Markets are clearly on edge, unsure whether imminent rate cuts are something to celebrate or the actions of a Federal Reserve that is behind the curve to the extent a recession is a clear risk.
Nvidia has clearly grown into a bellwether name; much like we watch Caterpillar financials as a signal for economic strength, we are now having Nvidia results parties (or so I have been told, having never been invited to one), with the mood music a good indicator of whether to be long or short risk.
So where to now for Nvidia and the rest of the magnificent seven?
Prior to the earnings release the Nasdaq had recovered almost all of the losses it had sustained in late July and early August.
The sell-off came on the back of weak US economic data and was exacerbated by the low volume summer period. Why the stocks have made a full recovery is not quite so clear, as there hasn’t been any data that flies in the face of that which caused the dip.
In fact we have since had news that 820,000 fewer jobs were created in the US between March 2023 and March 2024.
Long-term AI is set to be a game changer and the magnificent seven companies that are getting ahead now through large investment are most likely to be tomorrow’s winners – with investors looking at these stocks for growth over the next five years.
However the reaction to Nvidia’s earnings was one of a market with cooling sentiment, and although I am no chartist the Nasdaq looks like a classic ‘double-top’.
With a slowing US economy it is likely that spending on a technology that is not generating revenues will be scaled back, and with it some of the hype around AI.
In the next three to six months, while markets assess the extent of the economic slowdown, I see a greater likelihood of weakness in the sector than strength.
James Rowlinson is associate director at Forvis Mazars
