It may sometimes appear that investors care more about Jensen Huang than they do about Federal Reserve Chairman Jerome Powell.
Huang has been CEO of chipmaker Nvidia for many years.
NVDA
,
It made headlines last week by blowing away already lofty earnings expectations and driving stocks to new all-time highs, even as nagging concerns about a resurgence in inflation continue to seep into the background. Huang declared that the artificial intelligence industry, of which Nvidia is a major supplier of critical chips, has reached a “tipping point” where the technology will become “mainstream.”
Deep dive: Here are 20 AI stocks poised to rise as much as 44% after Nvidia’s recent collapse
This may make you wonder if investors are wasting their energy worrying about the economic cycle and the timing of the Federal Reserve’s interest rate cuts. Should we instead embrace the tech-stock-led rally that is beginning to spread to other sectors, powered by the potential for advances in artificial intelligence to deliver generational productivity gains that boost corporate profits and curb inflationary pressures?
It’s a very beautiful photo, but it’s unlikely that it would come together so seamlessly.
“Investors are going to be obsessed with inflation metrics again,” Michael Alone, chief investment strategist at State Street Global Advisors, told MarketWatch in a phone interview.
As it happens, the central value of the Consumer Expenditure Index, the Federal Reserve’s preferred measure of inflation, is scheduled to be released on Thursday morning. The January figures came after markets were previously spooked by higher-than-expected Consumer Price Index and Producer Price Index readings.
Arone said investors know that one-month data does not set a trend, and the Fed has emphasized that inflation could return to a downward trend toward the central bank’s 2% target. said it was important. If it starts to become seriously endangered, we will eventually see market volatility.
read: Wall Street braces for more positive U.S. economic and inflation data next week
Looking ahead to 2024, investors had been pricing in a rate cut of six to seven quarter points over the year starting in March. With the data released and the Fed backtracking on those expectations, the market now has a slightly better than 50% chance that a rate cut will begin in June, and that the Fed will cut rates between 3 and 4 by the end of the year, according to CME. I think it will remain in the 3rd edition. FedWatch Tool.
If inflation stagnates or starts rising, investors could end up having to accept no rate cuts in 2024, or even an outsider’s view that the Fed will need to raise rates again. be. Arone said that would be a big shock, likely causing stock prices to enter a correction and U.S. Treasury yields to rise significantly.
All that aside, Arone is optimistic, saying the bull market will continue to expand after seeing strength in sectors other than technology and consumer services last week. If the rally continues, investors will have the opportunity to increase their exposure to small-cap and value stocks.
Stock prices continued to rise last week, with the S&P 500 SPX and Dow Jones Industrial Average DJIA hitting new highs. The Nasdaq Composite Index, which is heavy on tech stocks, briefly broke new closing prices in more than two years on Thursday and Friday, then fell back, but still ended the week up 1.4%.
Of course, the megacap-driven rally in tech stocks is not a new phenomenon. Nvidia and its powerful group of AI beneficiaries led the stock market rally in 2023, and that rally was increasingly (and alarmingly) concentrated.
“The most important event in global stock markets last year was not a macro one, but the acquisition of Microsoft.”
MSFT
Investing in ChatGPT maker OpenAI,” Christopher Wood, global head of equity strategy at Jefferies, argued in a note last week.
“This was the catalyst for the AI theme to start moving market sentiment and, crucially, gave the most important sector of the world’s largest stock market a new, longer-term, rather than cyclical, narrative.” he wrote.
The rally also drew comparisons to the dot-com bubble of the late 1990s.
Barons: 1995 or 1999 Echo?
A look at how much of the day’s big gains contributed to the stock market’s year-to-date rally shows what role the strength of the tech sector has played.
Nick Colas, co-founder of DataTrek Research, said in a note that the S&P 500 index has risen 6.7% year-to-date through Thursday, but that gain was accounted for in just five trading days.
This includes four days of gains of 1% to 1.4%, including Thursday’s 2.1% rise led by Nvidia’s earnings and a rise on Jan. 8 following the announcement of new chips by Nvidia. Chip stocks led the rally on January 19 following Taiwan Semiconductor’s earnings outlook
TSM
; a rebound on February 1st after a decline inspired by Chairman Powell’s remarks.and a February 2 rally led by Metaplatform.
meta
20% jump.
The lesson, Collas wrote, is that the market is ignoring the prospect that interest rates will remain high for an extended period of time in favor of focusing on Big Tech’s earnings leverage. “This is a classic ‘mid-cycle’ market move. Investors can live with higher interest rates if (but only) there are promising developments in key sectors. ”
However, the extent of that promise is still up for debate.
“Of course, over the past 125 years, many “new paradigms” for improving U.S. productivity have been proposed by market experts. “It’s only really been that high twice (in the mid-1960s and in the mid-1990s),” said Thierry Wisman, global currency and interest rate strategist at Macquarie. Write it down in your notes (see image below).
“But the point is not whether this new AI-driven paradigm will be accepted.
It works well.If it’s going to be successful, it’s important that people believe it will work.
“It changes the macro dynamics,” he said.
Such changes can be very painful.
The danger is that the new growth paradigm could lead the Fed to conclude that the so-called neutral rate (the level at which the official rate neither promotes nor sustains growth) is higher than it currently believes, opening the door to further rate hikes. is.
Meanwhile, investors will be focused on whether AI will continue to drive strong performance for major technology providers, and whether it will ultimately improve productivity and profitability for the companies that use their products. Jose Torres, senior economist at Interactive Brokers, said in a note. .
He said the practical aspects of AI do not yet appear to be supporting gross margins, as many companies outside the tech space are offering cautious guidance.
“Time will tell whether NVIDIA CEO Jensen’s optimism is justified,” Torres wrote. “While bulls are encouraged by his comments and NVIDIA’s quarterly results, bears are praying that AI is more fluff than substance.”
