All three major market indexes approached or reached new all-time highs last Friday after three down days in the middle of last week. The Friday surge came after Fed Chair Jerome Powell delivered an extremely dovish speech at the Kansas City Fed Conference in Jackson Hole, where he signaled “a shifting balance of risks” that “may warrant adjusting our policy stance.” Additionally, Powell said that “downside risks to employment are rising.” This tells us the Fed’s employment mandate is now overshadowing its inflation fears. Adding to the Fed’s new focus on jobs, jobless claims rose to a two-month high of 335,000 last week.
Powell also recognized that a “decline in growth has largely reflected a slowdown in consumer spending.” Powell also admitted that “Our policy rate is now 100 basis points closer to neutral than it was a year ago, and the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance.” Stocks (and gold) shot up in response to Powell’s talk, and Treasury yields declined in the wake of Powell’s comments, so let’s hope he follows through on this view.
Here are the most important developments recently and what they mean:
- The big news this week is expected to be Nvidia’s second-quarter earnings announcement on Wednesday. There have been positive analyst earnings revisions in the past three months, and the company has a strong earnings surprise history. As always, Nvidia’s guidance will be crucial. Due to all the call options written on Nvidia (so market makers can collect option premiums), do not be surprised if the stock does not rally in the wake of its earnings, since sometimes market makers run “mean reversion algorithms” to prevent them from exercising all the call options issued.
- Nvidia now has a market capitalization that accounts for 3.6% of global GDP, according to Deutsche Bank. Furthermore, according to Deutsche Bank, Nvidia’s market capitalization is now bigger than the entire stock market capitalizations of Britain, France and Germany. Nvidia’s ascension to over $4 trillion in market capitalization has been stunning and swift. Only China, India and Japan have stock market capitalizations larger than Nvidia. So, it is very apparent that Nvidia is overpowering the world with its market dominance of AI chips that data centers increasingly demand for all the AI applications.
- In the wake of Fed Chairman Jerome Powell’s Jackson Hole speech, the Fed is expected to cut key interest rates at its September Federal Open Market Committee (FOMC) meeting and continue cutting the rest of this year. These interest rate cuts are desperately needed to stimulate the housing industry, which is struggling with falling home prices. In the past 12 months, median home prices have only risen 0.2% to $422,400 through July, so at least housing inflation is finally cooling off. The primary inflation catalyst has been higher shelter costs based on owners’ equivalent rent and has been cooling in recent months. As soon as owners’ equivalent rent is unchanged or actually declines, inflationary pressures are expected to fall below the Fed’s 2% inflation target.
- The real risk to the global economy is deflation in the upcoming years. In fact, since May of 2022, China has been plagued by deflation that is now running at a 3.6% annual pace. Why things are so dire in China is that their population has been shrinking, and they are losing households. This problem exists throughout Asia and Northern Europe, simply due to a low birthrate. At the Kansas City Fed Conference in Jackson Hole, the central bank heads of Britain, the European Union (EU), and Japan said the world’s largest economies will increasingly lack the workers they need to power economic growth due to aging populations. AI and productivity growth can counteract the poor demographics that now plague most of the world.
- European Central Bank (ECB) President Christine Lagarde said that an influx of foreign workers would play a “crucial role” in countering negative demographic trends. What ECB President Lagarde failed to say is that Europe has done a poor job assimilating foreign workers and that there is a “clash of civilizations” in many European countries. In America, we do not have this problem, since we quickly assimilate foreign workers. Naturally, the Trump Administration wants legal immigrants with green cards versus illegal workers and is moving fast to make sure the U.S. workforce is legal.
- I am expecting a resurgence in the U.S. dollar due to (1) stronger GDP growth, (2) the fact that the Fed is the last major central bank to cut key interest rates, and (3) the U.S. has superior demographics, plus better assimilates immigrants. A resurging U.S. dollar is deflationary and should help to offset many price increases from tariffs. Furthermore, what is also putting downward pressure on prices are the many AI advances that originate in the U.S. and China before spreading around the globe. China and the U.S. are in the midst of an AI race, with self-driving vehicles being one of the first physical AI battlegrounds.
- Currently in the U.S, there is a race between Google (via Waymo), Tesla, and Uber for who with win the self-driving race. Uber is poised to win long-term, since they are already using a Chinese self-driving platform outside the U.S. and will be introducing I.D.Buzz vans (VW Group) in Los Angeles in 2026. Most reviews of self-driving believe that Waymo, with its lidar system, is ahead of Tesla with its camera-based system. The upcoming Uber system with I.D.Buzz vans are also lidar-based. Several years from now, I think Uber will become the self-driving leader due to the fact that it can make an alliance with whatever AI software works the best from China, Waymo, VW Group, etc.
- The robotics race is a bit more complicated, since the robots themselves will have to be frequently updated via links to AI data centers. Until the Optimus robot at the Tesla Diner in Santa Monica stops serving just popcorn and starts cooking and serving, I think we can conclude that robots will be confined to factory floors before they become our personal servants by doing household chores and walking dogs. Regardless of how the AI race unfolds, we are poised to profit via Nvidia and all the data center-related stocks that I recommend.
- Palantir Technologies is probably implementing AI better than most companies as it strives to revamp the U.S. Defense Department, the CIA, NSA, and other federal agencies. The stock has been attracting the attention of short sellers, but I suspect it will “squeeze the shorts” when it announces its next quarterly results. The analyst community is expecting Palantir Technologies to post 50.5% sales growth of $1.09 billion and 68.2% earnings growth of 17 cents per share. In the past month, the analyst community has revised their consensus earnings estimate 21.4% higher. Of course, typically, positive analysts’ earnings revisions precede future earnings surprises, so I remain very optimistic that Palantir Technologies will resurge in the upcoming months.
Overall, there is typically some seasonal weakness through September 15th, since some investors sell stocks to raise money for their quarterly tax payments. However, the FOMC key interest rate cut on September 17th will help to inspire investors and should spark more buying pressure. By the time October arrives, the rest of the year is seasonally strong, so I am expecting a robust year-end rally fueled by strong corporate earnings, lower interest rates, and AI-led productivity gains.
