Thursday, May 23, 2024

Dow Jones Futures: Nasdaq Powers Higher as Nvidia, Chip Stocks Ride the AI Wave; Fed Meeting in Focus

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As investors prepare for another busy week on Wall Street, stock futures are pointing to an extension of last week’s powerful rally in the major indexes. Dow Jones futures will open Sunday evening, along with S&P 500 and Nasdaq futures, after the tech-heavy Nasdaq composite surged 4.2% in exceptionally volatile trading.

The market was turbocharged by blockbuster earnings from Big Tech leaders like Microsoft and Google parent Alphabet, both of which unveiled aggressive spending plans to expand their artificial intelligence capabilities. Their AI offensives electrified investors, sparking frenzied buying in chip stocks at the forefront of the AI revolution.

“It was an absolute AI frenzy last week, unlike anything I’ve seen in my 25 years investing,” said Scott Rostan, founder of Training The Street. “The market is utterly convinced that AI is the next great technological paradigm shift that will create massive economic opportunity.”

At the center of the AI stock mania was graphics chip maker Nvidia, which saw its shares rocket 15% higher. The semiconductor giant flashed multiple buy signals as it benefits from soaring demand for its chips optimized for AI computing workloads like natural language processing.

Nvidia got another publicity boost on Sunday night from a fawning “60 Minutes” segment featuring CEO and co-founder Jensen Huang. The AI evangelist made a compelling case for his company’s pivotal role powering the AI boom underway across industries. Huang predicted we are at an “tipping point” where AI will sweep through nearly every sector.

Other AI chipmakers also joined the party in a big way. Broadcom stock surged nearly 12% on the week, while Astera Labs, a recent AI chip IPO, skyrocketed 32% higher. The blistering moves higher came as cloud providers like Microsoft and Google turbocharged their AI capital spending, with those dollars flowing into specialized silicon from Nvidia, Broadcom and others.

“AI has reached a true inflection point where adoption is hitting a vertical ramp across enterprises and consumer applications,” said Dan Ives, a tech analyst at Wedbush Securities. “The trillion-dollar arms race is playing directly into the semiconductor food chain, led by Nvidia.”

The market exuberance around AI represents a remarkable psychological pivot from just a few months ago. Early in 2023, stocks were being crushed under the weight of red-hot inflation forcing aggressive interest rate hikes by the Federal Reserve. But blowout earnings from tech titans with booming AI businesses changed the narrative overnight.

Even an alarming government report showing still-elevated consumer prices did little to derail the buying. On Thursday, data showed inflation raced ahead at an annual 5.5% clip in March, up from the prior month and defying predictions of a steady cooling. In a normal market context, such persistent price pressures would stoke fears of more Fed rate increases to slow the economy, tanking stocks.

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However, with investors now fixated on the game-changing possibilities of generative AI applications like ChatGPT, the hot inflation data was largely brushed aside. Meta Platform’s 14% plunge on Thursday after hiking its AI spending plans – normally a major drag on the overall market – actually lifted shares of Nvidia and other AI chip stocks powering those investments.

“Right now the market is in full-blown ‘Buy Anything AI’ mode,” said David Wagner, portfolio manager at Aptus Capital Advisors. “We’re seeing completely indiscriminate buying of artificially intelligent companies regardless of their current financial profile or valuation. There’s a pervasive belief that AI will be the growth driver for decades.”

While the market enthusiasm is not without merit, the sheer euphoria around AI also carries echoes of prior speculative bubbles like the dot-com craze. Rising interest rates and fears of potential recession make the risk of a market peak and correction ever-present.

“I’m not saying the AI revolution isn’t real or incredibly impactful in the long run, but things have gotten wildly overheated in the near-term,” said David Bahnsen, chief investment officer at The Bahnsen Group. “The market is pricing in perfection for an awful lot of companies in the space. We may end up paying a hefty price for this bout of irrational exuberance.”

Despite the risks, the upward momentum appears firmly in the bulls’ control – at least for now. In addition to the AI frenzy, a number of other economic catalysts could sustain the rally in the week ahead:

Federal Reserve Meeting

On Wednesday, the Federal Open Market Committee will conclude its two-day policy meeting with investors eagerly awaiting any clues about the future path of interest rates. Markets are currently pricing in a 90% chance that the Fed raises rates by another quarter percentage point, while seeing the first rate cut coming as soon as September.

Fed Chair Jerome Powell’s comments about inflation, the impact of prior rate hikes, the health of the banking system, and how long the current hiking cycle may persist will all be parsed meticulously. Any dovish pivot could unleash further buying, while a more hawkish tone may undercut the rally.

“The Fed meeting is the biggest wildcard hanging over the market right now,” said Zhiwei Ren, managing director at Penn Mutual Asset Management. “If the statement or Powell’s comments hint at rates staying higher for longer, we could get a pullback as investors reprice that into the economic outlook.”

April Jobs Report

On Friday, the Labor Department will release its closely watched monthly employment report for April. Economists forecast 180,000 new jobs were created last month, down from March but still pointing to a resilient labor market.

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A stronger-than-expected number above 200,000 may be viewed negatively as it signals the Fed still has work to do in slowing the economy to cool inflation. Conversely, job growth under 150,000 could feed speculation about an impending economic contraction or recession, injecting volatility.

“The April jobs report takes on outsized significance because investors will be looking closely at wage growth and labor force participation to assess whether inflation pressures are rebuilding or subsiding,” said Michael Arone, chief investment strategist at State Street Global Advisors. “It will help shape rate hike expectations in the months ahead.”

Key Earnings Reports

Over 150 companies in the S&P 500 are scheduled to report quarterly results this week, closing out another blockbuster earnings season. With expectations largely dialed down coming into the period, many companies have topped forecasts while offering optimistic guidance.

Some of the high-profile companies on tap this week include: Apple, Amazon, Pfizer, ExxonMobil, Caterpillar, McDonald’s, Ford, and Starbucks.

Of keen interest will be commentary from cloud computing giants Amazon and Microsoft around capital spending plans for AI projects involving data centers and specialized chips like Nvidia’s. Apple will also be closely monitored for any hints about new AI initiatives.

In the semiconductor space, AMD and Super Micro Computer will provide insights into data center demand and views on the AI chip outlook. AI leaders like Nvidia and Broadcom that already reported could see volatility based on these datapoints.

“The earnings parade is far from over, and it has the potential to be a sentiment driver given the market’s hyper-focus on anything AI at the moment,” said Mike Loukas, CEO of TrueMark Investments. “Capital expenditure plans, sales growth projections, and forward-looking statements around AI adoption and spending will be devoured by traders.”

Other Economic Data

In addition to the Fed meeting and jobs report, a steady stream of economic data is also on tap:

  • S&P Case-Shiller March home price index (Tuesday)
  • March trade deficit (Wednesday)
  • March construction spending (Tuesday)
  • March factory orders (Tuesday)
  • Q1 productivity and labor costs (Thursday)
  • April ISM manufacturing PMI (Monday) and services PMI (Wednesday)

The combination of earnings, Fed policy meeting, jobs report and other datapoints will likely result in significant cross-currents and volatility this week. But with the AI trade red hot and cyclical stocks like industrials and materials joining technology as new market leaders, many traders are betting the path of least resistance remains higher.

“No one wants to be caught leaning the wrong way with so much positive revisions happening around future earnings leverage from AI,” said Sal Sollitto of Sollitto Investment Analytics. “The visceral fear of missing out is turbocharging the rally.”

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The million-dollar question is whether excessively high expectations have already gotten baked into stock prices. If so, the market may be vulnerable to any speed bumps or unexpected disappointments that cause investors to rethink AI growth trajectories.

As Mark Haefele, Chief Investment Officer at UBS Wealth Management, cautioned: “While we see significant long-term potential for AI, current market exuberance could mean valuations in some areas of the market are starting to outrun reality. Investors should be selective and focus on quality companies with proven AI capabilities and reasonable valuations.”

The frothy sentiment has also prompted some long-time Wall Street bulls to urge caution amid the AI stock frenzy.

“There’s a speculative mania underway in AI names that feels very familiar to past bubbles,” said Ed Yardeni, president of Yardeni Research. “It may run for a while longer, but investors chasing this trade now are taking on an awful lot of risk.”

Yardeni noted that while generative AI breakthroughs are revolutionary, many of the core technologies like natural language processing models are not new. He believes some investors may be overstating the speed and magnitude of AI’s commercial adoption and economic impact.

“Everyone is wowed by ChatGPT’s capabilities, but it remains an open question how quickly these innovations can generate real revenues and profits across industries,” Yardeni said. “There’s a lot of hauling and heavy lifting still required to monetize generative AI at a transformative scale.”

Yardeni’s sentiments were echoed by Brett Ewing, chief market strategist at First Franklin Financial Services. “This euphoria over AI feels very similar to the dot-com boom when valuations raced out of control despite many companies having unproven business models,” he said. “We’re likely going to see another big shakeout eventually that separates the real AI winners from the wannabes.”

However, Ewing acknowledged the market rarely gets obsessed with new technologies that fail to have a profound impact. “There’s no doubt AI has immense disruptive potential, but as always, separating the hype from reality will be crucial for investors,” he stated.

For now, the reality on Wall Street is that money continues to pile into AI stocks at a blistering pace. Caution may be warranted, but the fear of missing out on generative AI remains the dominant force driving the market higher.

Whether the rally can persist could depend on forthcoming earnings reports, economic data, and insights from the Federal Reserve and corporate America on the depth and durability of the AI revolution underway. One thing is certain: investors will be listening for any AI nuggets like their portfolios depend on it.

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Mezhar Alee
Mezhar Alee
Mezhar Alee is a prolific author who provides commentary and analysis on business, finance, politics, sports, and current events on his website Opportuneist. With over a decade of experience in journalism and blogging, Mezhar aims to deliver well-researched insights and thought-provoking perspectives on important local and global issues in society.

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