Market Digesting a Strong First Half
The Dow rose 283 points after the Dow, Nasdaq, and S&P 500 fell for three straight days. This is consolidation, not the end of the bull run. The first half of the year brought a huge run-up in tech and semiconductor stocks. They became historically overbought and could not keep rising in a straight line. The third quarter flipped that trend. Market breadth has been getting worse, and some tech and AI stocks have seen multiple contraction (their price-to-earnings ratios shrinking). This consolidation likely needs to run a bit longer.
The Real Risk Is Inflation
Inflation is the number one issue for the market. Oil prices are high and bond yields are climbing, though the rising bond yields are less worrying than the inflation itself. Manufacturing is strong, but costs keep rising. Reports from the Fed regional banks, S&P Global, and ISM all show good manufacturing activity paired with rising costs. Commodity prices are hitting highs: copper sits near its all-time high, and even farm goods like corn and wheat are making highs. An election is coming that could get wild.
Despite this, the bull market should continue once the market gets past this stretch, because earnings are excellent. Companies are posting record earnings. The last earnings season was the kind of gain usually seen coming out of a recession or a trough like COVID, but these gains landed on top of already strong numbers.
Nvidia (NVDA) Looks Cheap
Multiple contraction shows up clearly in the numbers. Marvell (MRVL) traded around 80 times forward earnings, then came down into the 50s. Nvidia (NVDA) has pulled back too.
Nvidia (NVDA) looks very cheap. Free cash flow is about $193 billion this year and a projected $323 billion next year. The stock is worth far more than its current price. It may be over-owned, which could be why it does not climb, since a stock and the company behind it are two different things.
In the current volatile market, most of these names are trading stocks. Anyone with a longer-term horizon can buy. Good areas to look at: tech, some healthcare, and some industrials. Many stocks tied to the data center build-out are down 50% from highs hit a couple of months ago, even though the build-out is still going. This reflects short-term worry and negative seasonality. The market hit short-term oversold levels: only 22% of the S&P 1500 were above their own 10-day average. The bounce is a good sign, but real follow-through needs more buying and more investor demand.
The AI Trade
AI is not going away. Dell's (DELL) results were astonishing, and worth watching to see if the stock can make a new high over the next week. Nvidia's (NVDA) numbers were strong too, along with a batch of other companies.
Worries about "circular financing" in AI will not matter for at least a couple of years. Nvidia (NVDA) is the giant with its reach across the whole space; $5 billion or $10 billion is nothing to a company with that cash flow. The people running these companies are the smartest in the world and get demand data by the second, and they keep saying they need more and more compute. That is a strong reason to trust them. They are planning years and decades ahead, not for this week or this month.
Consumers, Yields, and the Fed
The economy is K-shaped, meaning some groups do well while others struggle. Very high bond yields can hurt people with loans or credit cards. If a falling market makes people less euphoric, that is actually good. Too much bullishness is a headwind. A certain amount of skepticism, or even bearishness, is healthy.
Consumer balance sheets are in good shape. Corporate balance sheets are in phenomenal shape. The fourth quarter should be very good. The wild card is inflation. If commodities keep rising, that is a real problem.
Will the Fed hike? The odds point to the Fed hiking, possibly 50 basis points higher by year-end or January. Rate hikes may not help. The old saying is that the cure for higher commodity prices is higher prices, which triggers a natural slowdown on its own. When shortages come from supply chain problems, raising interest rates does not fix them. It would be better for the Fed to hold rates where they are, but the market is pricing in hikes.
Key dates ahead: a jobs report, CPI on the 11th, and the Fed on the 16th. Jensen Huang was speaking to the G20, urging finance ministers to speed up AI adoption as a key to growth.
