What’s Good for This Chip Giant Isn’t Good for Its Customers
The largest stock in the market held up the indices but there was plenty of weakness under the surface.
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The story on Thursday is that NVIDIA (NVDA) and Salesforce (CRM) earnings lifted chips and software, but everything else was weak. Breadth in the Nasdaq 100 (QQQ) was almost dead even, while only about 150 of the 500 stocks in the S&P 500 managed a gain.
Good for NVIDIA, Not for its Customers
The primary problem is that what is good for NVIDIA is good for NVIDIA and not for its customers. The response to the report puts the issue of profit margins on hundreds of billions in capital spending front and center. NVIDIA said it will raise prices on its upcoming systems to offset the cost of scarce memory, which means its customers pay more for the things there must buy. Investors have been rather sanguine about the spending because they are hopeful that the investment is going to pay off big, but it is a complicated issue and a headwind for various areas of the market.
Software Reassessed
The other big development in the AI sector was the strong move in software stocks led by Salesforce. Software was hit hard at the start of the year due to concerns that AI was going to replace a lot of the tasks performed by software. That may still be the case, as we have seen with Intuit (INTU), but Salesforce and Palantir Technologies (PLTR) are showing that AI may be an adjunct to their business and not a competitor. This is just another example of how the AI sector is undergoing a reassessment of the ultimate winners and losers in the group.
Chips, Oil and the Fed’s Dilemma
The display of NVIDIA’s pricing power is hitting on the eve of Fed Chair Kevin Warsh’s speech at Jackson Hole. It is a compelling example of inflationary pressure, and it is growing worse. AI as a source of inflation has been on the fringes of the monetary arguments for a while, but it will be interesting to see if Warsh addresses it directly.
It creates a difficult dilemma for a Fed that sees soft jobs and retail spending on one hand and rising prices driven by oil and chips on the other. That has the aroma of stagflation, and there are no easy policy solutions. This is a dangerous setup and it won’t take much for Warsh to create a negative reaction.
Game Plan
My game plan is unchanged. I’m concerned about what lies ahead, but I’m excited about the opportunities that may develop if we go through a difficult period. At this point, we will just have to wait and see what happens.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
