For those of you who would prefer to listen:
The Market volatility continues. The volume of issues and events that are at play today is simply striking. Heading into the week, investor eyes were on the AI trade. Specifically, Nvidia, the engine of AI. Let’s start with that.
Nvidia delivered another beat and raise quarter That was expected. CEO Jensen Huang said the innovative company is experiencing”extraordinary demand” for its Blackwell chips. These are the most advanced chips in the world that are fueling AI. It’s moving at light speed. The Market liked that. Huang also had a positive spin on the DeepSeek breakthrough. Looking forward, Jensen said that the reasoning models will require 100x more compute than the pre-training methods, which is what DeepSeek showed, on the heels of ChatGPT and the others. That’s where AGI (Alternative General Intelligence) takes hold, when machines become as smart or smarter than we humans. Believe it or not, that could come as early as next year.
The biggest issue for Nvidia; It’s a victim of its own success. The company’s revenues grew 78% compared to a year ago. That’s incredibly impressive growth. But with the Market, it’s all about expectations. Nvidia reported the smallest revenue beat in years. What’s more, the company forecast 66% growth ahead, which is seemingly what hit the stock. The prospects of higher tariffs and export controls weigh heavy too. More on that later.
Nvidia’s Data Center business accounted for over 90% of the company’s revenue. That’s where the Tech Titans, often referred to as “hyper-scalers” in AI, keep spending. AI capex continues to be a theme with META reportedly considering $200 Billion in AI data center projects. Microsoft reiterated its plans to spend $80 Billion this year. That, on top of Google and Amazon’s aggressive investment plans. In all, the Tech Titans have pledged over $1 Trillion in AI spending, with the vast majority landing in the United States.
This is the final stretch for Q4 Earnings Season. The results have been good. Actually, they’ve been really good. Roughly 90% of the S&P 500 companies have now reported. 77% have beat Street estimates on earnings. 62% beat on revenue. The blended earnings growth rate for the S&P 500 is 17.8%. That is tracking the fastest since Q4 of 2021.
There is one problem: The outlook ahead. With so much uncertainty, forecasts have become murky. Corporate America has become a little cautious. There are twice as many companies that lowered their outlook for the year than raised. That has put pressure on stock prices.
There has been a rally in the Bond Market. Prices rose as yields fell. The yield on the 10-Year Treasury is back to 4.2%. It’s down over a 1/2-point in just a month. That’s a big move in a short time. Bonds are considered a safe haven for their predictability. The Bond Market seems to be saying inflation is becoming less of a problem. But there is a new problem. It’s the Economy.
The most logical reason for lower yields is that economic growth is slowing. The speed of the move in yields suggests the slowdown is accelerating. The probability of the Fed cutting has increased again. The good news is credit spreads remain quite tight. That’s an indication that the financial system is functioning well, and default risk is low. We watch that closely because widening spreads are early indications of trouble ahead. So far so good. The Bond Market will be first to sniff out trouble. We watch it like a hawk.
Crude Oil fell to its lowest levels on the young year. West Texas Intermediate (WTI) is below $70. The anticipation of the slowdown helps explain it. Demand declines. But there’s also this: The way things are going, the Market seems to be anticipating more Russian Oil back in circulation as the prospects of sanction relief rises. Russia is clearly not receiving the same pressure from Washington anymore. It’s a very fluid situation. Lower Oil prices mean less money at the pump. That’s good for our wallets, for those of us who still fill up tanks. But why they’re falling isn’t always good news. So, there’s that.
The S&P had its first 4-straight decliner on the year. The streak broke Wednesday, but barely. The S&P finished slightly in the green despite 8 of 11 sectors ending red. The selling returned Thursday. Friday brought a reprieve, at least at first. A contentious press conference in the Oval Office sent stocks back in the red. That was quite extraordinary. Unprecedented is such an overused word, but wow, there is no precedent for that. But an afternoon reversal sent stocks surging into the weekend sharply in the green. It was quite a session. That said, there are still far more questions than answers on multiple subjects.
There’s definitely been a rotation back into value and more defensive areas of the Market as Tech and Momentum continue to correct. In fact, Apple was the lone member of the $3 Trillion club. Microsoft and Nvidia slipped below. The late day rally brought Nvidia back above. Bitcoin, a proxy for investor enthusiasm and appetite for risk, eclipsed $80K on the downside this week. It was over $100K in January. Importantly, not everything was red. Those Boring Blue Chips have caught a bid again. They’re definitely doing their job.
We mustn’t forget, there’s still that major issue of Tariffs. Is it a negotiating tactic or policy? That’s been very confusing with a barrage of mixed messaging coming out of the White House. The Market has taken it in stride for the most part. Mostly because there has been limited actual implementation thus far. But the Market is definitely starting to react to the threats as possible actual policy. It doesn’t like it.
The President said the 25% tariffs on Mexico and Canada will go into effect next week. The extensions negotiated in February are coming to an end. China will be slapped with an additional 10%. That would make it 20% tariffs on Chinese goods. These 3 countries are America’s biggest trading partners. Of course, 2 are our neighbors and close allies. All have promised to retaliate. A trade war could further push up prices and slow growth.
Americans have been feeling the pricing pinch. They’re not happy. US consumer confidence fell the most since August of 2021 amidst increased tariffs and nagging inflation. When people aren’t confident, they tend to tighten their wallets. The tariff threats are weighing heavy on Corporate America too. Export controls will definitely impact business. It’s a big reason why companies are being careful with their outlooks.
These pressures are already taking a toll on the US Economy. It grew 2.3% in Q4, which was reiterated this week. But 2025 is acting more sluggish. The Market is already recalibrating the road ahead. As you know, when it comes to the Market, it’s all about where we’re going, not where we’ve been.
Optimism has evaporated. Bearish sentiment jumped above 60% this week. That’s only the 5th time that’s happened since the American Association of Individual Investors started tracking it in 1987. That’s extreme fear. What’s surprising, the S&P hit an all-time high just last week. It’s only down 3% since. Those other instances came when the Stock Market was down 10%+. It speaks to the tremendous uncertainty and anxiety out there today.
There has been plenty of damage beneath the surface. Even though the overall Stock Market is only down 3% from its all-time highs, the growthiest and most speculative stuff has been hit much harder. The excess enthusiasm has definitely been burned off. Soft hands have been selling. The spread between Bulls and Bears is the most negative since the 2022 low. That’s usually a contrarian indicator of near-term bottoms. This time feels a little different. There has not been a complete washout. The Market does not appear to have reached oversold levels quite yet.
It’s important to remember, the 45th President viewed the Stock Market as his scoreboard, taking credit for its performance during his first term. There’s every reason to believe it’s still the case as 47th. The increased volatility has to be recognized in the White House. The Tech-heavy NASDAQ saw all its post-election gains get erased this week. Bitcoin did too. The Market is a powerful force that can make people move.
We are officially done with February, now on to March. We have 2 eventful months already in the books for 2025. The size and speed of the news flow has been, shall I say, combustible. So has the subject matter. Get used to it, I suppose. Get used to the Market volatility too.
Just know, we’re on it.
The End… for now.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
