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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
If you were wondering whether markets were still in summertime silly season, allow me to settle the matter for you: they definitely are. August is traditionally a month when markets go bump in the night thanks to slimmed-down trading desks in the northern hemisphere summer, and 2024 is a particularly fine example.
Remember the yen carry trade? No, nor does anyone else, but only around three weeks ago it was one of several factors thrown into the mix to help understand an ugly and swiftly reversed stock market sell-off. Bond and currency markets continue to exaggerate the likely scale of the impending US economic slowdown.
But the real evidence of summertime flights of fancy stems from the scale of focus this week on the earnings of one company, Nvidia.
Hype and general overexcitement are pretty standard fare in markets, and Nvidia is, after all, one of the most valuable companies on the planet, but the breathless lead-up to this week’s results from the Silicon Valley-based chipmaker was intense, even by those standards.
Several analysts compared the importance of the results to the most heavy-hitting of all US economic data releases, such as inflation or non-farm payrolls — the only regular data reports for which fund managers will ever rearrange a lunch. Nvidia’s numbers are, as Deutsche Bank pointed out, “an important macro event in their own right”, up there with those key inputs into US monetary policy.
This is curious but perfectly rational, given the outsized role that Nvidia plays in driving US and global stocks. But the real excess exposed by this “macro event” is the weight of investor expectations.
Nvidia managed to more than double its revenues in the three months to the end of July, compared with the previous quarter, reaching a stonking $30bn. The company said that in the third quarter, it expects that tally to stretch up to $32.5bn. This is serious money.
And what did the shares do? They fell in after-market trading, of course, by some 6 per cent, largely because some investors had been looking for a slightly higher forecast for the third quarter. Analysts at UBS, among others, suggested this was silly. “This is . . . missing the forest for the trees,” wrote Timothy Arcuri, an analyst at the bank, and reflected, he said, “somewhat frothy expectations”. He advised clients to buy the dip in the stocks, for which he is still expecting a 20 per cent ascent from here.
This is something that is always worth remembering about markets: they tell you very little about what is going on today, and much more about what investors think will happen tomorrow. In this case, these are great expectations indeed. The explosion higher in Nvidia stocks — some 800 per cent or so since the start of 2023 — is already a reflection of the so-far largely unproven potential of artificial intelligence. The task now is for AI-related companies to demonstrate they can live up to the hype. In this show-me phase, markets will punish any little crack or wobble, even if only briefly.
Reasons to accentuate the positive fall into two areas. The first is that, finally, barring some kind of inflationary disaster, interest rates are poised to fall, as US Federal Reserve chair Jay Powell underlined at the Jackson Hole monetary policy symposium earlier this month.
Another is that, backing out a little from the myopic market obsession with Nvidia, the broader US stock market is in fine fettle. French bank Société Générale points out that 80 per cent of US companies beat earnings-per-share expectations over the quarter and, importantly, the proportion of companies delivering positive surprises is growing.
Stripping tech-focused Nasdaq 100 companies out of the bigger S&P 500 index delivers encouraging news, analyst Manish Kabra at the bank said. Profit growth for non-tech companies is outstripping the shiny tech sector that has grabbed so much attention of late. “The biggest theme we find is of rotation — the rotation from the narrow ‘bubble’ trade to the broader ‘breadth’ trade should continue,” Kabra wrote.
It is striking that despite the significant blow to Nvidia stocks this week, the S&P 500 kept on motoring higher. Perhaps from now on, the intense focus on this one company will fade, just a little.
Charlotte Daughtrey, an equity investment specialist at Federated Hermes, is among those who expect a slice of the profits extracted from mega-tech stocks this year to be churned into the rest of the market from here. She notes that the gap in valuations between the tech giants and the rest of the market is abnormally large, at more than 25 per cent. Monster tech stocks could be “vulnerable” for the rest of this year, she said, while small and mid-cap stocks finally find their time to shine.
This wholesome dynamic lacks the fireworks of the spectacular rally in AI-related stocks. Let’s be honest, it’s pretty dull. But broad-based market gains and a Federal Reserve that is about to start cutting rates are unambiguously positive news for stock market investors. Ignore the short-termist tech obsessives — they are an overly tough crowd.