Why Nvidia stock is being punished after a blockbuster earnings report

However, the S&P 500 as a whole was flat by lunchtime, appearing to be holding up despite the storm in technology stocks. The Dow Jones Industrial Average rose.

Why?

It’s not just a lot of negative headlines about AI.

The context here is that Nvidia shares are up more than 31% year to date, nearly triple the gains of the S&P as a whole. So a lot of this selling seems like people rationally deciding to take advantage of some of these gains while they can.

This entirely understandable decision has a disproportionate impact: Because Nvidia and a handful of other tech stocks account for 40% of the entire market’s valuation, and 75% of its gains over the past three years, when Nvidia moves everyone else moves too. Thus, some traders will likely see selling in Nvidia as a signal to sell the S&P 500 as a whole.

Longer term, Wall Street remains very bullish on technology stocks. Both JP Morgan and Wedbush published notes this morning arguing that AI is still in its early days, and that capital spending on AI — much of which ends up being spent on Nvidia products — still has years to go.

Federal Reserve Bank worker

However, there is a second dynamic at work that helps explain why Nvidia has taken a hit while the rest of the market is getting back on its feet.

Until recently, the Chicago Mercantile Exchange’s FedWatch Index — which measures bets on what investors think the Federal Reserve will do at its next rate-setting meeting — was almost evenly divided on the idea that Chairman Jerome Powell might keep interest rates unchanged in December. This would have negatively affected stocks, because traders prefer lower interest rates and the new waves of cheap money they provide.

Today, the odds of a rate cut have risen to 73%, meaning investors suddenly seem to think the Fed is about to become the Fed. probably To cut.

We can’t be sure, but one plausible reason for this change is that the US government officially announced yesterday that its unemployment rate had risen to 4.4% from 4.3% in September. This doesn’t seem like a big problem. But Fed governors and chairs have been publicly concerned about the labor market for months, and they have only one tool to help them: lower interest rates.

Pantheon macroeconomic analysts Samuel Toombs and Oliver Allen put it this way: “We maintain our expectations for the FOMC to ease policy again in December after yesterday’s labor market report, given clear signs that the $119,000 payrolls increase in September overstates the trend, and the additional rise in the unemployment rate.

“The rise in the unemployment rate to 4.4% in September, from 4.3% in August, was more significant. The 0.1 percentage point rounded rise was below the threshold for statistical significance, but the 0.3 percentage point rise over the previous three months clears that hurdle. Moreover, the unrounded unemployment rate, 4.44%, was a long way from 4.5%,” Toombs and Allen said in a note to clients.

If they’re right, that explains why Nvidia is struggling so much today while the Dow Jones and S&P are more solid. Nvidia investors sold on good news, while everyone else is buying the Fed rate cut scenario.