But nothing’s changed!
Wall Street on Thursday experienced a stunning reversal in sentiment. Impressive results from the company spearheading the artificial intelligence (AI) revolution, Nvidia (NVDA), and a strong September jobs report initially drove the Nasdaq up more than two per cent.
On Wednesday, Nvidia’s CEO Jensen Huang had described demand for its Blackwell chips as “off the charts”, and dismissed fears of an AI bubble on the company’s earnings call.
Meanwhile, the U.S. economy added 119,000 jobs in September, meaning the labour market was in better shape than previously thought.
By lunch, however, the market gains had vaporised, and by the close, the tech-heavy Nasdaq had declined almost five per cent below its intraday high and 2.2 per cent lower than the prior day’s close. Nvidia itself dropped 3.15 per cent to close 8.5 per cent below its intraday high.
Attempts to explain
This morning, the Australian Financial Review reported the move as follows;
“Australian shares are set to drop more than 1.5 per cent at the open, tracking afternoon losses in New York after early gains were wiped out and volatility spiked to a seven-month-high. While there was no one catalyst for the sudden late morning reversal on Wall Street…”
Wall Street brokers surveyed by various news outlets suggested the price reversal was due to a historical pattern of sharp intraday swings in Nvidia, a hit to interest rate cut expectations, and developments in the crypto space.
Talk to yet others, and they’ll tell you that, even though Nvidia beat estimates, the guidance commentary on China restrictions and marginally slower AI capex growth triggered a “sell the news” wave that has now spread across the entire semiconductor and mega-cap tech complex.
Axios reported their summary of the day’s action thus; “The world’s largest retailer, the world’s most valuable company and the world’s largest economy all showed signs of life – but not enough to shift the mood of increasingly jittery investors.”
On Substack, one commentator wrote, “Blame for the violent reversal in stocks today lies equally with the leadership of the AI movement and the financial media. Eager to dispel a reasonable distrust of AI’s impact on employment and a bubble narrative, news agencies hyped up a fear-vs-greed outcome for NVIDIA’s earnings over period of days. A beat meant valuations were justified (which they obviously expected). A miss meant otherwise. Plus, a plutocratic dinner at the White House on Tuesday created a vulgar optic of hubris and vanity instead of timely and probative humility.”
No catalyst
Unless you ask every buyer and seller why they traded, you will never know precisely why the market moved as it did during the session.
As a very young investor, still at university, I can remember being ecstatic when the price of the options I held over a speculative mining company surged. I became distraught, however, when those gains vaporised alongside the share price, and I specifically remember being baffled by the losses because ‘nothing had changed’. There was no announcement, no change to the company’s prospects, and no exogenous events that had triggered the reversal. The shares stopped going up and subsequently slumped.
It’s a mistake to rely on catalysts to help you navigate the market’s sometimes wild swings. Sometimes there just aren’t any.
The boom in artificial intelligence (AI) stocks has been driven by bullish sentiment surrounding the history-defining prospects of nascent AI technology. We have seen this sentiment before. It existed around the scaling of automobile production, when the TV emerged, when commercial flight took off (pun intended) and when the internet burst onto our computer screens.
The problem with sentiment is that it is unpredictable. It’s impossible to forecast when it will reverse. What we do know is that when prices or capital expenditure (capex) far exceed what is rational, sentiment is driving the underlying behaviour.
All of the above technologies can be broadly categorised as General Purpose Technologies (GPT), and the hype surrounding the emergence of these technologies is typically constructed on a narrative that the tech and its benefits are structural. The end customer, however, is cyclical.
When a structural narrative finally meets a cyclical reality, it is the narrative that must change.
In the absence of any catalyst, the most likely explanation for today’s wild trading ranges and spike in volatility is that sentiment toward the AI narrative shifted.
Investors may simply be beginning to realise:
- Even though AI technology – hailed as the 4th Industrial Revolution – will change the course of human history, it probably won’t do so tomorrow. And
- Therefore, current prices are at risk of setbacks because there will be commercial bumps (delays in data centre builds, changes in interest rates, shortages of energy and water, and not all companies can win) along the way to an AI ‘utopia’.
Timing a change in sentiment is impossible. But when it comes to the hype surrounding general-purpose technologies (GPTs), a change in sentiment is inevitable. It has always been so.
Even though nothing has changed, everything has changed.
Disclaimer
The Polen Capital Global Growth Fund own shares in Nvidia. This article was prepared 21 November with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
