Last week, the trend of the three major US stock indices diverged. Driven by large technology stocks, the NASDAQ showed the best performance with a weekly rise of 1.41%, showing a strong trend; the S&P 500 index narrowly closed higher, while the Dow index, which did not wait for the new economy and technology stocks, fell sharply. The weekly decline was 2.33%, and the trend was slightly weak.
Overall, the minutes of the Federal Reserve meeting “open the hawk” talk about interest rate hikes and the recent recovery in many economic data exceeding expectations. The pressure to postpone interest rate cuts has risen sharply, and the global capital market is in turmoil. Meanwhile, large technology stocks, led by Nvidia, have shouldered the responsibility of resisting market volatility, and their impressive performance continues to drive the rise in the US stock market.
What is foreseeable, however, is that in the near future, the global capital market, especially the three major US stock indexes, will still be under the double pressure of the game between the Federal Reserve's monetary policy and the performance of large technology stocks.
Nvidia “monopolizes” US stocks, but Wall Street analysts are sounding the alarm
Since the beginning of the boom in artificial intelligence, Nvidia's stock price has been moving in a straight line like a rocket. Last week, Nvidia's stock price continued to advance rapidly after the announcement of impressive Q1 earnings results, surging 15% to 1064.69 US dollars in a single week, reaching another record high. The latest market capitalization reached 2.62 trillion US dollars.
As the core driver of Nvidia's growth, the data center business has always been the area that the market and investors are most concerned about, and continued to grow rapidly this quarter — in the first fiscal quarter of FY2025, Nvidia's total revenue was US$26 billion, of which the data center business contributed US$22.6 billion, up 427% year on year and 23% month on month. The business's share of the company's total revenue continued to expand, reaching a record 86% this quarter.
Nvidia CEO Hwang In-hoon also stated bluntly in an earnings statement that “the next industrial revolution has begun.” He said that countries and a large number of companies are cooperating with Nvidia to transform traditional data centers into “AI factories” to produce a new product called “artificial intelligence.” Hwang In-hoon believes that AI will bring significant productivity and revenue growth to various industries, as well as significant improvements in cost efficiency and energy efficiency.
In addition, Nvidia also generously presented a “stock split+double dividend” package, officially announcing a 1:10 stock split plan. In addition, it raised the cash dividend per common share from $0.04 to $0.10 (corresponding to $0.01 per share after the split). Various measures further boosted market optimism.
The impressive performance prompted Nvidia's stock price to continue to soar, and AI concept stocks and large technology stocks enjoyed a group carnival, which in turn encouraged the NASDAQ and S&P 500 indices to continue their previous gains. According to a recent Bank of America research report, Nvidia contributed 37% to the S&P 500 EPS growth rate in the past month.
However, in the midst of the joyous sound of gongs and drums, there were also many hidden worries. A growing number of analysts are warning that Nvidia's gains are unlikely to last forever.
Investment bank DA Davidson analyst Gil Luria anticipates a double-digit decline in Nvidia's stock price within the next 18 months. He estimated that by 2026, Nvidia's stock price could drop to around $900, while in a more pessimistic situation, the decline could be as high as 20%.
Luria explained that Nvidia's biggest customers include tech giants such as Meta, Alphabet, and Amazon, which are already developing their own artificial intelligence chips or investing in other partners. Over time, the giants' dependence on Nvidia may weaken. Once Nvidia's main customers — including Amazon, Alphabet, Meta, and Tesla — begin divesting, he will give the stock a “sell” rating.
Furthermore, legendary investor Rob Arnott, chairman of the investment agency Research Affiliates, also warned of a bubble in Nvidia's stock and was skeptical about its long-term prospects. Arnott pointed out that Nvidia's current success is largely due to its high profit margins and market share, facing$Advanced Micro Devices (AMD.US)$, this week's two key indicators, and$Taiwan Semiconductor (TSM.US)$As other major companies compete more fiercely, the current advantage may not be sustainable.
Stock prices are getting higher and more expensive. What do you think of the big tech stock market in the future?
Whether there will be the next “Nvidia” and whether large technology stocks can continue to lead the bullish trend in US stocks have always been core issues of concern in the market.
The influence of large technology stocks on stock indices continues to increase. Goldman Sachs's strategy team said that the seven tech giants account for 11% of total sales and 18% of total profit in the 2023 S&P 500 index. At the same time, the agency expects the seven tech giants to increase their earnings per share (EPS) by at least 20% in 2024, making the most important contribution to the S&P 500 index's overall EPS.
Tom Lee, co-founder and head of research at the US investment agency Fundstrat Global Advisors, is optimistic that by the end of 2030, the global labor gap will reach around 80 million, which will drive a “parabolic rise” in technology stocks. He predicts that technology stocks are$S&P 500 Index (.SPX.US)$The weight in will increase from around 30% to 50%. Lee believes the AI story is still in its early stages as it will help increase productivity and address the impending labor shortage.
Bank of America strategist Kwon pointed out that the first phase of investment in the artificial intelligence cycle has fully begun. The performance of companies closely related to AI, such as Nvidia, is growing dramatically, and US tech giants such as Google, Apple, Amazon, and Microsoft under Alphabet are also investing heavily in this evolving technology. However, with the recent sharp rebound in sectors such as utilities and energy, the return on investment surrounding AI has begun to fully expand to AI data center infrastructure other than AI chips, such as semiconductor manufacturing equipment, power resources, and liquid cooling technology providers.
However, it is worth noting that from another perspective, in the face of the unattainable share prices of the “Seven Sisters” of US stocks, the capital chose to vote with their feet. US hedge funds are reducing their exposure to large technology stocks and are instead looking for other alpha opportunities.
Data shows that hedge funds reduced their holdings in the first quarter$Alphabet-A (GOOGL.US)$/$Alphabet-C (GOOG.US)$,$Amazon (AMZN.US)$,$NVIDIA (NVDA.US)$,$Microsoft (MSFT.US)$und$Meta Platforms (META.US)$Stocks, the only one in the “Seven Sisters”$Apple (AAPL.US)$Their holdings were not reduced by hedge funds; instead, their holdings were increased.
Despite facing a reduction in holdings, except$Tesla (TSLA.US)$Most of the other tech giant stocks are still the most important holdings of most hedge funds.
Many economic data have exceeded expectations, and the Fed's interest rate cut rhetoric has changed over and over
Expectations of market interest rate cuts will still be constrained by macroeconomic data and changes in the Federal Reserve's policies. Federal Reserve Chairman Powell said at a press conference on May 1 that the current monetary policy is clearly restrictive. Over time, he expects the current interest rate level to reduce the inflation rate to the Federal Reserve target of 2%. At the same time, he added that the Federal Reserve's next move is unlikely to raise interest rates.
However, the minutes of the latest meeting subtly reveal that the Federal Reserve's attitude towards cutting interest rates continues to change. Many officials mentioned that they are willing to further tighten the policy if necessary. Officials are unanimous in their desire to keep interest rates high, and “many” question whether the policy is restrictive enough to reduce the inflation rate to the target level.
Regarding inflation, the minutes of the meeting showed that participants noted that the inflation data for the first quarter was disappointing. “It will take longer than previously anticipated to have greater confidence that inflation will continue to move towards 2%.” Participants believed that the anti-inflation process might take longer than previously thought.
After the release of the Federal Reserve minutes, the market's expectations that the Fed would cut interest rates twice during the year quickly cooled down.
Furthermore, the recent recovery in several US economic data that exceeded expectations has also made interest rate cuts in the short term hopeless.$S&P Global (SPGI.US)$The US Composite PMI Index rose more than 3 points to 54.4 in May, the highest level since April 2022. The rise in this PMI indicator indicates that overall economic activity in the US will continue to accelerate further after entering the middle of the second quarter.
According to the CME Federal Reserve's observation tool, the US Federal Reserve's first interest rate cut at the current rate futures market will be in November or December. The possibility of two interest rate cuts throughout the year is less than 50%, which is significantly smaller than the probability of about 70% in early May.
The Federal Reserve's next interest rate meeting will be held on June 11-12, local time. At that time, the Federal Reserve will release the latest interest rate bitmap forecast. There may be a more clear answer to the question of how and how many times the Federal Reserve will cut interest rates during the year.
When exactly did the first interest rate cut occur? Wall Street continues to stir up controversy
There are many opinions on Wall Street about when the first rate cut will occur. Goldman Sachs economists recently adjusted their forecasts for the Fed's initial drop window, drawing market attention — the latest forecast is that the Federal Reserve will not start cutting interest rates until September of this year; the previous forecast was July.
Earlier this week, we pointed out that to push the Federal Reserve to cut interest rates in July, we need not only to see better inflation data, but also to show significant signs of weakness in economic activity or job market data.
However, against the backdrop of better-than-expected manufacturing PMI data for May and a drop in the number of first-time jobless claims, interest rate cuts in July are unlikely to be realized.
Earlier, Goldman Sachs Group CEO David Solomon's latest speech was even more astonishing. He said that he currently does not expect the Federal Reserve to cut interest rates this year because US government spending proves that the country's economy is more flexible. “I still haven't seen convincing data indicating we're going to cut interest rates here. My current forecast is zero interest rate cuts.”
According to the latest data, currently only a few institutions, such as J.P. Morgan Chase and Citigroup, still insist that the Federal Reserve will start cutting interest rates in July. Most Wall Street investment banks have focused their predictions on the Fed's first decline in September and December.
Expectations of interest rate cuts have repeatedly failed, but many major banks are still very optimistic. Deutsche Bank believes that even if the Federal Reserve does not cut interest rates this year, the S&P 500 Index (SPX) may continue to hit record highs.
Binky Chadha, chief US stock and global strategist at Deutsche Bank, said in an interview that as long as the economy and corporate profits continue to grow, even though the Federal Reserve may maintain high interest rates for a long time, the strength of US stocks will continue. Chadha raised his year-end forecast for the S&P 500 to 5,500 points last week, about 4% higher than last Thursday's closing level.
The strategist pointed out that strong profit cycles, economic expansion, and easing price pressure are reasons for his optimism. Although the consensus was that the US would fall into recession, he pointed out that forecasters had underestimated seven quarters of economic growth. At the same time, he said, inflation mainly reflects factors such as seasonality and the stickiness of calculated rents.
It is worth noting that two key indicators may continue to cause waves in the US stock market this week: the first revised GDP value for the first quarter of 2024 and the consumer confidence index will continue to reveal economic growth; in addition, the personal consumption expenditure (PCE) index, the inflation index favored by the Federal Reserve, will provide guidance on inflation trends and the effectiveness of the Federal Reserve's high interest rate policy, which is worth investors' attention.
edit/emily