Nvidia posts strong sales and guidance but the outlook for the US isn’t so rosy

Nvidia’s stronger-than-expected sales and guidance could drive a renewed rally in the so-called ‘Magnificent Seven’ tech giants.

Nvidia founder and chief executive Jensen Huang. Picture: AFP

Nvidia’s stronger-than-expected sales and guidance could drive a renewed rally in the so-called “Magnificent Seven” tech giants, creating bullish implications for risk assets globally.

There’s no faulting the $3.2 trillion AI chipmaker, which has a market capitalisation that easily exceeds the entire Australian sharemarket, after a staggering rise of more than 500 per cent in the past 16 months. Nvidia’s sales for the December quarter and revised sales guidance for the March quarter both beat expectations by about 10 per cent, boosting its shares as much as 11 per cent in after-hours trading.

Founder and CEO Jensen Huang said accelerated computing and generative AI had “hit the tipping point” as “demand is surging worldwide across companies, industries and nations”.

Pac Partners institutional sales trader James Nicolaou said Nvidia was “a $US1.7 trillion company that posted 265 per cent revenue growth and 765 per cent EPS growth”. He added: “This was, by far, one of the most widely anticipated earnings reports of all time. And they beat expectations in just about every metric possible.”

Amazingly, Nvidia’s 12-month forward PE multiple has fallen over the past year to a reasonable looking 32 times – despite its surging share price, as earnings estimates have risen sharply.

It delivered again with guidance for revenue to grow another 230 per cent on-year.

However, the focus may shift back to the US macroeconomic outlook before long.

Core personal consumption expenditures (PCE) inflation data at the end of next week may further test expectations of interest rate cuts.

Amid renewed optimism about Nvidia, it is worth noting that after reporting even stronger results, guidance and a $US25bn share buyback in August last year, its shares reversed a 6.7 per cent intraday rise. The S&P 500 remained weak until November last year, and Nvidia didn’t really break its August 2023 peak until last month. Of course, August 2023 was a different macroeconomic backdrop: Inflation was higher and there had been an expectation of another rate rise by the end of the year.

Fed hawkishness rose to a peak at its September meeting, faded as the 10-year bond yield neared 5 per cent in October, and turned outright dovish in December when chairman Jerome Powell said the committee discussed the timing of rate cuts. Now the market is expecting 92 basis points of cuts by the end of 2024. But the direction of Fed rhetoric – pushing back on market speculation of rate cuts as it caused excessive loosening of financial conditions – is not too dissimilar to last August.

After higher than expected CPI and Producer Price Index (PPI) inflation data and Fed pushback on rate cuts, the US 10-year bond yield is on the cusp of breaking above its 100-day moving ­average at 4.33 per cent.

“Most participants noted the risks of moving too quickly to ease the stance of policy and emphasised the importance of carefully assessing incoming data in judging whether inflation is moving down sustainably to 2 per cent,” the January FOMC meeting minutes said.

“Furthermore, several participants mentioned the risk that ­financial conditions were or could become less restrictive than ­appropriate, which could add undue momentum to aggregate demand and cause progress on inflation to stall.”

The Fed’s January board meeting predated the blowout CPI and PPI data this month.

JPMorgan chief market strategist Marko Kolanovic said the recent CPI and PPI data and weaker economic activity data from the US and abroad cast shadows on optimistic scenarios.

In the past three years, narratives for the macro regime went from the “roaring 20s” post-pandemic secular recovery, to imminent recession, to the current Goldilocks and best of all worlds when it comes to growth, inflation and monetary easing.

“Most investors believe we are in a benign risk-on macro environment where one should invest along with market momentum,” Mr Kolanovic said. “Optimism now is quite high and some ­describe the current regime as ‘parabolic stockmarkets’ and ‘platinum-locks’ (better than Goldilocks).”

He said the idea that stocks should trade higher because the theoretical neutral rate of interest was making financial conditions easier “sounds like a stretch”, and consumers who could not afford the new mortgage rate or a car loan were not deciding based on theoretical interest rates.

He said he found it odd that Europe and Japanese stockmarkets were hitting record highs while the UK, Japan and Germany were in technical recessions, and “various far-fetched applications of AI” were being fully priced in related stocks and were expected to boost the economy in the near term.

With a tight US jobs, high immigration and fiscal stimulus high, stock and crypto markets adding trillions of dollars in paper wealth, and quantitative tightening being neutralised by treasury issuance, Mr Kolanovic said inflation might stop falling or, worse still, rise.

“Historically, loose monetary conditions are a significant driver of upside in CPI readings,” he said.

“These inflation considerations are separate from geopolitical considerations such as cur­rently low oil prices with risk of an upside shock, shipping disruptions in the Middle East, and the risk of East Asia supply chain disruptions as a result of geopolitical conflicts or an outcome of US elections. We believe investors should be open-minded that there is a scenario in which rates need to stay higher for longer, and the Fed may need to tighten financial conditions.”

The US stockmarket surge since October was predicated on a repricing of the US rates outlook from two cuts to seven cuts in 2024, yet while half of those cuts have since been priced out, the stockmarket hasn’t corrected.