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Dream Bigger Than the Price

The data from the US yesterday was mixed: a softer-than-expected ADP read and a stronger-than-expected ISM services data marked the session. According to the data, the US economy added 152K new private jobs in May – much lower than 175K penciled in by analysts and the weakest number since the start of the year, meanwhile services expanded by the strongest pace in the past nine months during the same month. The bond traders focused on the weak ADP report rather than on the strong ISM read, and sent the US 2-year yield down to 4.72%. The fact that the Bank of Canada (BoC) announced the widely expected 25bp and left the door open for more rate cuts – if inflation progress toward the right direction – and the expectation that the European Central (ECB) will be the second G7 central bank to announce the first rate cut also helped tilting the balance in favour of the doves.

And the lower yields boosted appetite in global indices. The Canadian TSX rebounded past its 50-DMA, the European SXXP jumped while the S&P500 was catapulted to a fresh record for the 25th time this year. Yes the S&P500 renewed record 25 times since this year started – regardless of the fact that we spent most of the year scaling back the Fed cut bets and are still not sure if the Fed will be able to cut rates this year at all.

So what’s driving these stocks higher? Well, tech stocks are still behind the most of the upside pressure thanks to AI craze. In numbers, the 10 stocks at the S&P500 – that include Microsoft, Nvidia, Apple, Amazon, Meta, Alphabet and Broadcom – accounted for about 35.7% of the market cap after the strong May rally. Nvidia rallied more than 5% to a fresh record and joined the club of companies that are worth more than $3 trillion. As of yesterday’s close, Nvidia is more valuable than Apple, and a touch less valuable than Microsoft – which triggered the AI rally with OpenAI’s ChatGPT. Apple on the other hand advanced by a meagre 0.78% yesterday and is at a spitting distance from its own ATH, after announcing a partnership with the very OpenAI and hoping that it could give the company’s stagnant sales the sugar boost it needs.

Dream bigger than the price

As Nvidia advances like a bulldozer to fresh highs, emerges the question of whether this price rally is justified. Now, it’s always hard to say, yes everything is justified, while looking at a price chart that rises exponentially, and pushes the PE ratio higher along with it. What’s justified, however, is the sense of urgency that investors feel about being part of the AI dream: investors want to dream bigger than the price and financial metrics. What’s happening today is – no doubt – the digital equivalent of the industrial revolution. The opportunities are huge at both the company and individual levels, and Nvidia is aware of the growing demand and keeps its foot on the gas. It announced last week that it will upgrade its AI accelerators every year, and the company is working on a 360 degree offering: this means that Nvidia is not focused on making ultra-efficient AI chips, but they are also expanding their offering with software and services to reach out to mid and small sized companies so that they can also integrate AI in their business models. This is perhaps what differentiates Nvidia from its competitors. Some compare Nvidia’s strategy to Apple’s closed system that worked so well in keeping the company on top of its game for years. The rumor has it that Nvidia is on the path to becoming the next Apple. And in terms of market cap, since yesterday, it’s already more valuable.

For the crucial question of: is it too late to buy? Well listen, we asked the same question when the stock price hit $500, $800, and $1000 per share. Now it is past $1220.

And other chipmakers are doing well, as well, Qualcomm rose more than 3% yesterday, AMD jumped nearly 4%, even the sputtering Intel added 2.50%. Here in Europe, we also had a change in top ranks of the market leaders. The Dutch ASML – which sells machines to the world’s leading chipmakers – jumped 9.50% yesterday and became Europe’s second most valuable company – overtaking LVMH – on news that TSM will receive the high-NA extreme ultraviolet machine by the end of this year. I asked ChatGPT what’s that – as I think there is no one in a better position to answer that question and it replied by a detailed text and said that ‘the introduction of high-NA EUV machines is significant because it represents a major technological advancement, enabling the production of even smaller and more powerful semiconductor devices. These machines are expected to play a critical role in the next generation of chip manufacturing, supporting further advancements in electronics and computing’. TSM also rallied 6.85% yesterday to a fresh high.

ECB to cut

Let’s now come back to earth, the ECB is expected to announce a 25bp cut later today. Because that decision is broadly expected and priced in since months, it won’t matter that much for the market mood. The real question is, what tidbit will Lagarde drop regarding the future rate cuts. Will she sound cautious about future rate cuts, or will she sound confident that this is the first rate cut of a series of more rate cuts expected to come regularly. Note that the latest CPI update from the Eurozone wasn’t enchanting last week – as it hinted at rising price pressures last month, but released yesterday, a softer-than-expected PPI figures for April threw some cold water on worries. The EURUSD rebounded yesterday but saw resistance into the 1.09 level. A sufficiently dovish hint from Lagarde at today’s presser should bring the euro bears in charge of the market.

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