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Nvidia Opens Its Books

Market Update

27.08.2024

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What happened last week?

Global

  • The price of gold hit a new all-time high.

US

  • US startup failures rose nearly 60% from a year ago.

Europe / Asia

  • China launched an investigation into the price of dairy imports from the European Union.

    Why It Matters

    The price of a single bar of gold hit a new milestone, topping $1 million for the first time ever. The metal has been white-hot lately, and it’s not hard to understand why. First, the US dollar has been weakening in anticipation of US interest rates declining, and gold (which usually sells by the ounce, not the brick) is priced in dollars. Second, bond yields have been falling since May, reducing the opportunity cost of owning gold, which doesn’t generate any income. Third, gold has been seeing increased safe-haven demand amid rising economic and geopolitical risks. Those factors have helped drive gold’s price up by more than 20% this year.

    A few years ago, near-zero interest rates led investors to pour cheap, borrowed money into riskier startups, inflating their valuations. 

    However, as rates rose, venture capital funds struggled to raise new capital, leading to a sharp decline in startup valuations. That caused investors to focus primarily on the buzziest new firms – the ones related to AI – and leave the rest out in the cold.

    New data showed US startup failures have jumped 58% in the past year, as companies ran out of cash raised during the tech boom of 2021-22. Further exacerbating the trend was the collapse of Silicon Valley Bank, which had been a big provider of venture debt.

    China launched a pricing investigation into dairy imports from the European Union (EU), accusing the bloc of exporting cheese and other products for less than they sell for at home (a tactic commonly referred to as “dumping”). The probe – the latest volley in a trade dispute between the two major economies – came a day after the EU said it would increase tariffs on imports of EVs from China. That’d slap them with an additional 9% to 36% tax, on top of the existing 10%.

    This week’s focus: Nvidia Opens Its Books

    Analysts and investors have high hopes for Nvidia’s second-quarter update: they’re predicting $28.7 billion in revenue and $15.9 billion in profit – both more than double what they were a year ago. They’ll be sharply focused on how well its data centre business is doing. The segment, which accounts for more than three-quarters of its total revenue, makes and sells the powerful chips that are widely used to run generative AI applications like OpenAI’s ChatGPT. This competitive advantage has made Nvidia’s stock the ultimate “pick-and-shovel” play in this tech revolution.

    Almost no one expects the firm to drop down to a lower gear anytime soon, especially with spending on data centres continuing to pick up steam. Mind you, that’s not to say it’ll all be smooth sailing, either. Nvidia faces growing competition from Intel, AMD, and Arm. Plus, the firm’s heavy reliance on the AI chip market could backfire if the industry sees a hiccup along the way. Because investor expectations are already sky-high, even a hint of bad news on Wednesday could have an outsized impact on the stock price. Mere rumours about delays in the rollout of Nvidia’s next-generation Blackwell chips sent its shares tumbling earlier this month, after all.

    That’s why this earnings release – along with what management says regarding the firm’s outlook – could help either validate Nvidia’s nifty $3 trillion valuation or tone down the fervour surrounding tech stocks. This comes at a key time, with the latest earnings season revealing a long-awaited profit recovery for the companies that were left out of the AI frenzy. The Magnificent Seven – the biggest of the big US tech firms – have been driving most of the S&P 500’s earnings growth lately. Take those seven out, and the rest of the index’s profits have actually shrunk year-over-year for the past five quarters. But that unfortunate streak may be over: earnings for those 493 companies are estimated to have grown by 7.4% in the second quarter, compared to the same time a year ago. For the Magnificent Seven, meanwhile, they’re set to have risen by 35% – a comedown from the even loftier gains that they’ve been used to.

    The Week Ahead

    On The Calendar

    • Monday: US durable goods orders (July), UK markets are closed for the summer bank holiday.
    • Tuesday: US consumer confidence (August).
    • Wednesday: Eurozone M3 money supply (July). Earnings: Nvidia, Salesforce, CrowdStrike.
    • Thursday: Eurozone economic sentiment (August).
    • Friday: Japan retail sales and industrial production (July), Japan unemployment rate (July), eurozone inflation (August), eurozone unemployment rate (July), UK M4 money supply (July), US personal income and outlays (July).

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