After Three Days of Misery, Optimism About Nvidia Earnings Is Boosting the Market
Carnage in high-P/E growth stocks has been the headline, but market rotation is the real story.
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Following three days of miserable action, the market mood is upbeat early on Wednesday morning as investors anticipate the Nvidia NVDA earnings report, which will be released after the close.
Concerns about AI infrastructure spending, declining consumer sentiment, weaker retail sales, and the impact of tariffs have been dragging down high-P/E growth stocks, semiconductors, and other technology names. However, the mood has become so gloomy that conditions are ripe for a bounce. Investors expect that Nvidia will dismiss the threat of DeepSeek and confirm that demand for AI infrastructure, in the form of chips, is still robust.
The corrective action that has hit the market over the last three days has been very uneven. High-P/E growth stocks such as those in the Innovator IBD 50 ETF FFTY went from a multi-year high on Tuesday, February 18, to a drop of nearly 20% at the close on Tuesday, February 25. Other ETFs and indexes that hold high-P/E technology names, such as the Nasdaq 100 QQQ and ARK Innovation ETF ARKK, have seen similar drops.
This aggressive selling was so severe that it had a very intense impact on market sentiment and caused some moments of panic, especially on Tuesday morning. However, the most notable development was that breadth was never terribly lopsided. Many stocks in the DJIA that weren’t high-P/E technology names held up well. The DJIA only had one bad day of selling last Friday and has held up well otherwise.
Many market participants have overlooked the amount of rotational action that is occurring. Ultimately, this is very positive and simply reflects a shift in leadership. The Magnificent Seven and many growth stocks have become very expensive, and the market is moving toward cheaper value names. This sort of transition is never smooth, and this one was particularly painful because of how fast growth stocks corrected.
The issue now is how this market transition develops as we move forward. Investors are likely to be more sensitive to valuations, which means there will be more focus on stock picking now that the indexes are finding some support.
Another positive is that the House of Representatives passed a large budget reconciliation bill that calls for $4.5 trillion in tax cuts and $2 trillion in spending cuts over the next 10 years. After the Senate passes the resolution, the House and Senate will begin drafting the actual legislation. This is a significant accomplishment for the Trump administration and is widely viewed as an economic positive.
It has been a very rough three-day period for the market, and there is some relief Wednesday morning. Still, volatility is very likely to stay elevated, so it is important to stay vigilant and protect capital.
At the time of publication, Rev Shark was long NVDA.
