Nvidia's Earnings Highlight AI Boom, Reflecting Economic Shift

Key Takeaway

• Nvidia's latest quarterly report exceeded high expectations, driving further optimism and stock gains, highlighting the AI investment boom.
• Nvidia's rapid sales recovery contrasts with the dot-com era, emphasizing AI's transformative impact on the economy.
• Intellectual property and software investments now surpass physical equipment in GDP contribution, reflecting a significant economic shift.

Nvidia's Earnings and Market Impact

Nvidia's latest earnings report has once again demonstrated the company's ability to exceed high expectations, driving its stock to new heights. The options market had anticipated a potential market-cap swing of nearly $200 billion by the end of the week, underscoring the significant volatility surrounding Nvidia's stock. This figure is comparable to the market caps of major companies like Disney and McDonald's, highlighting the substantial impact Nvidia's performance has on the broader market. The stock closed at an all-time high on Tuesday, continuing its meteoric rise. However, the stock's reaction to earnings has been unpredictable; in February, it surged 16% post-earnings, while in November, it dropped by 2.5%. This volatility makes trading Nvidia's earnings a challenging proposition, with the Friday straddle priced at approximately 8.2% of face value.

Fed's Stance and Economic Data

The early part of the week saw limited macroeconomic catalysts, with the primary focus on comments from Federal Reserve officials. Most speakers reiterated the need for more evidence of controlled inflation before considering rate cuts. Raphael Bostic and Loretta Mester hinted at the possibility of a higher neutral rate. The market, however, is already pricing in a higher steady-state level for the Fed funds rate than the Fed's dot plot projections. The upcoming Fed minutes on Wednesday may provide more insights into the decision to taper Quantitative Tightening (QT), although much of the discussion has already been covered in previous speeches.

The Treasury's general account balance has slipped below its target levels, which could put downward pressure on reserve balances as the Treasury deposits more cash at the Fed. This dynamic will be crucial to watch as it could influence the Fed's balance sheet and monetary policy decisions.

ISM Manufacturing Survey and Industrial Production

The ISM manufacturing survey has been a topic of debate, with some questioning its relevance given the divergence between its readings and overall GDP growth. The survey has been below 50 for almost all of the past 18 months, despite solid economic growth. However, when compared to industrial production, the ISM readings align more closely. The current level of the ISM suggests that industrial production should be at 47.2, given the -0.37% year-over-year change in industrial output.

Manufacturing activity has struggled since the Fed began raising rates, with the industrial production index remaining flat since April 2022. This indicates that monetary policy has had its intended effect on manufacturing, even though the sector's overall influence on the economy has diminished. The ISM survey, while historically accurate in tracking activity, may not be as relevant in an economy dominated by companies like Nvidia and Apple, which derive significant revenue from hardware without manufacturing the products themselves.

Street Views

• Cameron Crise, Bloomberg (Bullish on Nvidia):

  "Expectations were high and the company still managed to exceed them, while ratcheting up guidance to boot. It all reminds me of the investment-banking heyday prior to the GFC, when the best forecast for Goldman’s quarterly earnings per share seemed to be 'consensus plus a buck.'"

• Cameron Crise, Bloomberg (Neutral on AI investment theme):

  "The comparisons with the dot-com era remain alluring, but there are also significant differences between then and now."