Nvidia May Be Hurt by AI Challenge, But It's Great for the Economy
Smaller stocks are the new leaders as the AI sector undergoes a significant shift.
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The S&P 500 is expected to open higher for the fourth straight day on Wednesday. The day before the Thanksgiving holiday has a history of positive action, and the mood is quite upbeat as investors await the latest economic news.
The positive market action has been building as hopes of a Fed interest rate cut in December have been increasing. Retail sales were softer than expected, and consumer confidence dipped in November, further boosting the odds of a cut. Inflation news will hit Wednesday morning and could cement the chances of a cut if it doesn't surprise to the upside.
Another factor driving the market's positive action is a significant shift in the AI sector. The issue that most concerned the bears was valuation and overinvestment in infrastructure. That concern has subsided as attention is now focused on the cutthroat competition between Alphabet (GOOGL) and Nvidia (NVDA) . There is a major shakeup in the sector, prompting a reevaluation of valuations.
Increased competition will not be good for some individual stocks such as Nvidia, but a surge in competition in the AI sector is excellent for the economy. This is how the free enterprise system is supposed to work. There is a dogfight among hyperscalers to dominate, and the primary beneficiaries of that competition will be businesses and consumers using AI to increase productivity.
In the last few days, we have seen a shift in market leadership. Alphabet has emerged as the primary winner as it challenges Nvidia, but there is also a move by investors into other sectors and many secondary stocks.
On Tuesday, the Russell 2000 (IWM) led the market with a gain of more than 2% while the Nasdaq 100 (QQQ) , which is dominated by big-cap technology, only managed a gain of 0.5%. According to Investor's Business Daily, volume fell on the indexes, but 680 stocks were up on heavy volume while just 79 were down.
When smaller stocks are leading, that means that there is an increased focus on stock-picking. Investors don't typically just buy a small-cap index. They tend to look for individual stocks that are the best values and have the best charts. This is when it really pays to be doing research into fundamentals.
We have upbeat action as we await economic news, but volume will slow quickly as the day progresses.
At the time of publication, Rev Shark had no positions in any securities mentioned.
