It seemed like everything was going as expected for Nvidia, the star of the S&P 500 this year. Their outstanding earnings report on Wednesday night initially sent their stock and index futures soaring in the premarket on Thursday.
However, the situation quickly took a turn for the worse. Despite some minor gains, Nvidia’s shares struggled to stay afloat while the major indexes tumbled into the red.
According to Tom Essaye, the founder of Sevens Report Research, stocks should have experienced a rally due to Nvidia’s impressive results. After all, the chip maker has been a prominent player in the market’s fascination with artificial intelligence this year. But instead of rallying, stocks not only failed to rise but also reversed an early upward momentum. Essaye described Thursday as an “ugly day in the markets.”
Even Nvidia, known for its strength, couldn’t withstand the turmoil. Although the AI frenzy has been driving stocks, particularly in the tech industry, higher throughout 2023, this week’s focus has primarily been on the Jackson Hole Economic Symposium and Chairman Jerome Powell’s speech, which will shed light on the Federal Reserve’s future policies.
The Fed Remains in Control
Investors and AI optimism may be important, but they can’t overthrow the power of the Federal Reserve. The pathway for interest rates continues to be the key factor for risk-sensitive assets, and currently, rates are at a generational high. When rates are elevated, bond yields also rise, giving investors the opportunity to earn a solid 5% on risk-free Treasuries. With this attractive option available, investors have less motivation to take on higher-risk investments like tech stocks.
Shifting Expectations
Lately, investors have been adjusting their expectations regarding interest rates. This comes as they analyze the reiterated commitments from Fed officials to combat inflation by implementing stricter financial conditions, as well as scrutinizing economic data. If the economy shows signs of strength, the central bank is unlikely to lower rates. Conversely, indications of economic weakness may lead to a more moderate Fed policy.
Overcoming the Odds
Despite Nvidia’s impressive earnings report, it wasn’t enough to counterbalance the impact of data on durable goods orders and weekly jobless claims. These data points reinforced the belief that interest rates will stay higher for a longer period of time.
“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,” noted one market commentator.
The Power of Fed Policy
While Nvidia’s performance has contributed to the rise in major indexes this year, it is crucial to recognize that the earnings of one company alone cannot shift the entire market when Federal Reserve policy is in focus. The role and influence of the Fed remain paramount.
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