U.S. Economy Is Not in Bad Shape, But Trump Faces Challenge to Prove it
The president dedicated much of his state of the union address to economic positives, but consumer sentiment will be hard to shape.
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The Magnificent Seven (MAGS) and the Nasdaq 100 (QQQ) are leading the market higher on Wednesday morning as investors await the Nvidia (NVDA) earnings report after the close. The worries about the AI wrecking ball have been set aside for now as the focus turns to the one stock that has benefited from AI capex more than any other. That stock is NVDA.
As I mentioned on Wednesday morning, NVDA is the best performing of the Magnificent Seven names so far in 2026, and it also has the cheapest valuation based on a trailing PE of 48 and EPS growth of around 60%. Typically, chip stocks aren't rewarded with high PEs because they tend to be cyclical, but there are no signs of cyclicality in NVDA.
The report is likely to be very strong but what is important is the reaction. A beat and raise may not be enough to cause positive momentum if investors are worried about the payoff on all of those chips that hyperscalers are buying. Many of the big hyperscalers have little choice but to continue massive capex spending to keep pace with the competition. The extent of profitability is a different issue.
In any event, the response to NVDA will shape how the AI sector develops from here. At a minimum, there will be a greater focus on separating the winners from the losers. That process accelerated as the AI wrecking ball has been swinging around, but it is far from over. It will offer some good trading opportunities if we pick the right names but it will be volatile.
The AI uncertainty doesn't exist in a vacuum. There is a bigger economic story underneath it.
Trump Economic Dilemma
Trump cited a long list of economic positives in Tuesday night's state of the union address, and the data backs him up on most of it. This is not a bad economy despite some concerns about employment. The problem is that voters aren't embracing the positive view and the Republicans are increasingly at risk of losing the House in the midterms.
The disconnect isn't hard to understand if you know how inflation actually works. Inflation coming down is not the same as prices coming down. The damage from the Joe Biden inflation years is permanently baked in. Prices only go lower if there is actual deflation and deflation only happens in a weak economy. Deflation is one of the most difficult problems for central banks.
So Trump is caught in a very difficult position. He can claim victory on inflation because the rate of increase has slowed. But voters are still paying very high prices for groceries, rent, gas and everything else that matters in daily life. The numbers on the price tags at the stores doesn't care what the CPI report says.
This is why we hear so much about the "K-shaped economy." Upper-income households recovered through asset appreciation. The stock market is up, home values are elevated and 401(k)s are near record highs. Lower- and middle-income households have been crushed by price increases and have never gotten the asset inflation offset. They are still feeling it every time they pay their bills. That is why the consumer-confidence Present Situation Index keeps falling, even when the headline number bounces.
Trump can show voters the GDP number and the unemployment rate all day long. If eggs still cost three times what they did four years ago, none of that data makes people feel like he is doing a good job. The pain is real and it is locked in.
The Democrats have their own dilemma. Their policies created the inflation and it isn't clear that they have any new ideas about how to fix things. If anything, their policies are likely to make inflation even worse. That is a peculiar political dynamic that nobody in Washington wants to talk about honestly.
The economic debate in the next eight months will be dominated by this issue. On one hand, the economy is looking pretty good, but many people aren't feeling it and that will hurt consumer confidence, hiring and other issues and help to make the economic pessimism self-fulfilling.
I'm not doing much trading on Wednesday as I await the Nvidia report and consider how the economic situation develops. The good news is that there are quite a few stocks with good technical action. If Nvidia delivers the goods, we could see some decent follow-through, and if they don't, then I'll be looking for rotation into other groups like energy, financials, medical, and biotechnology.
At the time of publication, DePorre was long NVDA.
