Nvidia Beats, Tariff Judgment Shocks, 'Confirmation Day' Looms
After getting the 'Day One' bullish reversal, is Confirmation Day here? Also, let's check the latest in the tariff saga and how Nvidia's report is boosting the chip sector.
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How interesting. Investors were treated to the "Day One" bullish reversal of trend (though that bearish trend was short, just four days) on Tuesday coming off of the president having delayed the increasing of his tariffs on European imports. As laid out here in this column about 24 hours ago, we then looked for a pause. It appears that a pause is exactly what we got on Wednesday. Do we get that coveted, but usually elusive "Confirmation" day on Thursday, the day that would technically confirm the change in trend on Tuesday? Gang, we just might.
The bell had rung. Nvidia NVDA had reported. While there are glaring holes (China), the results and guidance were both better than feared. That put equity index futures markets in a better mood. Then came what some have said was an expected (not so sure how expected this was) judiciary action that would certainly slow down the president's agenda on trade policy. These markets seemed to really, really like that move by the court.
A three-judge panel (two Republicans, one Democrat) representing the U.S. Court of International Trade, decided that Pres. Trump had exceeded his authority to impose tariffs on nearly all imported goods from nearly all nations. This would, in effect, block the Trump administration's use of executive power under the International Emergency Economic Powers Act of 1977. The president had used the IEEPA to underpin his plan to not only place punitive duties on Chinese, Mexican and Canadian goods in response to the fentanyl crisis, but also to place (currently paused) reciprocal tariffs on top of a baseline 10% tariffs on most nations.
The Judgment on Tariffs
The three-judge panel wrote, "The court does not read IEEPA to confer such unbounded authority and sets aside the challenged tariffs imposed thereunder." The court added, "An unlimited delegation of tariff authority would constitute an improper abdication of legislative power to another branch of government."
Does this put the whammy, in a negative way, on the administration's efforts to reach deals with a number of nations through negotiation? Very likely, it does if left to stand. That said, the Trump administration will appeal and may already have done so. At the very least, this appears to, for now, strip the president of his authority to implement the "Liberation Day" tariffs. That order, if I read this decision correctly, unless overturned on such an appeal, must be vacated.
The Skinny on Nvidia
On Wednesday evening, Nvidia reported better-than-expected adjusted earnings and revenue generation for its fiscal first quarter. It projected $45 billion in sales for the current quarter, which was below consensus, but better than feared. Nvidia also announced that this guidance would have been about $53 billion had its H20 chips not been denied access to the Chinese market by the Trump administration.
NVDA did incur a $4.5 billion charge related to now useless inventories. While nasty, this was well below the $5.5 billion that had been expected. NVDA also said that its gross margin of 61% would have been 71.3% had it not had to take that China-related charge against its inventories. Markets were thrilled with these results as well as the guidance, which is potentially conservative. The stock is up more than 5% overnight as we traverse the zero-dark hours on Thursday morning. In fact, chip stocks are trading higher globally at this time.
The Pause
On Wednesday, the S&P 500 gave up 0.56%, while the Nasdaq Composite surrendered 0.51%. U.S. equity markets in general, had opened higher and then worked their collective way lower headed into the closing bell. That pressure increased just ahead of the close as investors took off some risk ahead of the Nvidia release as well as the Salesforce CRM release.
The selloff was quite broad, as the Dow Transports, the KBW Banks and all of the small to mid-cap indexes lost more than a full 1% for the session. While breadth was weak, so was trading volume. This is exactly what bullish investors wanted to see coming off of Tuesday. Remember, as I have often explained, a pause is needed in between any Day One and any subsequent Day of Confirmation.
Those looking for immediate follow-through after a day like Tuesday, and seeing that as a positive, simply have not been doing this long enough to understand how institutional portfolio managers manage. This sets up a very interesting Thursday morning. Ten of the 11 S&P sector SPDR ETFs closed out the Wednesday session in the red, led lower by the Utilities XLU, Materials XLB and Energy XLE funds, all of whom lost more than 1%. The REITs XLRE managed to close unchanged and were the day's top-performing sector.
Losers beat winners by a rough 3-to-1 margin at the NYSE and by about 2 to 1 at the Nasdaq. Advancing volume took just a 29.7% share of composite NYSE-listed trade and a more respectable 45.5% share of composite Nasdaq-listed activity. Here is how we know that Wednesday was a pause and not the start of something serious: Aggregate trade was light. Trading volume was down 9.4% on a day-over-day basis across Nasdaq-listed securities and down 13.1% across NYSE-listings. Volume across the membership of the S&P 500 landed about 12% short of the 50-day trading volume Simple Moving Average for that index.
Charting the Pause
The market got the pause we were looking for, which is perfect. Equity markets look to rally this morning on the Nvidia and the tariff news. That plays well into how we have set you up.
The only potential fly in the ointment that I see on this chart right now is in the daily Moving Average Convergence Divergence (below). Here, while all three components are still postured above the zero-bound, which is bullish, the 12-day exponential moving average has inched just below the 26-day exponential moving average. While that is sub-optimal, in this environment, it likely is not the end of the world. I would expect to see a bullish crossover shortly after the opening bell at 11 Wall St.
GDP Revision
Don't be too surprised to see an upward revision to the first-quarter gross domestic product this morning. Remember, if you can, that net exports had a -4.83% (which was clearly inventory loading ahead of the president's tariffs) SAAR impact on the first estimate that landed at -0.3%. Final sales to domestic purchasers were up 3.0%, while federal government consumption was down 5.1%. Those are clearly positives.
Readers with good memories may also remember that there appeared to be a rough $185 billion unaccounted for in that first Q1 estimate. Recall that there was a $323.6 billion increase in the import of goods from other nations, but only a $131.3 billion increase in private inventories and a $7.3 billion increase in the consumption of those goods.
Where I come from, goods either end up being consumed or in inventory. I know of no third option. The math did not really work a month ago. Let's hope the BEA got their collective heads out of their collective tails. Maybe I'm wrong. It would not be the first time. I do seem to be the only professional economist I know that thinks there could be an upward revision.
Economics (All Times Eastern)
08:30 - GDP Growth Rate (Q2-Rev): Flashed -0.3% q/q, SAAR.
08:30 - Initial Jobless Claims (Weekly): Expecting 230K, Last 227K.
08:30 - Continuing Claims (Weekly): Last 1.903M.
10:00 - Pending Home Sales (Apr): Expecting -1.0% m/m, Last 6.1% m/m.
10:30 - Natural Gas Inventories (Weekly): Last +120B cf.
12:00 p.m. - Oil Inventories (Weekly): Last +1.328M.
12:00 - Gasoline Stocks (Weekly): Last +816K.
The Fed (All Times Eastern)
08:30 - Speaker: Richmond Fed Pres. Tom Barkin.
10:40 - Speaker: Chicago Fed Pres. Austan Goolsbee.
2:00 p.m. - Speaker: Reserve Board Gov. Adriana Kugler.
4:00 - Speaker: San Francisco Fed Pres. Mary Daly.
8:00 - Speaker: Dallas Fed Pres. Lorie Logan.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: BBY (1.09), BURL (1.43), FL (.11), KSS (-.22)
After the Close: COO (.93), DELL (1.69), MRVL (.61), ULTA (5.83), ZS (.76)
At the time of publication, Guilfoyle was long NVDA equity,
