Nvidia Earnings on Tap as Market Focus on AI Recharges…That May Not Help Bulls

There are plenty of fundamental threats lurking in the market – all out in the open – but sentiment remains unperturbed. In the absence of a pullback, bulls seem to be seeking tangible justification for an emotional ride. AI and earnings are too areas of support…a noteworthy focus with Nvidia earnings ahead.   

Talking Points:

• Sentiment seems to be driving markets more than any particular fundamental guiding light, which shifts the mechanics of momentum
• An uneven climb in speculative appetite across the financial system will and late-in-the-week retreat are factors to watch at this week’s open  
• Thematically, the US-Iran fragile ceasefire is still the most pressing driver while a heavier economic docket has Nvidia earnings topping event risk 

 

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Risk Appetite Running on Exuberance 

Though the market’s put in for a retreat to end this past week – the S&P 500 notching its biggest daily decline in 7 weeks – the underlying bullish trend over that period was still firmly in place. In fact, the most widely traded benchmark equity index notched a 7th consecutive week’s climb for the longest unbroken stretch higher on this dimension in two-and-a-half years. Adding further context to the sheer exuberance behind the charge over this period, the debatable preferred momentum play through this recovery phase rally, the Nasdaq 100, rallied so sharply that spot was over 14 percent above its 50-day simple moving average. We haven’t seen this strong a rally over this time frame since May 1st, 2009 – the beginning of the rebound after the Great Financial Crisis (the ‘GFC’). 

Chart of the Nasdaq 100 with the Disparity Between Spot and SMA (Daily)

Source: TradingView.com; John Kicklighter

I have called out these comparisons to historical periods through which the market has rallied so dramatically to cast a light on the fundamental context. By different measures, we have seen an incredible charge in certain benchmarks – the inconsistency is a matter to set aside for a minute – that is comparable to post-crisis periods following the Liberation Day tariffs announcement, the onset of the global pandemic and the GFC. In each of those historical periods, there were longer and deeper correction phases to justify a rebalancing of ‘value’. What’s more, it could be argued that those previous reversals could find more substantial floors for mounting a recovery. Both the GFC and pandemic triggered massive stimulus initiatives, while President Trump – the architect of the Liberation Day tariffs – reversed course on the panic caused by the aggressive US import taxes imposed on its partners.

Chart of the Nasdaq 100 with Key Crisis Point Reversal and 6-Week ROC (Weekly)

Source: TradingView.com; John Kicklighter 

 

What Would Come First: A Sentiment Reversal or Fundamental Focus? 

Skepticism alone does not justify a market-view – much less a trade – in my book, but it is an anchoring for conviction when deliberating whether to wade into long-in-the-tooth momentum and certainly for plotting tipping points for full reversal in the prevailing trend. On that latter scenario, it is worth asking what is more likely to happen first: that a fundamental spark will turn the market out of the blue or the quality of the sentiment backdrop will erode to the point of easily capsizing with even an innocuous occurrence?  Sentiment can be both overpowering (relative to event risk) and fickle in different measure.

Until this point, it has been so intense in favor of the bulls that major threats like the unresolved US-Iran conflict, ambitions to revive the trade war through tariffs, degradation of growth prospects and the throttling prospects of inflation and rate hikes have all been overlooked. That has left a sentiment vacuum to be filled with whatever justifications can be found. Earnings and AI (artificial intelligence) seem to be the winning headlines, even in the face of growing suspicion over the wells of untapped value they possess.   

Chart of Google News Search Worldwide by Key Themes
 
Source: Google Trends; John Kicklighter

 

As an observer of the psychology of crowds, I believe that sentiment precedes fundamental focus in most cases – sans a crisis or systemic evolution to the plumbing of the financial system – and thus find it important to keep close tabs on the ‘quality’ of risk appetite. Returning to this past week’s Friday retreat, the scale of the S&P 500 and Nasdaq 100 drop on the day was only remarkable relative to the time since the last such retreat. The -1.2 and -1.5 percent declines respectively weren’t particularly remarkable when markets were more active and bi-directional – in other words, before this risk-seeking rally began. 

Perhaps more meaningful has been the lack of consistency in the risk bid in previous week from traditionally sentiment-aligned market benchmarks like Bitcoin or high-yield fixed income. There is discretion to the market’s risk seeking, and it seems to be more momentum oriented than fundamental backdrop. That speaks more clearly to sentiment-orientation, which isn’t usually driven by rationality but always finite in duration. 

Risk Appetite Benchmarks Comparison (Daily)

Source: TradingView.com; John Kicklighter 

 

Heavy Run of Event Risk, Limited Thematic Commitment, Seasonal Malaise

Considering the general backdrop for fundamental interest heading into next week, we have to set reasonable expectations as to what event risk has market moving potential and how significant that influence can ultimately prove under different scenarios. What’s more, it important to highlight that while we are looking at a full trading week ahead, we will end the period heading into a long holiday weekend for the US and UK markets among some others. That expected drain will further raise the bar for staking major moves with follow through. 

Looking thematically at the calendar, there is quite a lot to draw on for narrative for fundamental themes that will develop over time. Then again, the short list for what can reasonably spark the markets ‘single-handled’ is…short. It is worth watching: the G7 financial minister and central bank governor meeting in Paris for anti-US positioning, various labor reports, a smattering of sentiment surveys and the May PMIs from Standard & Poor’s for growth insight. Yet these are not currently treated as if they are on the verge of any tipping points. 

Calendar of Top Global Macro Event Risk
 
Source: John Kicklighter

 

Nvidia Earnings May Strike a Global Market Nerve

Arguably, the most prominent event across the global macro calendar is the Nvidia earnings update due Wednesday after the New York session close (20:30 GMT). There are a number of reasons this is noteworthy listing. The tech company is the largest market cap of any public company and its share price has stretched aggressively to fresh record highs. More systemically, it has been the face of AI conviction over the past few years and in this most recent leg of resurgence for the theme. Given that placement and AI seems to be a leading point of bullish interest at present, there is greater potential potency behind this update for the wider market. What is further interesting about the conglomerate’s financial update is the NVDA response after previous updates – as I have previously pointed out. There is a trend whereby earnings ‘beats’ are met with a selloff in the stock the following day/days. That is not an encouraging trend for so centrally-placed a measure of bullish confidence. 

Chart of Nvidia Stock with Earnings Overlaid with Nasdaq 100 and 10-Day Correlation (Daily)

Source: TradingView.com; John Kicklighter

Japan Faces Growth, Trade and Inflation Updates

Another area of market impact potential is through a few key, dispersed Japanese economic releases. While there are a number of lenses to read the Japanese Q1 advanced reading, April trade balance and CPI update; the context of a potentially failed effort by Japanese financial authorities to bolster the Yen seems the weightiest and most pressing. Despite the heavily suspected intervention to charge the Japanese currency (lower USDJPY) back on April 30th – and potentially May 6th – the market seems to have absorbed the punch and returned to its prevailing trend. USDJPY advanced 1.3 percent this past week after holding firm the trendline support of the past 12 months. Can the run of data on tap turn the tide better than the intervention efforts? Or perhaps will they only exacerbate the issues? 

Japan’s Q1 data is due Tuesday morning and even a better-than-expected reading will struggle to meaningfully alter the global dynamics given the country’s growth reading is volatile, at least relative to the likes of the US. Thursday morning, the trade balance will suffer the same assumption of series volatility as the growth update, but there is also the issue that ‘good’ outcomes can be discounted readily through exchange rate assumptions. Then the Japanese CPI on Friday doesn’t truly have a supportive outcome to bank on. Either it is weaker and the lack of pressure on the BOJ to hike rates will cement its inability to draw capital back to the country; or it beats and highlights the central bank’s inability to close the gap to global counterparts drawing capital away from the economy. 

Chart of USDJPY Overlaid with Japanese Inflation and US-Japan 2-Year Yield Spread (Weekly)

Source: TradingView.com; John Kicklighter

Walmart, TJX and Target Earnings Offers Insight into the Consumer 

Finally, another multi-event fundamental update worthy of our monitoring – though it may not carry the same global potential as NVDA earnings nor the intensity for a particular corner of the financial system like Japan’s data has for its own market. Nevertheless, the record low reading of US consumer confidence measured by the UofM survey paired with the knowledge that the US consumer is the largest singular source for the largest economy (which extends to a global leader), makes their spending habits at the corporate level particularly interesting. Among the companies reporting that deserve a close review are Target and TJX Companies Wednesday before the open followed by Walmart – ninth largest market cap stock and the largest consumer staple overall – before Thursday’s New York open. How long can the market continue to feed on expectations of AI infrastructure investment as the American consumer struggles? Where consumer is an active engine of economic expansion, the emergent tech is more based in anticipation and hope, with heavy concentration of the wealth expected to emerge on the trend. The economic reconciliation is inevitable. 

Chart of Dow-Nasdaq Ratio, Walmart-Nasdaq Ratio and UofM Confidence Survey (Weekly)

Source: TradingView.com; University of Michigan; John Kicklighter

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-- Written by John Kicklighter, Global Head of Content