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This week, we pointed out that we came into this week looking at three well-known potential market catalysts. The first, PCE, was a dud. The third, Fed Chair Warsh’s address to the Jackson Hole Economic Policy Symposium, doesn’t occur until tomorrow. The second, however, was a doozy. Nvidia’s (NVDA) earnings report was originally greeted with a bit of a yawn. Then, during the conference call, management indicated that revenues are likely to grow by 70%, well above the 45% analyst consensus. Suddenly, the AI trade seemed much sunnier.
Although the original earnings release contained the now-customary surpassing of analysts’ expectations, the stock initially traded lower. Had it continued with the early modest declines, today would have been the fifth quarter in a row where NVDA closed lower despite a solid report. It is not clear why the company decided to wait until the start of the conference call to reveal the substantial increase in revenue guidance. Perhaps its executives felt that it would maximize the positive impact on the stock price. By waiting, they forced the early sellers to reverse course, thus providing an extra catalyst to the price bump that followed.
A revenue increase of that magnitude is remarkable, especially when starting from an already enormous base. Whether you think of NVDA as the linchpin of the AI industry, the central banker for that industry, or the nexus of a series of self-dealing, interlocking deals that artificially prop up the industry’s numbers, what’s good for NVDA is good for AI, and thus good for major indices. Frankly, I think it’s a combination of all three, but I can’t figure out exactly which weights to apply to each of those factors. For now, the simplest factor is the dominant one: if the biggest, most important company in the AI industry is thriving, and seemingly constrained only by external capacity issues rather than demand, that bodes well for the broader trade. NVDA’s nearly 8% rise this morning is now almost singlehandedly lifting the S&P 500 (SPX) by more than 0.5%.
It’s not just NVDA earnings that have moved the needle. Some key software stocks are seeing even more substantial jumps than NVDA after their own well-received earnings. Crowdstrike (CRWD), Okta (OKTA), and Salesforce (CRM) are all up about 20%. These jumps, along with NVDA’s, tell us nearly as much about institutional investors’ allocation strategies as they do about those companies themselves.
In recent months, we have seen many companies, particularly in the tech sector, fail to rally after reporting good results. My theory is that many, if not most, institutional investors were already fully invested in those popular names. Good results reaffirmed their investment theses but were often insufficient to incentivize them to add to already market-weight or overweight allocations. Hence, the relative lack of reaction, akin to the slight declines that occurred after NVDA’s prior four reports. But if institutions are relatively underweighted in stocks that report good news, the fund managers rush into them en masse. This is why a giant like MSFT rose by over 15% after its last report and why formerly shunned software stocks were greeted with similar enthusiasm today. Bearing in mind the recent relative underperformance of NVDA vis-à-vis a raft of other semiconductor shares and the magnitude of the guidance increase, it is clear that institutional investors are moving into that semiconductor giant today and out of popular memory chip makers like Micron (MU) and Sandisk (SNDK). This is rotation writ large.
If NVDA was the word of yesterday and today, the word for the rest of today and tomorrow is “Warsh.” Obviously, all eyes will be on the Fed Chair’s speech tomorrow. Unfortunately, it’s difficult to know what to expect. This is someone who clearly believes in less communication rather than more, so I would take the “under” on the length of the speech. My best guess is that it will be dry, focusing on the need for price stability, but once again offering few concrete prescriptions for how to achieve it. Remember, he probably has very little desire to raise rates ahead of the midterms. My belief all along has been that the FOMC won’t raise rates before December (after the midterms) unless something catastrophic warrants it. The recent PCE prints don’t. And his creation of task forces to address key parts of Fed policy has bought himself several months of being able to say, “We’re waiting for the reports from the task forces.” Let’s see if the third of this week’s three key catalysts has much of an effect.
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