Is Nvidia’s “glory and dream” still there after $200 billion evaporated in a single day? – OFweek Communication Network

Nvidia and the recent U.S. stock market have indeed experienced a “surprising” market:

Although the Federal Reserve suspended raising interest rates in June 2023, the federal benchmark still maintained its highest value in 20 years. Generally speaking, asset prices fall as interest rates rise, but from the end of 2023 to the present, Nvidia and major U.S. stock indexes have hit record highs. The academics were a bit overwhelmed.

Since the popularity of ChatGPT, NVIDIA’s stock price has soared, especially in the first three months of 2024, when it rose nearly 100%. At the same time, the market has also recently had some disagreements about NVIDIA’s future trend. If there is a view that NVIDIA’s stock price will break through The US$1,000 mark continues to write a myth in the stock market (a symbol of new productivity), and the bearish people compare thisinternetBefore the bubble, Cisco believed that the current euphoric market sentiment was obviously overvalued.

On April 19, Nvidia plunged 10% in a single day, and its market value shrank by as much as 200 billion US dollars in a single day. This obviously caused a great disturbance to the optimism of the optimists. Over the following weekend, the world’s major financial media and investors Platforms are struggling with whether it is a “temporary adjustment” or an “inflection point has emerged.”

This article focuses on finding the key factors that affect Nvidia’s stock price to make a clearer judgment on its market value trend:

First, the main reasons for this round of surge in U.S. stocks are: the foreign exchange market spitting out U.S. dollars, increased market risk appetite, and rising expectations for the development of AI, which together constitute the driving force behind the rise in stock indexes and NVIDIA;

Second, after March 2024, with the release of higher-than-expected inflation data, the narrative style of the Federal Reserve and the market entered a major adjustment, which had a drastic impact on U.S. stocks and Nvidia, and some positive factors have faded;

Third, we must be wary of linear development expectations for companies.

There are still signs of U.S. stocks rising

As mentioned at the beginning, interest rates are regarded as a “weighing device” for assets in academic textbooks: the higher the interest rate, the greater the pressure on asset prices to contract. This is also the main reason why global markets are closely watching the Federal Reserve. Under the path of raising interest rates, U.S. stocks have reached new highs, which is really hard to understand.

Before answering the logic of NVIDIA’s stock price rise, we must first understand the expansion mechanism of this round of US stocks.

The U.S. 10-year Treasury bond yield is known as the “anchor” of global assets, and this value has also risen as the Federal Reserve raises interest rates. The chart above shows the trend of the U.S. 10-year Treasury bond and the S&P 500 index since the start of interest rate hikes in early 2022. It can be clearly seen:

1) Although the federal benchmark remains the highest in 20 years, the U.S. 10-year Treasury bond yield has fallen back to lower levels after peaking in 2024 (at one point approaching the 5% mark), and once fell below the 4% mark in early 2024;

2) The surge in U.S. 10-year Treasury bond yields has indeed had a huge negative effect on the S&P 500 index. If the time horizon is extended,S&P 500 hits record high again amid rising interest ratesafter entering 2024, when the interest rate market was relatively flat, the S&P 500 rose sharply.

The federal benchmark interest rate, the ten-year Treasury bond yield, and the U.S. stock market are all traceable in textbooks, but the reality has made analysts very nervous. I myself once had doubts about what I had learned.

The U.S. 10-year Treasury bond interest rate is equivalent to the market interest rate. In addition to the federal benchmark interest rate (which can also be called “price factor”), its trend is also affected by quantitative factors. In practical analysis, we often realize the former but ignore it. the latter.

Generally speaking, the quantitative factors in the money market include endogenous and exogenous markets. The former mainly involves the central bank directly injecting liquidity into the market. The typical method is the Federal Reserve directly buying treasury bonds (also called QE, quantitative easing). During the interest rate hike cycle, this method is suppressed, so the focus can only be on the exogenous market, that is, the foreign exchange market.

The European financial market has been ups and downs in the past two years, which is exciting. Especially when the Federal Reserve began to raise interest rates and the “Russian-Ukrainian war” collided, the euro experienced a roller coaster depreciation in early 2022. In September 2023, it fell to a historical low against the US dollar. point, on the trading side, the operation at this time should be “sell euros – buy US dollars”, a large amount of US dollars were withdrawn in the foreign exchange market,Under the influence of both price and quantity factors, the liquidity of the U.S. dollar has been severely suppressed, and the yield on the 10-year Treasury bond has entered a fast rising lane.

Afterwards, the European economy gradually stabilized, and the unfavorable factors of the war were gradually digested by the market (the market corrected its excessive pessimism in the early stage), and the euro began to enter the appreciation channel. On the trading side, it was “sell the U.S. dollar – buy the euro”. A large amount of U.S. dollars was released here, and part of the U.S. dollars returned to the United States, improving market liquidity.

The essence of the Fed’s interest rate hike is to use window price guidance to raise the central interest rate to suppress demand and achieve the purpose of suppressing inflation. However, in reality, the US dollars released in the foreign exchange market have buffered the above policy from the quantitative factor. It is worth noting that the export Due to factors such as the stability of the financial market (the Silicon Valley Bank incident broke out in March 2023 due to the rapid rise in interest rates), the Federal Reserve has turned to a conservative stance on its plan to sell treasury bonds, which has largely alleviated the tight market liquidity problem.

So far we have discussed another set of narrative logic for U.S. bonds, foreign exchange markets and U.S. stocks in addition to interest rate hikes: increased expectations for euro appreciation – buy euros and sell U.S. dollars – part of the U.S. dollars flow back into U.S. dollars – buy U.S. bonds and U.S. stocks – Asset prices rise.

simply put,The appreciation and depreciation of non-US currencies is like swallowing US dollars on the sidelines, which may strengthen or hedge the impact of the Federal Reserve’s interest rate hike policy to a large extent.

Since 2023, the U.S. stock market has emerged from the bull market, and we have the following interpretation:

1) In the second half of 2023, the Federal Reserve began to suspend this round of interest rate hikes, and out of optimism about controlling inflation, the market began to have extremely optimistic interest rate cut expectations. The most optimistic view is that there will be 6 interest rate cuts in 2024, each of 25 basis points, from Pressure on price factors is alleviated;

2) The euro will also experience a round of rise after October 2023, and quantitative factors will continue to contribute to liquidity;

3) After 2024, the market began to widely discuss the soft landing of the U.S. economy. The mainstream view is that the Fed’s regulation this time is very sophisticated. The U.S. economy will still maintain strong growth in 2023, and againUnder the argument of “AIGC comprehensively improves productivity”, market risk preferences have undergone fundamental changes, which means that the market is more willing to “bet” on high-risk assets, and the stock market has risen sharply.

Nvidia’s market logic needs to be restated

In the previous article, we spent a lot of space to explain in detail the rising mechanism of U.S. stocks. Due to factors such as risk preference and improved liquidity, U.S. stocks regained “chips” and hit record highs.

For Nvidia, the high growth of the industry in which it operates and the special status of GPU chips for AI, like “water, electricity and coal”, are indeed very important and are the basis for the company to achieve its current scale. It’s just that we need to emphasize,The realization of an enterprise’s intrinsic value (or theoretical value) requires liquidity, and it is meaningless to talk about market value without liquidity.

Half of NVIDIA’s myth in the capital market comes from the value of its products, and the other half comes from the stimulation of positive US stocks as explained above.

Whether Nvidia’s miracle can continue depends on whether the above two major benefits are still there.

In the picture above, NVIDIA and the U.S. 10-year Treasury bond yields parted ways in 2023. At that time, ChatGPT was very popular, the demand for AI computing power surged, and the demand for GPUs increased sharply. NVIDIA was in short supply and became a popular chicken. In the “market value = profit * price-earnings ratio” formula , the company has entered a period of glory, with both price-to-earnings ratios and profit expectations rising.

Later, when the U.S. economy experienced a soft landing and expectations of an interest rate cut by the Federal Reserve intensified, Nvidia obtained high-risk premium chips due to the amplification of market risks. In line with fundamental expectations, the total market value expanded rapidly.

However, with the release of U.S. inflation data in February and March 2023, the Federal Reserve began to admit that combating inflation is not easy. The previous views of calling for a 150 basis point interest rate cut have disappeared.Instead, it will cut interest rates once by 25 basis points in 2024.

Against this background, the narrative logic from the end of 2023 to the present is at risk of being subverted:

1) The price factor hits the market again;

2) As the Fed’s interest rate cut expectations are postponed, interest rates and the foreign exchange market will have to re-digest this information, and a series of asset prices will be revalued. For example, the euro and the Japanese yen will depreciate due to the expected increase in the central dollar interest rate (the foreign exchange market is absorbing the U.S. dollar);

3) As mentioned above, the U.S. economy has not experienced such high interest rates in nearly 20 years. Although the current U.S. economic trend is still very good, there are still concerns that some industries will become victims of high interest rates, such as the Silicon Valley Bank incident in 2023. No one can guarantee whether it will happen again. On the one hand, it will have an impact on the real economy. On the other hand,Remaining high interest rates will also change the market’s risk preference, and the market will choose safer assets for investment out of risk aversion.

In the new narrative logic, the market style switches, and it is difficult for Nvidia to be alone here.

Regarding this point of view, some friends may have different opinions: As long as NVIDIA still has technological leadership and indispensability, the impact of liquidity is temporary, and it will not change the basic trend of a great company. The so-called simplicity is the best.

Most of us agree with this view, but we just want to remind you that today’s outlook for NVIDIA is all “expectations”: it is expected that the AI ​​industry will grow linearly, and NVIDIA is also expected to remain advanced.

If the U.S. economy experiences severe downward pressure, the real economy’s demand for AI is likely to shrink. In addition, due to factors such as energy and geopolitics, GPU production capacity will also be constrained, as recently listed by The Economist Nvidia’s future is uncertain, such as TSMC’s production capacity issues, some components from China may be restricted due to geographical reasons, chips consume huge amounts of energy, and the power grid may be unable to meet computing power requirements, etc. The development of the industry is likely not to be Linear.

When the market is booming, we tend to keep an eye on the positive side of companies. Once the market goes down, uncertainty will be amplified. At this time, the market will reallocate funds and reduce “bets” on high-risk assets.

The essence of Nvidia’s sharp fall on April 19 is the recharacterization of the company under the new narrative logic.when the above logic cannot be reversed, it is not advisable to remain overly optimistic. In particular, we must observe:

1) Anti-inflation effect;

2) Interest rate cut expectations;

3) Whether it is a soft landing.

The greatness of a company and its achievements in the capital market often do not happen at the same time. There may be a lag, or early realization, or it may experience overvaluation or revaluation. We cannot project our admiration for a company into the market without reservation. Because there are too many factors that affect the market, and the mechanism is more complex.

At this time, it is better to be calm and avoid excitement.

Original title: Is Nvidia’s “glory and dream” still there after $200 billion evaporated in a single day?