With AI Story Intact and Rate Cuts Imminent, Markets Turn Higher

(Bloomberg) -- Nvidia Corp.’s earnings report was impressive by virtually any metric — except its own recent history.

That was enough to send markets into an overnight tizzy, but calmer hands prevailed early Thursday as investors speculated the artificial intelligence revolution remains intact and took solace from money-market bets suggesting Federal Reserve rate cuts could reach 100 basis points this year.

While Nvidia shares slipped 4%, the S&P 500 — which is about 1.3% below its all-time peak — was set to advance, with futures gaining 0.2%. In Europe, the Stoxx 600 Index hovered near a record, while Germany’s DAX Index rose to an all-time high.

The chipmaker delivered profit margins north of 50% on revenue that topped $30 billion, and promised more of the same in coming quarters. Investors wanted more from a company that for six quarters has blown past analyst estimates.

Those numbers, though, were enough for investors to speculate that demand from across industries for Nvidia’s AI engines remain robust enough to justify more bets on tech.

“If anybody was scared about a potential disappointment of demand for AI, this has gone,” said Alberto Tocchio, a portfolio manager at Kairos Partners. “Of course, we are talking about a stock that had a big run, but we can be assured that the sector is still in demand.”

Optimism around cooling inflation, a relatively solid economy and interest-rate cuts from the Federal Reserve has buoyed sentiment in recent weeks. Markets will get the next indication on Friday from the personal consumption expenditures index — the Fed’s favorite inflation gauge.

Technical factors are also helping stock markets more broadly. On Monday, Scott Rubner, managing director for global markets and tactical specialist at Goldman Sachs Group Inc. predicted that the S&P 500 would reach a record high this week, citing massive inflows from systematic funds and corporate buybacks.

Indeed, trading in equity options showed investors have been positioning for gains following the selloff in early August, which was triggered by worries about a US recession.

The S&P 500 Index’s call skew, a measure of how much traders are willing to pay for bullish exposure, is steepening fast, suggesting some urgency in grabbing bullish options after Federal Reserve Chair Jay Powell’s dovish Jackson Hole speech, according to Charlie McElligott, a Nomura cross-asset strategist.

Meanwhile, volatility traders are feeding option dealers with overwriting, underwriting and outright volatility selling. That means dealers are left with a long gamma position, which acts as a market stabilizer as they need to buy futures when stocks fall.

The bounce in Nasdaq 100 futures Thursday is following a pattern seen all week, where the contract dropped during normal trading hours before bouncing overnight. In a bearish signal, however, the overall trajectory of the market remains in a downtrend. The Nasdaq 100 is over 6% below its record high hit in July.

As far as the reaction to Nvidia, William Marsters, senior sales trader at Saxo UK, said the stock declines Wednesday were a potential “overreaction.”

“Investors have become too accustomed to exceptional results,” Marsters said. “The real test will be today’s normal trading session which will paint a clearer picture of how clients react.”

The Fed rate-cut bets have also served to lessen the market’s dependence on the performance of megacap tech shares. Small caps and profitless tech, for example, have seen inflows as lower borrowing costs would boost their bottom lines. The broadening was evident in a version of the S&P 500 that is stripped of market-cap bias. The equal-weight index hit an all-time high last week.

“Futures are higher as market is broadening out,” said Craig Johnson, chief market technician at Piper Sandler & Co. “It’s no longer about just the Mag-7 stocks and there is a sense of relief that Nvidia was not a miss on a seriously delayed Blackwell launch.”

--With assistance from Allegra Catelli, Michael Msika and Natalia Kniazhevich.