Macro

Atlas Shrugged as Bonds Steal Nvidia's Thunder Amid $218B Surge

Nvidia's Market Cap Surges $218 Billion, Yet S&P 500 Falls 0.74% Amid Bond Market Influence

By Mackenzie Crow

5/24, 00:34 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
Advanced Micro Devices, Inc.
NVIDIA Corporation
QUALCOMM Incorporated
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Key Takeaway

  • Nvidia's market cap surged by $218 billion after tripling sales, but broader US stocks fell 0.74% due to rising bond yields.
  • The two-year Treasury yield neared 5%, driven by strong US PMI data and Fed minutes indicating rates may stay "higher for longer."
  • Taiwan Semiconductor Manufacturing Co. (TSMC) remains a critical player amid geopolitical tensions, accounting for 48% of MSCI Taiwan index market cap.

Nvidia's Earnings and Market Reaction

Nvidia's recent earnings report was nothing short of spectacular, with the company's market cap surging by $218 billion after its sales tripled. The stock rose 9.3% on Thursday, yet the broader market did not follow suit. The S&P 500 fell by 0.74%, and an "S&P 500 excluding Nvidia" index would have dropped by 1.2%. This divergence highlights a significant shift in market dynamics. "Quite frankly, if you told me that Nvidia would be up over 10% by midday while the S&P 500 is up only slightly, I would have thought that impossible," said Steve Sosnick, chief strategist at Interactive Brokers. Nvidia has often been seen as the "Atlas holding up the broader market," but this time, the bond market had other plans.

Bond Market's Influence

The bond market's reaction overshadowed Nvidia's impressive earnings. After a significant dip earlier this month, the two-year Treasury yield is almost back to 5%. This shift is driven by changing expectations for the Federal Reserve's monetary policy. The Bloomberg World Interest Rate Probabilities model, based on fed funds futures, shows a notable shift in the projected course of rates since May 15, when the CPI data was released. The S&P Global's purchasing manager index for US combined manufacturing and services rose to its highest level in two years, reaching 54.4. This was taken as evidence that the Fed's monetary tightening hadn't significantly impacted the economy. Initial jobless claims were lower than expected, although the four-week moving average of new claims is at its highest since September, indicating a steadily slowing economy.

Investors reacted negatively to the latest FOMC minutes, which revealed that "many" Fed officials expressed uncertainty over the degree to which policy is restraining the economy. Policymakers agreed that this year's disappointing inflation data meant it "would take longer than previously anticipated for them to gain greater confidence" that it was heading for the 2% target. This was interpreted as confirmation that rates would stay "higher for longer." Sosnick noted, "Coming on the back of yesterday’s 'higher for longer' Fed Minutes, bond traders were in no mood to hear about a strengthening economy."

Nvidia's Market Position

Despite the broader market's reaction, Nvidia's shares performed exceptionally well. The company's sales growth is unprecedented, driven by the transformative impact of AI technologies like ChatGPT. Nvidia's market share for AI chips is around 90%, with profit margins of 55%. However, Rob Arnott, founder of Research Affiliates LLC, cautions that this dominance may not last forever. He suggests that over the next decade, overall demand for AI chips could grow by 25% annually, but prices might drop by two-thirds, and profit margins could fall to 30%. Nvidia's market share could also decrease to 50%, potentially leading to lower profits in ten years than today.

Arnott draws parallels with Qualcomm Inc., the best-performing stock of 1999, which took two decades to regain its peak level despite significant profit growth. Investors are beginning to recognize that Nvidia's success might come at the expense of its peers, such as Advanced Micro Devices Inc. and ARM Holdings Plc, which fell on Thursday.

Geopolitical Tensions and Taiwan

China's military drills around Taiwan, following the inauguration of President Lai Ching-te, have raised concerns about the potential for a major crisis in the Taiwan Strait. TSMC, under CEO C.C. Wei, remains a dominant force, accounting for 48% of the market cap of the MSCI Taiwan index. Jennifer Welch of Bloomberg Economics argues that while these maneuvers are unlikely to lead to a major crisis, they cannot be ignored. A blockade could cut Taiwan off from global trade, severely impacting the global economy. Welch and her team estimate a 5% chance of this happening, potentially costing the global economy $5 trillion in disruption to semiconductor supplies or a 5% loss in GDP.

Admiral Philip Davidson, the retiring commander of US military joint forces in the Indo-Pacific, warned that Beijing is fast-tracking plans for an amphibious invasion. A full-blown invasion could lead to a 40% contraction in Taiwan's GDP during the first year of war, with staggering implications for global trade and financial markets. The latest drills have made investors jittery, reflecting increasing tensions in the Taiwan Strait.