Stock markets collapsed globally yesterday and this morning, even as Nvidia, the world’s most valuable company, reported skyrocketing, better-than-expected profits. Shares of the company fell 3.15% yesterday. And the bloodshed continued today for the red-hot semiconductor maker: Nvidia was still down 3% as of mid-morning.
Still, the broader S&P 500 index was flat at lunchtime, appearing to hold up despite the storm in tech stocks. The Dow Jones Industrial Average was up.
For what?
It’s not just a lot of negative headlines about AI.
The context here is that Nvidia stock is up more than 31% year to date, nearly three times the gain of the entire S&P. So a lot of this selling looks like people are completely rationally deciding to cash in on some of these gains while they can.
This perfectly understandable move has a disproportionate impact: Because Nvidia and a handful of other tech stocks account for 40% of the entire market’s valuation and 75% of its gains over the past three years, when Nvidia moves, everyone else is moved too. So it’s likely that some traders see Nvidia’s selloff as a signal to sell the S&P 500 as a whole.
In the longer term, Wall Street remains rather optimistic about technology stocks. JP Morgan and Wedbush both issued notes this morning arguing that AI is still in its early stages and that AI capital spending (much of which ends up going to Nvidia products) is expected to last for years.
The Fed Factor
However, there is a second dynamic at work that helps explain why Nvidia is getting hit while the rest of the market is back on its feet.
Until recently, CME’s Fedwatch Index, which measures bets on what investors think the Federal Reserve will do at its next interest-rate-setting meeting, was about evenly split on the idea that Chairman Jerome Powell might keep rates unchanged in December. That would have been negative for stocks, as traders prefer lower interest rates and the new waves of cheap money they generate.
Today, the prospect of a rate cut has risen to 73%, meaning investors suddenly seem to think the Fed is becoming more likely cut.
We can’t say for sure, but one plausible reason for this change is that the US government officially announced yesterday that its unemployment rate had increased to 4.4% from 4.3% in September. This doesn’t seem like a big deal. But governors and Fed chairs have been worried about the labor market for months, and they have only one tool to fix it: cutting interest rates.
Pantheon Macroenomics analysts Samuel Tombs and Oliver Allen put it this way: “We maintain our forecast for further FOMC policy easing in December after yesterday’s labor market report, given clear signs that September’s 119,000 wage increase overstates the trend and further rise in the unemployment rate.” »
“The rise in the unemployment rate to 4.4% in September, from 4.3% in August, was more significant. The rounded 0.1 percentage point rise is below the threshold for statistical significance, but the 0.3 percentage point rise over the previous three months clears that hurdle. Additionally, the unrounded unemployment rate, 4.44%, was within a hair of 4.5%,” Tombs and Allen said in a note to clients.
If they’re right, that explains why Nvidia is hurting so much today while the Dow and S&P are stronger. Nvidia investors sold after hearing good news, while everyone buys into a Fed rate cut scenario.
