The big stock news last week was that Nvidia’s second-quarter sales rose by 55.6% to $46.74 billion vs. $30.04 billion in the same quarter a year ago. Nvidia posted a 4% positive earnings surprise and a 1.35% sales surprise. More importantly, the company raised its third-quarter guidance.
In its guidance, Nvidia excluded any H20 chip sales to China. Nvidia also said there were no H20 sales to any China-based customers in the second quarter. However, the company benefited from a $180 million release of previously reserved H20 inventory. I should add that the stock does not always rally in the wake of its earnings, due to call options on Nvidia (so that market makers can collect option premiums).
Nvidia now has a market capitalization of $4.24 trillion, which amounts to 3.6% of global GDP according to Deutsche Bank. Furthermore, Deutsche Bank says that Nvidia’s market capitalization is now bigger than the entire stock market capitalizations of Britain, France or Germany. Nvidia’s ascension to over $4 trillion in market capitalization (from $1 trillion two years ago) has been stunning and swift. Only China, India and Japan have market capitalizations larger than Nvidia, so Nvidia is overpowering the world with its dominance in AI chips, which data centers increasingly demand for all AI applications.
Here are the most important developments recently and what they mean:
- Gold is making a record high as government budget woes in Britain and France are weighing on government bond yields. Italian and U.S. government bond yields are also rising. So essentially, the bond vigilantes are back and influencing the long end of the yield curve. Britain and France are led by parties that are expected to be ousted in the next election by Nigel Farage’s Reform Party and Marine Le Pen’s National Rally party, respectively. Northern Europe has acute demographic problems and has failed to successfully assimilate immigrants, so a “clash of civilizations” is underway that is undermining government budgets due to high social expenses.
- The other problem plaguing Europe so far this year is its erratic electricity grid. As an example, Spain has 503 negative price hours this year, which compares with 451 in Germany and 436 in France. Negative electricity prices stop the incentives to add more solar and wind electricity to power grids. Strong hydroelectric output in Spain has also contributed to negative electricity prices this year. Due to negative electricity prices, green energy expansion is anticipated to slow dramatically, despite the European Union’s Net Zero mandate.
- The big news this week is expected to be Friday’s August payroll report. The ADP report on Thursday will also be scrutinized. We are in an environment where bad news will be considered good news, since financial markets are expecting a key interest rate cut by the FOMC on September 17th. In preparation for the upcoming FOMC meeting, the Beige Book survey will be announced on Wednesday. It will be interesting to see how many of the 12 Fed districts report labor market problems and/or economic weakness.
- The Institute of Supply Management (ISM) on Tuesday announced that its manufacturing index improved to 48.7 in August, up from 48 in July. Since any reading below 50 signals a contraction, the ISM manufacturing index has now contracted for six straight months. The details in the ISM manufacturing report were mixed, since a sharp drop in the production component to 47.8 in August (down from 51.4 in July), was offset by an August surge in the new orders component to 51.4 (up from 47.1 in July). Only seven of the 17 industries surveyed reported an expansion in August. Overall, there are some green shoots in the ISM manufacturing reports.
Overall, some seasonal market weakness is typical in early September, since some investors sell stocks to raise money for their quarterly tax payments, due September 15. However, a key interest rate cut on September 17th should spark more buying pressure. Then, the fourth quarter is seasonally strong, so I expect a robust year-end rally fueled by strong corporate earnings, lower rates, and AI-led productivity.
