peaked in 2022 at about 0.17, and has since tumbled to about 0.1. That represents the lowest level since 2000, according to his calculations, and one of the lowest levels since 1990.

Paulsen declined to venture a guess on when exactly prices for drugs or healthcare stocks will recover. But he said the steep decline in his P-D ratio, with stock prices falling much more steeply than drug prices, almost certainly reflects an overreaction by spooked investors.

You can read more from Ian here.