Nvidia CEO Jensen Huang announces new partnerships in GTC keynote, gold extends sell-off

Key Concepts

• AI Optimism and Tech Rally: The market is experiencing a rally driven by optimism surrounding Artificial Intelligence, with tech stocks leading the gains.
• Nvidia's Dominance: Nvidia is a key player, announcing new partnerships and demonstrating strong performance, with its CEO providing optimistic revenue projections.
• AI Boom vs. Bubble Debate: There's an ongoing discussion about whether the current AI surge is a sustainable boom or an unsustainable bubble, with differing perspectives on valuations and future demand.
• Market Concentration: Gains are concentrated in larger tech companies, with smaller companies and broader market participation lagging.
• Interest Rate Sensitivity: Real estate and utilities sectors are identified as interest rate-sensitive and are underperforming.
• Fed Policy and Rate Cuts: Market expectations are for the Federal Reserve to cut interest rates, influencing investor sentiment and asset allocation.
• Crypto Market Developments: The launch of a Solana ETF and the potential impact of Fed policy on risk assets like cryptocurrencies are discussed.
• Corporate Earnings and Guidance: Upcoming earnings reports from major tech companies are a key focus, with particular attention on AI-related capital expenditures and revenue growth.
• Valuation and Accounting Risks in AI: Concerns are raised about the sustainability of AI valuations, the impact of accounting practices on reported earnings, and the potential for overbuilding and stranded assets.
• Amazon's Growth Drivers: AWS growth, e-commerce efficiency, and the advertising business are highlighted as key drivers for Amazon's future performance.
• Apple's Leadership Transition: Potential successors to CEO Tim Cook are discussed amidst questions about Apple's AI strategy and future product innovation.

Market Performance and Sector Analysis

The market is currently experiencing a rally, primarily driven by AI optimism. Major indices are showing gains, with the Dow up 280 points, the S&P 500 up about half a percent, and the tech-heavy NASDAQ rallying about 1%. This rally is characterized as tech-driven, contrasting with a more broad-based rally seen previously.

Intraday Performance:

• Dow: Gapped up at the open and has been hovering around the 0.5% mark.
• NASDAQ: Showing a strong trend since the noon hour, up 1%.
• S&P 500: Up half a percent, having recovered from a slight dip into the red earlier in the day.
• Russell 2000: Smaller stocks, particularly those that performed strongly yesterday, are taking a breather. The Russell 2000 is slightly in the green but has been mostly in the red, down about 0.5%.

VIX: The VIX is slightly elevated but remains well under the 20 level, a threshold crossed a few days ago. It has returned to prior averages after a spike during the China tariff scare.

Bond Yields:

• 10-year Treasury yield: Down one basis point to 3.98%.
• 30-year Treasury yield: Down two basis points to 4.55%.

US Dollar Index: Down.

Sector Performance:

• Outperforming: Technology (XLK up 1.3% vs. S&P 500 at 0.5%), Consumer Discretionary, and Materials are showing gains.
• Underperforming: Real Estate and Utilities, identified as interest rate-sensitive sectors, are not performing well. Energy and Staples are also down about 1%.

Mag Seven Performance: Four out of the seven "Mag Seven" names are hitting record highs today.

• Nvidia: Leading the pack, up 5.5%.
• Broadcom: Up 3%.
• Tesla: Up 2%.
• Amazon: Up 1%.
• Alphabet: Hit an intraday record high but closed down about 2/3 of 1%.

Dow Components: While most of the Dow is in the green, notable decliners include Walmart (down almost 1%) and J&J (down 1.5%).

Nvidia's GTC Conference and AI Developments

Nvidia CEO Jensen Huang delivered a keynote at the GTC conference in Washington D.C., announcing several new partnerships, including with Uber, CrowdStrike, and the Department of Energy.

Key Announcements and Partnerships:

• Department of Energy (DOE): Partnering with Nvidia to build seven new AI supercomputers to advance national science. Secretary Chris Wright is credited with bringing significant energy and passion to the DOE.
• Uber: Partnership to connect Nvidia Drive Hyperion cars into a global network for future robo-taxi services.
• CrowdStrike: A partnership was announced.
• Palantir: Mentioned as a commitment to consume massive amounts of AI and GPUs.
• ServiceNow: Mentioned as a commitment to consume massive amounts of AI and GPUs.
• Nokia: Nvidia is investing $1 billion in Nokia, and Nvidia chips will be used to accelerate Nokia's software for 5G and 6G networks. This deal is seen by some as a "yellow flag" due to its circular nature, but others view it as Nvidia picking key secular trends like 5G and 6G.
• Eli Lilly: Will take 1,000 GPUs to work on drug discovery.

AI Boom vs. AI Bubble Debate:

• Daniel Newman (Futurum CEO): Believes Jensen Huang's comments provide clarity, stating he has line of sight to half a trillion dollars in revenue for Blackwell Rubin through the end of 2026. He argues that the partnerships demonstrate a willingness for companies to spend money to get value from AI, validating the "boom" perspective.
• Concerns about Circular Deals: The Nokia deal, where Nvidia invests in a company that then uses Nvidia's tech, raises questions about the sustainability of demand. However, Newman sees this as Nvidia strategically picking key secular trends.
• Broader Consumption: Newman anticipates that upcoming earnings from cloud companies like Microsoft, Amazon, and Alphabet will show AI consumption by enterprises, businesses, and government entities, not just a few companies.

Nvidia's Market Position:

• Nvidia's market cap is closely approaching the $5 trillion mark, having hit $4 trillion in July.
• The company's success is attributed to its leadership in AI infrastructure.

Market Concerns and Future Outlook

Steve Sausnik (Interactive Brokers Chief Strategist):

• Lack of Fear: Expresses concern about the current market sentiment, noting a "lack of fear" and a feeling that daily gains are almost "too good to be true."
• Potential Derailers:
  • Trade Talks: Markets are placing enthusiasm on potential trade talks, which have previously gone awry.
  • Earnings: A significant earnings week is ahead, with Microsoft, Meta, and Alphabet reporting. Any negative surprises could derail the market, especially given high expectations for the "Mag Seven."
  • Fed Meeting: Expectations for rate cuts and the end of quantitative tightening are priced in. The Fed's commentary on future rate cuts and the acceptance of inflation above 2% (e.g., 3% as the "new 2%") are key points of focus.
• "Don't Fight the Tape, Ensure Against It": Sausnik's mantra, suggesting hedging strategies like using the VIX (currently around 15-16) to protect against potential market hiccups.
• AI Capex Sustainability: Questions the sustainability of increasing AI capital expenditures, especially if companies like Meta and Amazon are cutting jobs in AI. He draws parallels to the internet bubble, citing companies like Lucent, Global Crossing, and WorldCom as examples of infrastructure builders that ultimately failed.
• Valuation and Profitability: The "gold rush" into AI makes it tough to sustain the current enthusiasm, high levels of profitability, and growth priced into these stocks.

Alli Melly (Manach Capital Partners Managing Partner and CIO):

• AI Risks: Identifies valuation and accounting as primary risks.
  • GPU Depreciation: The average leasing price for an Nvidia H100 GPU has dropped by 80% ($10/hour to $2/hour). However, buyers often use 4-5 year depreciation schedules (20% per year), leading to exaggerated corporate earnings with revenue growth upfront and depreciation back-ended.
  • Hyperscaler Expenditures: Hyperscalers spent ~$400 billion on AI in the past year, with total revenue growth (AI and other) only $200 billion. Without amortization, this would represent a loss.
  • Overbuilding and Stranded Assets: Accounting rules encourage investment, potentially leading to overbuying of chips, overbuilding of data centers and power, and ultimately stranded assets, similar to the office building market or the telecom boom and bust.
• Credit Cycle Concerns: The reliance of AI projects on credit from private credit funds is a warning sign, as their cost of capital is higher than that of hyperscalers. Borrowing in the private credit market to keep debt off-balance sheet is a red flag.
• Similarities to Speculative Cycles: Draws parallels to the internet bubble, noting overbuilding and "zombie companies" with negative income and revenues but still receiving investment.
• Investor Signals: Advises investors to look at income statements and cash operational cash flows, focusing on positive cash flows, capex versus revenue growth, and which companies would become money-losing if capex were expensed upfront.

Crypto Market Developments

Bitwise Solana Staking ETF (BSOL):

• Launch: Bitwise has launched the first spot Solana ETF in the US, trading on the NYSE under the ticker BSOL.
• Features: Offers direct exposure to Solana with built-in staking rewards (around 7% annually). It provides institutional-grade custody and removes the hassle of direct crypto asset management.
• Solana Explained: A fast blockchain capable of processing over 100,000 financial transactions per second at a very low cost (less than one-tenth of a penny per median transaction). It's seen as crucial infrastructure for stablecoins and tokenization.
• Risks: Volatility is inherent in crypto assets. However, increased regulatory clarity from a "crypto-friendly SEC" and positive statements from SEC Chairman Paul Atkins are reducing regulatory enforcement fears.
• Portfolio Fit: Crypto assets like Solana offer potential for high returns, are uncorrelated with traditional assets, and can contribute to a diversified portfolio.
• Fed Policy Impact: Historically, crypto has benefited from low interest rates. The Fed's pivot to rate cuts has positively impacted crypto assets like Solana, Bitcoin, and Ethereum.

Gold Prices:

• Gold prices have fallen more than 1.5%, extending declines from yesterday and last week. This is the sharpest sell-off in over a decade.
• Post-Fed Cut Weakness: Gold typically experiences a period of weakness 10-12 weeks after the Fed starts cutting interest rates, before rallying again.
• Safe Haven Flight: Some weakness is attributed to rising optimism over a China-US trade deal, leading investors to flee safe-haven assets.
• Year-to-Date Performance: Despite recent declines, gold is up 49% year-to-date, and was up 60% at its peak. Major banks like UBS, JP Morgan, and Goldman Sachs still predict higher gold prices into next year.

Corporate Earnings and Business Updates

VFCore (North Face, Vans):

• Q3 Performance: Topped earnings and revenue estimates.
• Guidance: Guidance fell short of street expectations, with a projected 2% year-over-year sales decline for Q4.
• Analyst Sentiment: Analysts view this as the early innings of a turnaround story, but are looking for greater validation of a return to consolidated growth. The CEO expressed optimism but acknowledged uncertainty in the macro environment and the consumer.

CoreWeave:

• US Federal Market Expansion: Announcing plans to enter the US federal market, delivering AI cloud services to government agencies.
• Stock Performance: The stock is up over 250% since its IPO. The move into the federal market continues its existing momentum, which may already be priced in.

Amazon:

• Q3 Earnings: Expected on Thursday.
• Job Cuts: Announced 14,000 corporate job cuts, impacting payments, logistics, video games, and cloud computing. This is seen as a routine cut, smaller than the 27,000 cuts in late 2022/early 2023.
• AWS Growth: Investors expect AWS growth to accelerate from 17-18% to 19% this quarter and aim for 20%+ in 2026. This is driven by AI-related demand exceeding capacity and Amazon's investment in Anthropic.
• AWS Market Share: Amazon holds a significant market share in cloud computing, with annualized revenues around $130 billion. The monetization of AI is still in its early stages.
• E-commerce: Expecting a strong quarter, driven by increased delivery speeds and cost efficiencies through automation and robotics.
• Margin Mix: Amazon is seen as a strong margin mix shift story, with advertising and AWS having higher margins than e-commerce.
• AWS Outage: The recent outage highlighted AWS's indispensability to the global economy. While it may lead to questions on the earnings call, moving cloud providers is difficult, suggesting it may not be a net negative for Amazon.
• AI Job Losses: Arun Sundaram anticipates AI-related job losses will emerge in the coming years as automation increases, but the current 14,000 cuts are not attributed to AI efficiencies.

Apple:

• Leadership Transition: With CEO Tim Cook turning 65, potential successors are being discussed.
• Potential Candidates:
  • Craig Federighi: Senior Vice President of Software Engineering.
  • John Ternus: Senior Vice President of Hardware Engineering, instrumental in Apple's move to its own processors.
  • Greg Joswiak: Senior Vice President of Worldwide Marketing.
  • Eddy Cue: Senior Vice President of Services, leading a key business segment.
  • Deirdre O'Brien: Senior Vice President of People and Retail, with deep customer understanding.
• Analyst Concerns: Some analysts question if a product-focused CEO is needed, given Apple's slow move into AI and the search for its next big product post-iPhone. However, there's no indication Cook is in danger of losing his job, and he is expected to lead for at least the next five years.

Upcoming Events

• Big Tech Earnings: Microsoft, Alphabet, and Meta are reporting first-quarter results on Wednesday. Analysts expect increased spending on AI and cloud infrastructure from Microsoft, with capital spending potentially rising by 45% from 2025 to 2026.
• Federal Reserve FOMC Meeting: The Fed is concluding its October meeting and announcing its interest rate decision. Wall Street largely expects a 25 basis point rate cut. Yahoo Finance will provide coverage starting at 2:00 p.m. Eastern.
• US-China Summit: President Trump is meeting with Chinese counterpart Xi Jinping amid continuing trade tensions. A "substantial framework for a trade deal" has been mentioned by Treasury Secretary Vessence.

Conclusion

The market is currently riding a wave of AI-driven optimism, with tech stocks, particularly Nvidia, leading the charge. However, underlying concerns about valuations, accounting practices, and the sustainability of AI-related investments persist. Upcoming earnings reports from major tech companies and the Federal Reserve's interest rate decision will be crucial in shaping market sentiment. In the crypto space, the launch of a Solana ETF and the potential impact of a dovish Fed policy are key developments. While Amazon's AWS and e-commerce businesses show strong growth potential, questions remain about the long-term implications of AI on corporate workforces and the potential for speculative bubbles. The leadership transition at Apple also remains a point of interest for the future of the tech giant.