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Nvidia’s volatile share price is an omen for the stock market

Nvidia CEO Jensen Huang speaks in Taipei earlier this month. Credit: Getty

June 26, 2024 - 2:30pm

The AI rally steams onward, lifting the US stock market to new highs and raising its share of global market cap to its highest level since the financial crisis. The infectious optimism has led many brokerages to raise their targets for the S&P 500, with some foreseeing a rise of another 10% by the end of the year. Leading the charge has been Nvidia, the chipmaker whose earnings have been growing by 50% per year.

So its sudden recent implosion, its stock shedding half a billion dollars of worth in just a week (before correcting somewhat), can’t help but ring alarm bells. That’s because, when AI-related stocks are taken out of the mix, the rest of the stock market has actually been falling. In fact, so have a wide suite of assets. Commercial real estate keeps imploding; government bonds, despite rebounding from last year’s lows, are several years into what appears to be a long bear market; crypto is having an especially rough ride just now, with Bitcoin down more than 20% since its peak earlier this year; and the stock markets of most other developed countries have bucked the American trend and begun sliding over the last month.

The falls everywhere else may reflect a major rebalancing, as money from around the world rushes into the American companies leading the AI revolution. If that’s what’s happening, the rest of the economy will begin to capture the productivity gains of the AI giants, and the wider market will in due course get dragged in its wake. What has happened to Nvidia may thus be just a brief correction in an otherwise continued ascent.

Still, it’s also possible that Nvidia’s wobbles are a warning of what may lie ahead. Although some analysts insist the productivity impacts of AI will be huge, we don’t yet know what they will be. In the meantime, extrapolating from Nvidia’s exceptional earnings to make predictions for the rest of the AI sector, let alone the broader market, may be a bit of a stretch. So it may just be that doubts are beginning to creep into the market.

The concentration of the market’s gains in a diminishing number of stocks may instead represent something altogether different from widening confidence, being instead more of a narrowing focus. It may be that the overall market has hit an iceberg and the message just hasn’t reached the ballroom, that iceberg being market liquidity. There are early signs that the freely available money which powered the everything-rally of the last few years may now be freezing up.

As the message from central banks slowly sinks into investors — that whether any or many interest-rate cuts come this year, we will nonetheless probably never again know the ultra-low rates of the past — they may be finally starting to tighten their belts. In that case, they may be cutting back and focusing their funds on the handful of companies that still promise outsized returns. Just as the Titanic’s stern rose high into the air as the rest of the ship sank below the water line, the market may be making a final surge before it all comes falling down.

Eventually one of these two narratives — that we are at the end of the beginning of a whole new era, or the beginning of the end of an old one — will prevail. Until then, this ride is likely to stay wild, with a few very big winners but plenty of losers. As for Nvidia, it will get even more attention than usual, as resuming falls signal trouble ahead for the overall market.


John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).

jarapley

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Right-Wing Hippie
Right-Wing Hippie
22 days ago

I’ve been here before. I remember how it was in 1998, 1999, when we were told that the internet was going to change everything and the old rules of market economics didn’t apply, that we were in the midst of a revolution that nobody really understood, except that we understood that it was going to make us all rich. And I remember being told that it wasn’t a bubble, that this time things were different.
And I remember standing in the wreckage, after it all burned down. It took another ten years before the internet economy really stabilized, and now here we all are, back in the same place. If I’ve learned anything over my life, it’s that humanity learns nothing. That may sound nihilistic, but I’ve grown more nihilistic as I’ve aged. They promise us the moon and then never deliver. And AI’s just more of the same.

Hugh Bryant
Hugh Bryant
22 days ago

At the very least AI massively increases the productivity of software developers which, eventually, massively reduces the development and maintenance costs of software and consequently hugely accelerates the automation of business processes.

You’d be amazed how many quite large businesses – in the UK at least – are still run on spreadsheets just as they were in the 90s. That will finally end.

Devin B
Devin B
22 days ago

If you had invested $10,000 in a portfolio modeling the S&P 500 at its low in 2002, it’d be worth nearly $70,000 today, doubling nearly three times in the 22 years since. If you invest for the short term, you’re bound to be disappointed, but over 10-20 years or more, it’s worth staying in the markets and riding out the lows.

RA Znayder
RA Znayder
21 days ago
Reply to  Devin B

That’s also because every time it fails the government (central bank) steps in.

M To the Tea
M To the Tea
22 days ago

I agree with you 100%, but I want to take it a step further. This shift will be similar to the transformation brought by Microsoft Outlook or similar interface. Soon, email will become obsolete because AI like ChatGPT will handle those tasks. Imagine how many emails you receive daily—all of which AI could answer including complex analysis having access to much longer history in the org’s database – faster and aggressive than 10 people’s primitive sensories!
So, what will we do for 8 hours? We have to all become Plato!
This change will shock people, especially older generations, as originality and uniqueness become valuable assets. The ability to think original thoughts and synthesize new ideas will be crucial for feeding the beast of AI. People will research these unique ideas to sell them. 
For example, consider mental illness symptoms: if millions exhibit the same symptoms at various degree of functioning across the globe and compare, it may no longer be considered a mental illness but a cultural difference. This shift will drastically change how we perceive and address reality.
Scientists will need to prove ideas physically rather than just influence and access to differentiate in real time. We’ll see a race of ideas across science, language, and physical research. AI will make many current tasks redundant, emphasizing the importance of original thought/prompt and cultural differences (hate or love transgender but it was a glimpse of cultural shift in language and internalization). Same culture, same thinking, same language will be at its own peril! because AI will just regurgitate and loop every years. Novelty and diversity will win out…at least the short term.
I see young millennials and younger taking over within 10yrs! so plan your retirement quickly! because I do not know if even money will have a meaning. Maybe attention will be an asset though my head hurts when I think too much that direction! LOL

UnHerd Reader
UnHerd Reader
22 days ago
Reply to  M To the Tea

They said the exact same thing about the internet back in the early nineties. People will tour the great museums! People will read the great books! People will write the new great books! Yeah. That really happened.

RA Znayder
RA Znayder
21 days ago

I think you are correct. However, a difference with the 90s might be the new reality of bailouts and the facts that bubbles are not just in tech but sort of everywhere. If the whole thing comes crashing down the market expects central banks to step in handing out even more free money.

Douglas Redmayne
Douglas Redmayne
21 days ago
Reply to  RA Znayder

Free money will be given to everyone otherwise there will be mass destitution because there will be no more need fo human labour

Jim Veenbaas
Jim Veenbaas
22 days ago

Test

Dave Canuck
Dave Canuck
22 days ago

AI is hot so it’s full of wild speculation, of course those stocks get massively overvalued , always the case in bubbles, it’s fomo. Sell overvalued stocks and buy undervalued ones. But wait for the bubble to burst first, when stocks hit record after record it’s always a sell signal. Besides the world is in chaos, something will trigger a crash at some point. And then there is the out of control global debt situation, there will be a financial crisis, just a questionoftime. . If Trump wins, his economic policies are all inflationary including tax cuts creating higher deficits, higher tariffs increasing prices of products, and reducing immigration which will reduce the supply of labor. All conditions for higher inflation, more debt and higher interest rates. Good luck with that.

UnHerd Reader
UnHerd Reader
22 days ago

Bare with me, I got my worst grade in college in economics. The author keeps returning to the the massive gains from AI stocks. Does this mean people will be fired to improve profits? How much information does the average person need?

Will Moore
Will Moore
22 days ago

Could be, maybe
talk about covering all bases
.doing nothing medium/long term yields losses. Bet against the stock at your peril, as some of the short sellers have done, for more than a year now. AI isn’t chat bots, that’s like saying all mechanical engineering is about bicycle pumps. The effect of AI will be on the scale of another Industrial Revolution. Mitigate your as yet unknown losses by supporting today’s winners

RA Znayder
RA Znayder
21 days ago

It is my humble estimation that, indeed, the extreme stimulation after 2008 and 2020 (quantitative easing) is a big cause of why we have these hype bubbles. Whether AI can live up to expectations is almost besides the point. What we see is that the asset market has still has so much liquidity that they don’t know what to do with it, which exacerbates speculation and rent seeking. Basically we have an asset economy that has almost no relation anymore to the real economy. Broadly speaking, wage labor and saving money was a futile exercise the last 20 years. You notice this if you want a buy a house now.
The question is, what will central banks do if a recession occurs? Will they start purchasing again and inflate the bubbles even further?