The AI Trade Cracked, But the Market Didn't
The reaction to Nvidia's earnings is all we need to know about the AI group right now.
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A sell-the-news reaction to Nvidia's (NVDA) stellar earnings report isn't a huge surprise. The AI sector has been a mess lately, and plenty of holders were simply looking for an opportunity to reduce exposure to strength.
What was surprising was just how good that report was and how aggressive the selling was anyway. Truly spectacular numbers. Record revenue, massive guidance raise, best quarter in semiconductor history.
None of it mattered. A fantastic report wasn't enough to make some folks want to stick with the AI leader and that is really all we need to know about the AI group right now.
After a freefall in early trading there was some stabilization and all the indexes closed well above their early lows. That matters. Even better is that 56% of stocks finished with gains and the Russell 2000 (IWM) rose 0.5%. This was not panic-dumping across the board. It was rotation out of risky AI-related names and into stocks with solid fundamentals and reasonable valuations.
Not that long ago the expensive Magnificent Seven stocks were the safe havens while the other 493 names in the S&P 500 struggled to find buyers. The tables have turned and that is actually good news for stock pickers. While the bears who have been screaming about an AI bubble got their wish to some extent, they didn't get the full-fledged crash they were betting on.
The primary problem when the market's most important stock is sold aggressively after a blowout earnings report is that it calls everything else into question. If Nvidia can't go higher on numbers like that, why would anything else? Luckily, investors appear astute enough to figure it out. The rotation is real and the bears who have been staring at index charts have badly missed the nuance of what is actually happening underneath.
Our job now is to exploit it. This rotational move is not over. There will be counter-rotations and elevated volatility in the mega-cap AI names, and plenty of collateral damage in sectors caught in the AI wrecking ball's path. Stocks getting hit for no reason other than market conditions rather than any fault of their own.
In my column earlier Thursday, I highlighted ADMA Biologics (ADMA) as exactly that kind of situation. Small, under the radar, solid fundamentals, cheap valuation, and under pressure mainly because of the environment around it, rather than anything wrong with the company itself. There are many more like it out there. Finding them is the work ahead of us.
Have a good evening. See you Friday.
At the time of publication, Rev Shark was long ADMA.
