The AI trade isn’t over, but markets are in a fog of uncertainty. What’s driving NVIDIA’s decline and market volatility?
KEY TAKEAWAYS
MY HOT TAKES
Not lazy, but certainly hazy. Ya, maybe I am ready for the warmth of summer, but the haze I am referring to is more like a fog. A deep fog of uncertainty that now overhangs the markets. I will get into that in a moment,
But first I want to do a quick epilogue on NVIDIA, and how the market reacted to its stellar earnings announcement of two nights ago.
In yesterday morning’s post, I talked about the future of the AI ecosystem and how we are just at the beginning of what is likely to be a decades-long run. The AI revolution saw companies like NVIDIA emerge from the shadows and experience 200+% earnings growth causing an aha moment for the markets. That revolution led to back-to-back yearly stock returns of 239% and 171% for 2023 and 2024. On Wednesday night, NVDIA announced that it handily beat both Revenue and Earnings estimates, logging annual growths of 72% and 78% respectively. Demand for products remain strong, and outlook was hardly mixed (despite the eyeball-grabbing headlines). Further, the company is experiencing growth in entirely new market verticals that haven’t even launched their revolutions yet (self-driving cars, for example). Yesterday, I posited that even once the revolution is over, that evolution would usher in another long period of growth for the stock.
So, what do you do when the stock goes down by -9.5% a day after an announcement like that? Do you declare that the AI trade is over and simply sell all your AI investments? First, we need to ask why the stock went down by so much. I think now that I need to step back and say that YOU CAN’T EXPECT 171% gains without any risk—in this case, volatility. NVIDIA is a volatile stock. The stock has a beta of almost 2, which means that it is twice as volatile as the S&P500. At a very simple level, a 1% gain in the S&P should lead to a 2% gain in NVIDIA. That works really well when everything is going up, but unfortunately as I always say, volatility works in both directions causing losses to be more extreme than the market. Volatility is your friend when stocks are gaining but your worst enemy when stocks are losing.
Now, let’s jump back into why the markets did so poorly yesterday, or the whole week, for that matter. It is that fog of uncertainty that has investors of all kinds on edge. The Trump Administration has simply not let up on its tariff-talk, and the talk that it has given to date has been vague and nebulous. All we can tell is that the proposed tariffs are going to be large in size and indiscriminate, meaning broad-based. Consumers by now know that it will be them that bear the brunt of tariffs in price hikes. And, again, for the record, a VAT tax not only means price hikes, but it absolutely, positively guarantees that the consumer will pay for any import-related levies (that is not conjecture).
Are consumers worried about more inflation? You bet they are, and that is showing up in the sentiment numbers. Yesterday, those fears came closer to reality when President Trump announced that the already-proposed 25% tariffs on Mexico and Canada will go into effect next week. Trump further announced that China will be slapped with an addition 10% tariff on top of the already existing 10% tariffs. Just a day earlier, Trump suggested that EU imports were next in line to attract taxes. Are they going to happen, or aren't they? If they don’t definitively, that would be very positive. If they do definitively, it would be bad, for all the reasons discussed in these past few months. However, if they don’t un-definitively (is that even a word), it would be even worse. Markets don’t like to be left in the lurch, which is exactly where they are right now.
Look, it is clear that the long-term strategy of leveling the playing field in international trade is important. Advantaging domestic producers is also a very positive and stimulative strategy. Trade tariffs, while effective bargaining tools, are unfortunately a destructive, inflation causing vehicle. With inflation running still high and nerves a bit raw, any speak of tariffs is bound to ignite some passion. And it has. To make matters worse, it is still not clear if, when, what, how much, and how long-lasting any tariffs will ultimately be enacted.
So, are investors selling NVIDIA because of fears that the AI revolution is over? I hope not—it isn’t. Are they simply selling with market ebbs, which are driven by fears of the unknown when it comes to inflation and unemployment? Some, probably. Or are NVIDIA investors selling for both reasons? Probably.
If you believe in the upside that will come from the AI ecosystem over the next several years, the markets will certainly test your conviction over the next few months until all un-definitives hopefully become definitive (even if bad). When will that happen? When the fog of uncertainty clears up, but until then even strong results like NVIDIA’s are likely to be met with skepticism. Be patient and please keep your eyes on the road.
YESTERDAY’S MARKETS
Stocks declined in a painful day of trade yesterday overshadowed by tough trade talk by the President. Pending Home Sales declined to a record low according to the latest numbers from the National Association of Realtors as investors sat on the sidelines due to cold weather and high mortgage rates. Weekly, first-time unemployment claims jumped to a 2025 high reflecting not only private sector layoffs (Starbucks, Meta, etc.), but also the beginnings of the mass layoffs going on in government.
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