It looked like it was all going according to plan:
Nvidia,
the hero of the
S&P 500
this year, posted blowout earnings late Wednesday, sending the stock and index futures skyward in the Thursday premarket.
Then it all went south, with the shares barely eking out a gain and the major indexes plunging into the red.
“By all accounts, stocks should have rallied,” said Tom Essaye, the founder of Sevens Report Research, pointing to
Nvidia’s
(ticker: NVDA) results—what initially looked like yet another opportunity for the chip maker, a key beneficiary of this year’s frenzy over artificial intelligence, to lead the market higher. “Instead, stocks didn’t just not rally, they reversed an early rally…Thursday was an ugly day in the markets,” said Essaye.
Not even Nvidia was strong enough to fight the fight. Sure, the AI frenzy has been an instrumental force propelling stocks, and especially tech stocks, higher in 2023. But this week has always been about the Jackson Hole Economic Symposium, Chairman Jerome Powell’s speech, and the outlook for Federal Reserve policy.
Neither investors nor AI optimism can fight the Fed, and the most important force for risk-sensitive assets remains the pathway for interest rates, which remain at a generational high. When rates are elevated—sending bond yields up, too—investors can earn a cool 5% on risk-free Treasuries, giving them fewer incentives to pile into riskier bets such as tech stocks.
Investors have been shifting their expectations about the outlook for rates in recent weeks, digesting reiterated commitments from Fed officials to fight inflation with tighter financial conditions as well as economic data. Signs of a strong economy give the central bank little reason to loosen rates, while indications of economic weakness could moderate Fed policy.
So, while Nvidia earnings were great, they just weren’t enough to overcome data from durable goods orders and weekly jobless claims that firmed up bets that rates will stay higher for longer.
“It’s very unlikely the Fed gets less hawkish while the labor market remains tight, because a tight labor market is a major contributor to high long-term inflation,” Essaye said.
It’s a day worth remembering. Nvidia has helped the major indexes march higher this year, but earnings from one company alone cannot shift the needle for the whole market when Federal Reserve policy is in focus.
Write to Jack Denton at [email protected]
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