The initial euphoria surrounding Nvidia Corporation's impressive earnings report was short-lived, as global stock markets quickly refocused on persistent worries about artificial intelligence investments and high valuations. Despite the AI giant surprising Wall Street with accelerating growth and a robust fourth-quarter forecast, investor optimism soon turned to caution.
Market Rally Fizzles Amid Valuation Concerns
Nvidia's Wednesday earnings announcement initially provided relief across world stocks, but by Thursday, the benchmark S&P 500 and tech-heavy Nasdaq Composite had retreated from their recent record highs. The initial gains evaporated as investors grappled with multiple concerns, including delayed September payrolls data that reinforced expectations the Federal Reserve would maintain higher interest rates.
Mark Hackett, Chief Market Strategist at Nationwide, characterized the market movement as a coordinated risk-off trade affecting technology stocks and cryptocurrencies alike. The intraday decline pattern suggested market exhaustion rather than a simple opening drop.
AI Investment Skepticism Persists
While Nvidia's results supported the artificial intelligence narrative, deep-seated skepticism remains about whether AI spending will deliver adequate returns. Angelo Kourkafas, senior global investment strategist at Edward Jones, acknowledged the encouraging results but expressed broad skepticism about AI's ability to deliver returns over the next one-to-three years.
Global stocks have declined over 3% this month, partly driven by concerns that the technology shares rally has progressed too rapidly. The concentration risk in few technology names continues to worry investors, with the so-called Magnificent Seven stocks, including Nvidia and Meta, seeing substantial price increases in recent years.
Economic Data Compounds Market Pressure
The release of September payrolls data, delayed due to the government shutdown, showed a greater-than-expected increase of 119,000 non-farm payrolls. This data prompted Morgan Stanley to abandon its forecast for a Fed rate cut in December, adding to market pressures.
Art Hogan, chief market strategist at B. Riley Wealth, noted that the uncertainty around Federal Reserve policy has become a larger market influence than questions about AI valuations. Meanwhile, Fed Governor Lisa Cook warned that historically elevated prices across various asset classes could signal a significant valuation pullback.
The S&P 500 technology sector's forward price-to-earnings ratio recently stood at about 30 times, significantly above its 10-year average of 22.2. Some analysts, including David Trainer, CEO of New Constructs, have raised concerns about whether current stock prices can be justified by future cash flows, with Nvidia needing to generate $2.1 trillion in annual cash flows within a decade to support its valuation.
European asset manager Amundi revealed it maintains an underweight position in megacap stocks, using derivatives to hedge against potential declines, reflecting the cautious sentiment spreading among institutional investors worldwide.
