Nvidia Strength and Rotation Into Big-Cap Tech Covers Up Growing Inflation Worries
Here's why the Magnificent Seven names are in a good position right now.
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The CPI report on Wednesday morning was slightly better than expected, but there was a slight increase in inflationary pressures. The Wall Street Journal is reporting that the average effective tariff rate is now at 20.6%, which is the highest since 1910. While there are some signs that this is starting to filter into the economy, it's still very mild as vendors have built up a cushion of inventory and the choppy tariff policy is not fully in effect.
There is nothing new about this argument. The economic bears have been very vocal for months about the inevitability of higher inflation and slowing growth. However, they have been wrong so far and created a giant wall of worry for the stock market to climb as investors try to stay with the positive price momentum.
The economic data are still quite good, but there is a PPI report on Wednesday morning and retail sales data on Thursday morning that will provide additional insight. More bank earnings will be hitting as well. The quarterly results on Tuesday were sold although they were generally strong.
One factor that complicates the market reaction is rotation back into the Magnificent Seven MAGS. A big jump in Nvidia NVDA on news of its ability to start selling a chip to China helped to cover up a huge amount of the technical damage on Tuesday.
Big-cap technology stocks are immune to the tariff and inflation pressures to a much greater degree than smaller stocks. Companies such as Microsoft MSFT and Meta META don’t have large foreign suppliers and do not have the same sort of inventory that manufacturers and retailers carry. Their sales are less sensitive to price increases.
Even if there are growing worries about inflation and some concern that the Fed may not cut rates until later in the year, the Mag 7 names may benefit from rotational action because they are viewed as safer than the broader market. This will help the indexes and cover up deteriorating action under the surface.
We have flattish action early Wednesday with soft guidance from chip-maker ASML Holding ASML causing a pullback in the leading semiconductor sector.
At the time of publication, Rev Shark was long NVDA.
