3 Issues Weigh on Market After Nvidia Earnings Spark Widespread Carnage
Here's my game plan with some panic in the air now. Plus, what many investors don’t understand about the AI bubble debate.
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Optimistic bulls were trapped on Thursday on what appeared to be a fantastic earnings report from Nvidia (NVDA) . The largest market capitalization stock in the market had been struggling for a while, and there was a sigh of relief after management stated that they didn’t see any signs of a bubble.
Despite the celebration over the positive news, selling pressure started to build almost immediately after the opening bell and accelerated steadily. Once the stock went negative, the entire market accelerated to the downside.
This intraday reversal of 3.6% on seemingly great news caught investors by surprise, but it illustrated three issues that have been lingering for a while.
Three Lingering Issues
The first issue is valuation. The AI sector has been powering the market higher since early 2023, and the view has been that this is one of the most significant technological shifts in history, still in its early stages of development. Mega-tech companies are spending trillions of dollars in hopes of gaining a competitive advantage, and Nvidia has been the primary beneficiary.
Recently, however, there have been growing questions about the payoff from those massive investments. Companies such as Meta META and Microsoft (MSFT) believe that they have no choice but to make these massive investments to stay competitive, but there are few signs of a payoff so far.
What many investors don’t understand about the AI bubble debate is that suppliers of infrastructure like Nvidia and data centers are in a very different position than those that are actually implementing AI as a tool. The hyperscalers are transferring vast amounts of capital to infrastructure players, and there is no clarity about their returns.
The market is grappling with this valuation issue now. Many stocks were priced for perfection, and now perfection is being questioned.
A second issue causing problems is the Fed's lack of dovish support. Not long ago, a quarter-point interest-rate cut in December was viewed as a near certainty, but the chances of a cut are now around 43%. The employment news on Thursday added to the confusion, as there were more jobs than expected but a higher unemployment rate. Clarity on interest rates would help to provide some support, but that may not happen for a while.
The third issue hitting the market is general concern about technical conditions and speculation in secondary stocks. Bitcoin (IBIT) has collapsed amid investor flight, and the chart has eroded. Hot sectors in equities, such as data centers, quantum computing, nuclear power, and rare earths, have also seen outflows as the charts have weakened.
This combination of AI valuation concerns, interest-rate worries, and eroding technical strength is driving the downside action. The question, of course, is how low things go before there is support and a bounce. No one can answer that question right now. We have to sit and watch and wait for price action to improve. There is some panic in the air now, which will help hasten an eventual resolution.
My Game Plan
My game plan is to avoid the temptation to try to guess when a turn will occur. I don’t want to buy stocks as they are falling. I want to buy them when they are going up. That means I’m not going to buy at the exact lows, but that isn’t a game I’m interested in. I want to buy when the potential for a sustained upside move has improved. That is far more important than being the genius who predicts the exact market low.
At the time of publication, Rev Shark was long IBIT.
