Stocks on Track for a Losing Month

For the first time since April, U.S. stocks have faltered.  Following six straight months of gains after the April selloff, the S&P 500 Index has turned negative in November and now sits about 4% below the all-time highs it reached on October 28.  While it is not possible to determine exactly which factors have moved the market and by how much, it seems that recent weakness in stocks can be tied back to two issues:  growing skepticism about the artificial intelligence trade and increasing uncertainty around the Federal Reserve’s plan to lower interest rates (or not).

Nvidia

Santa Clara-based fabless chip maker Nvidia, currently the largest company in the world by market value ($4.4 trillion), is arguably the most important company in enabling the huge buildout of artificial intelligence networks that are set to impact our personal and business lives from this point forward.  Nvidia sells GPUs (graphics processing units) into the vast data centers that are being built by the so-called hyper-scalers, the large tech companies that are racing to build an edge in AI for what many investors are calling the fourth industrial revolution.  On November 19^th, Nvidia reported huge growth for its third quarter.  The company posted revenues of $57 billion, up 62% year-over-year and profits of $32 billion, up 59% year over year.  By any objective measure, this is stunning growth off an already large base, yet the markets overall and technology stocks in particular did not rebound much in the wake of the report.  While it is clear that Nvidia remains the dominant supplier of AI chips, there seems to be growing unease among investors that not all of the vast sums of capital being devoted to AI will ultimately generate an attractive return on investment.  The crack in the AI narrative was supported by news that prominent investor Softbank had recently sold its entire Nvidia stake.  Going forward, expect investors to scrutinize companies’ AI spending plans more closely.

Federal Reserve Plans in Flux     

During the recent government shutdown, when regular economic data normally provided by the federal government was halted, Federal Reserve Chairman Jerome Powell admitted that the Fed was working with dated, incomplete information and would therefore be more cautious in its approach to reducing interest rates. “If you’re driving in the fog, you slow down” is how Chairman Powell put it in late October.  Continuing Fed interest rate cuts were one of the pillars to the bullish case for stocks.  Now this too is being called into question.  The Fed is trying to balance its interest rates policy such that it can continue to push inflation down to its 2% target while also supporting the labor market.  Right now, there is no current data about the state of the labor market.  (The September jobs report, released just yesterday, showed that we added 119,000 jobs and that the unemployment rate ticked up to 4.4%, the highest level since October 2021.)  However, this data is now old news and anecdotally it seems that layoffs are increasing.  High profile companies such as Amazon, Target, Meta Platforms, Ford, Alphabet, UPS, Intel, Microsoft and Verizon have announced significant layoffs in recent weeks, adding to the perception that the labor market has turned down.  The Fed has its work cut out for it as it tries to tackle stubborn inflation while boosting the flagging jobs market.  A December rate cut remains a coin flip.

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