As is well known now, Nvidia shares tumbled something like 17% last Monday. Was this bad news from the Fed about its plans for interest rates? The question isn’t serious.
Stock prices are a reflection of market expectations about all the dollars companies will earn in the future. Nvidia in particular shows us why the Fed narrative, one that suggests its rate cuts are like opium for the addict, is utter nonsense.
See Nvidia’s market cap since it went public in 1999. It was rather flat for a very long time.
Please think about the flat, price-depressed quality of Nvidia shares in relation to the popular view within the various economic religions that an allegedly “easy” Fed is the source of stock-market vitality. Shouldn’t Nvidia have soared in the early 2000s until 2007, and once again when the Fed was at “zero” from 2008 until 2015? In truth, Nvidia’s shares only started to look $1 and $2 in the mirror in 2015, the year that the Fed exited “zero.”
More recently, the Fed raised its funds rate 525 basis points starting in 2022, and aggressively so through 2023. Did this sap the strength of Nvidia’s shares? Not in the least. They rose 239% in 2023 alone.
Which is but a reminder once again that fundamentals drive the price of shares, not central bank fiddling. And improving fundamentals are frequently a reflection of dynamic change in the marketplace whereby the bad to mediocre are replaced by the good to great. In other words, markets gain strength from weakness as the future replaces the past.
That’s why Nvidia shares did so well at a time when former investor darling Intel wasn’t doing so well. Which is important to think about.
If it were true, as is so often said, that equity markets are yet again addicted to Fed “ease,” then it would be true that all shares would be on the rise when the Fed is in rate-cutting mode. Intel’s laggard ways show us why this isn’t remotely true, and that if it were true, equity markets would be too depressed to be worth writing or reading about. Think about it.
If the Fed could prop up stocks, then its interventions would be good for Nvidia and Intel. How terrifying if so, for the economy and markets as Intel hogged capital to the detriment of the good and great. It would mean that the Fed could suffocate dynamism borne of the future replacing the past, which is the source of market strength.
The above is rooted in the truest of all Wall Street truisms, that the past is a lousy predictor of the future. Thought of in corporate terms, AOL, GE, Intel, and Yahoo were once blue chips. Now they’re not. There’s your market strength as the Nvidia’s of the world run roughshod over the past.
Last Monday, Nvidia’s shares corrected not because of worries about what the Fed might do, but due to near-term investor worry that its ongoing ability to earn the dollars associated with its valuation was less certain than before. DeepSeek’s ability to do so much in the AI space at so little cost called into question Nvidia’s future. At least for a time.
What’s ahead? As Barry Ritholz has said, nobody knows anything. All we know is that present continues to rewrite the future in bullish ways as the future replaces the past. That’s the stuff of market strength as commercial advances reorient investment yet again away from the bad and mediocre to the good and great. And the good and great will inform this future, not the Fed. As always, if the Fed could dictate the future, the present would be too bleak to contemplate.
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