Nvidia earnings beat pushes markets higher

It was a love fest, as strong quarterly results from Nvidia, the linchpin of all things AI, once again wowed investors. Not even Kevin Warsh’s hawkish speech at Jackson Hole could make much of a dent in investors’ enthusiasm.

But looks can be deceiving. Yes, all three indexes gained on the back of the semiconductor company’s earnings, but 10 out of 11 equity sectors fell on Thursday. How can that be, you might ask? Simple, technology stocks are now the largest weighting in just about every index. As such, the results rippled through so many tech stocks that everything else was dragged up with it.

That said, investors' love/hate relationship with certain aspects of the world’s rollout of the artificial intelligence ecosystem took a turn for the better this week. Why so much attention on Nvidia? Because the semiconductor giant is at the center and the hub of the world’s build-out of the infrastructure of AI. It beat second-quarter earnings and revenue expectations handily. And, even more importantly, Jensen Huang, the chairman, also provided a better-than-expected outlook for the third quarter.

Unlike previous quarters, when the company’s stock price fell despite strong results, NVIDIA jumped almost 10% this time. Its report also helped other AI chip stocks and the technology sector in general recover after several weeks of lackluster performance. The company still derives the lion’s share of its revenues from hyperscalers like Google, Microsoft, and Amazon.

Investors have worried that these companies were already spending too much to build out their own infrastructure, as the trillions of dollars they are spending on and off their balance sheets have raised concerns. The revenues from this area more than doubled in Nvidia’s second quarter.

Investors are also concerned that these hyperscalers are beginning to build their own chips to reduce their dependence on Nvidia’s chips. But none of that seemed to matter this week as investors eyed the $20 billion stock buyback and the $6 billion in dividends ($ 0.25/share) the company returned to existing shareholders.

In the meantime, Oman and Iran are working on a deal to jointly “administer” the Strait of Hormuz. Tolls figure prominently in that discussion. On the U.S. side, the latest economic pressure is to convince those who are trading with Iran to stand down. If companies and countries ignore the American directive, they would then be excluded from the dollar-based global financial system.

Exactly when and how this could be accomplished is up for discussion. Given that China imports more than 90% of Iranian crude in non-U.S. dollar trade, their cooperation would be of paramount importance. So far, their response has not been encouraging. Oil traders are unimpressed and have held crude prices in the $80-$83-barrel range all week.

As for last week’s attempts to cap the climb in U.S. Treasury bond yields, Secretary Scott Bessent appears to have succeeded, at least over the last few days. Yields on the Ten-year bond have dropped about 10 basis points. Those waiting to see whether the Fed would jump in and back the Treasury secretary’s play were disappointed.

Fed Chairman Kevin Warsch underscored his commitment to reducing inflation instead. His speech in Jackson Hole was taken seriously enough to put an interest rate hike back on the table by the betting markets. On Friday mid-morning, the probability of a rate hike was back up to 50% for the September FOMC meeting. So, the Treasury and the Fed are somewhat at odds on where they think interest rates should be, at least on the long end.

The three major indexes notched a positive week. An almost 2% move in the Nasdaq, a 1.2% gain in the S&P 500 Index, with the Dow trailing with less than 1%, indicates buyers are still willing to chase markets.

Gold fell toward $4,500 an ounce, its lowest level in a week, as investors digested what was perceived as hawkish commentary from Warsh. Given its rise over the last few weeks, the Fed comments provided an excuse for some profit-taking in bullion and in most precious metals and mining stocks.

Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. None of his commentary is or should be considered investment advice. Direct your inquiries to his website at www.schmicksretiredinvestor.com. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal.