The Clash of Themes: Nvidia Earnings and Jackson Hole Symposium

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Introduction

The year 2023 has been marked by two dominant themes in the market: artificial intelligence and interest rates. Now, these themes threaten to collide as investors eagerly anticipate Nvidia’s earnings report and the Jackson Hole economic symposium. With risks leaning towards the downside, it is crucial for investors to look beyond short-term tech hype and disregard the fears surrounding the Federal Reserve.

Nvidia’s Fever Pitch: Fueling Tech Rally and Market Growth

Wall Street is currently brimming with optimism for Nvidia (ticker: NVDA), with analysts raising their estimates in anticipation of the chipmaker’s upcoming earnings release on Wednesday. Many investors are betting that Nvidia will revitalize not only its own stock but also ignite a broader rally within the tech sector and the overall stock market.

According to Dan Ives, an analyst at broker Wedbush, “We expect a bullish outlook from Nvidia that should be the fuel in the engine to continue this tech rally into the rest of the year despite the tough talking Fed.” This sentiment prevails among tech bulls, who believe that Nvidia’s positive performance will persist.

The Pitfalls of Unrealistic Expectations

While the enthusiasm surrounding Nvidia is understandable given its remarkable 220% increase in stock price this year, investors should be wary of exaggerated expectations. Betting on continued gains for a stock that has already seen such significant growth may lead to disappointment. While there are indications that the AI bubble can expand further, it remains uncertain whether Nvidia’s earnings will truly entice sideline investors to jump in.

Unfounded Optimism: A Concerning Sign

In the midst of this hype, Nvidia stock rose by 8.5% on Monday and an additional 1.5% in Tuesday’s premarket trading. The sustained optimism raises concerns, particularly when viewing the situation through the lens of the bond market. This may be interpreted as evidence that investors are ready to challenge the actions and policies of the Federal Reserve.

Recent weeks have witnessed a surge in U.S. Treasury yields, with the yield on the benchmark 10-year note surpassing 4.35%—its highest level since 2007.

The Impact of High Interest Rates on Bond Yields and Tech Stocks

Investors are experiencing a surge in bond yields, fueled by expectations that the Federal Reserve will maintain high interest rates for an extended period. With a commitment to reducing inflation to 2% and no significant signs of a slowing US economy, the central bank sees little reason to loosen financial conditions. Futures markets are even pricing in a nearly 50/50 chance of another interest-rate hike by November.

Interestingly, the recent increase in yields coincided with the tech-heavy Nasdaq snapping a four-day losing streak. This is notable because bond yields and tech stocks typically do not rise together. The rise in yields tends to dampen demand for equities that are valued based on future growth potential.

The market is now closely watching Federal Reserve Chairman Jerome Powell’s upcoming speech at Jackson Hole. It is widely anticipated that Powell will emphasize the central bank’s commitment to maintaining restrictive rates for the foreseeable future and potentially raising rates further if necessary.

Taking stock of both Nvidia’s performance and the implications of Powell’s speech in Jackson Hole, it becomes apparent that there are significant risks at play in the market. For Nvidia to sustain its momentum in the AI and tech sectors, it must surpass rather than merely meet analyst expectations. Conversely, there is a question of whether Powell will adopt a more dovish stance akin to the central bank’s version of Woodstock—a softer and more accommodative approach.

While both risks appear tilted towards the downside, it is crucial to recognize that the Federal Reserve holds considerable sway over market dynamics. Although AI and Nvidia have driven substantial gains in tech stocks this year, the role of the Fed in moderating the pace of rate hikes cannot be ignored. In fact, it was the central bank’s aggressive campaign of rate hikes in 2022 that led to the stock market’s worst performance since 2008.

If the Fed maintains high interest rates through 2024 and investors can earn a secure and attractive 5% on Treasuries, there may be limited incentive to venture into riskier bets like tech stocks.

Regardless of how enticing Nvidia’s earnings may seem, Powell’s speech at Jackson Hole can potentially turn the lights on early at the market party.

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