Key themes for the week:
- Selloff of Nvidia shares stokes concerns around tech stock valuations
- Treasury yields in major developed markets decline
- Equities mixed as global growth concerns and rate-cut expectations dominate the landscape
- Oil prices gain back some ground following steep losses
Nvidia, the darling of the tech world, has been flying high on the wings of artificial intelligence (AI) hype and investor enthusiasm. Over the last year, its stock price has skyrocketed, driven by its leadership in graphics processing units and its crucial role in powering the AI revolution. At one point, the company even flirted with a staggering $3.3 trillion valuation, surpassing Microsoft as the most valuable company on the planet. Quite the rise for a business that started as a manufacturer of gaming hardware!
But as the saying goes, what goes up must come down. On Wednesday, Nvidia faced a harsh reality check. Its stock was hit with a selloff that wiped a mind-boggling $279 billion off its market value in just one trading session. Marking one of the largest single-day losses ever recorded for a United States (US) company.
The selloff was not a result of one single factor, but rather, it was a perfect storm of issues. For starters, Nvidia’s growth has pushed its valuation into the stratosphere. Investors have begun to worry that the stock has become overvalued and that its forward price-to-earnings (P/E) ratio is inflated as it rides the AI wave. As much as AI is the future, investors have wondered if Nvidia has become too expensive, too fast — spurring fears of a bubble in the tech sector.
Then there is the regulatory hammer that is about to drop. The US Department of Justice (DOJ) has launched an antitrust investigation into Nvidia, looking into whether it is using anti-competitive tactics to dominate the market. The investigation has sparked fears that Nvidia could face significant legal challenges and potentially hefty fines.
And, as if that were not enough, broader market conditions played a role too. Historically, September tends to be a rough month for stocks, and the Nasdaq was already under pressure before Nvidia’s slide added fuel to the fire. With fears of an economic slowdown in the US and weak manufacturing data from China, investors are skittish and are on the lookout for safer bets.
Nvidia’s crash sent ripples through the entire tech sector, especially companies that are also deeply involved in AI and semiconductors. Investors are starting to rethink the lofty valuations of these companies, questioning whether growth projections are realistic in a higher-than-expected interest-rate environment. Tech stocks, particularly those with high growth potential like Nvidia, are highly sensitive to high-interest rate environments because they rely on future earnings. With interest rates currently remaining higher than market expectations, and for longer, the sector could face even more volatility.
Other big names like AMD and Intel were also not immune to the selloff, although their losses were not as dramatic. There is a broader reckoning underway about how all these AI investments will pay off, and investors are becoming more cautious.
However, because of its dominance in AI chips, Nvidia faces multiple risks its competitors do not. The most immediate challenge is the ongoing regulatory scrutiny, which could force the company to change its business practices, slowing down its aggressive expansion plans. If the DOJ finds Nvidia guilty of anti-competitive behaviour, it might have to rethink how it engages with customers and competitors. That could dent its market share and open the door for competitors like AMD.
Then there is the competition itself. AMD, Intel, and even new players are all gearing up to challenge Nvidia’s position in the AI and semiconductor markets. While Nvidia currently holds the lion’s share, any slip-up could give rivals the chance to close the gap.
Finally, macroeconomic conditions pose a continued threat. With interest rates still high and the global economy showing signs of slowing, Nvidia’s stock may struggle to regain its former glory. Investors are watching closely to see if demand for tech products softens in the coming quarters.
Nvidia’s rollercoaster ride from tech titan to stock market casualty serves as a reminder of the risks inherent in high-growth sectors. While the company’s future in AI is bright, the challenges it faces are very real—from regulatory scrutiny to tough market conditions. For now, Nvidia’s future seems poised between immense promise and significant uncertainty.
IN THE KNOW
Turbulence amid shifting conditions
Global bond markets have been fluctuating amidst shifting economic conditions. In the US, the yield on the 10-year Treasury note fell below 3.75% for the first time in 15 months. This came as market participants bet on significant rate cuts by the US Federal Reserve (Fed) following weak jobs data. The ADP report showed private businesses added fewer jobs than expected in August, triggering concerns about a weaker labour market and dovish signals from Fed Chair, Jerome Powell. Expectations are now leaning towards a 125-basis point rate cut by the end of the year, up from earlier bets of 100 basis points.
Across the Atlantic, the United Kingdom’s (UK’s) 10-year gilt yield also declined to 3.95%, tracking global bond movements. Investors are speculating that the Bank of England (BoE) may hold rates steady in September but could cut by 25 basis points in November. Meanwhile, political uncertainty continues, as British Prime Minister, Keir Starmer, warned of a challenging economic road ahead.
In Europe, the yield on the German 10-year bond dipped to 2.2% as traders remained cautious ahead of today’s US Non-Farm Payrolls report and the next European Central Bank (ECB) meeting. With eurozone inflation falling to 2.2% in August, its lowest level since July 2021, and with core inflation also easing, investors are increasing their bets that the ECB will cut rates again.
South Africa’s bond market saw its R2030 yield rise to 9.40%, although it remains well below the levels seen earlier this year. Improved investor sentiment around South Africa is tied to political stability and the end of power outages, while investors are betting that rate cuts by the South African Reserve Bank could come as early as September.
Green and Red play tug-of-war
On the equities front, US stocks have been in a tug-of-war between small gains and losses as traders digest weak US economic data and wait for today’s pivotal jobs report. The ADP jobs data and the sharp drop in job openings, released earlier in the week, have increased bets that the Fed will cut rates by 50 basis points in its upcoming Federal Open Market Committee meeting. Meanwhile, tech megacaps like Microsoft, Apple, and Tesla all posted gains, but healthcare giants like Eli Lilly and UnitedHealth struggled.
In Europe, the UK’s FTSE 100 is largely flat, hovering around a two-week low. Following weak sales reports, retail giant AB Foods led the losers with a 4% drop. Industrial metals and chemicals stocks also struggled, while housebuilders like Vistry saw gains. In Germany, the DAX edged up 0.3%, with stocks like global energy company, RWE, and multinational real estate company, Vonovia outperforming, while semi-conductor solutions firm, Infineon, continued to slide.
In South Africa, the JSE Index has continued its five-session losing streak, weighed down by global growth concerns. Miners, especially Harmony Gold, took a hit due to lower output forecasts, despite a dividend boost from strong annual profits.
Oil prices continue its seesaw ride
In the commodities market, Brent crude was back above $73/barrel after losing nearly 6% in the previous two sessions. Reports suggest that the expanded Organization of the Petroleum Exporting Countries, OPEC+, is close to delaying a planned output increase, which could provide some price support. However, demand concerns remain, driven by sluggish growth in China and contraction in US manufacturing.
Gold, on the other hand, is holding steady near $2,500/ounce as investors await further signals from the Fed.
Currencies swing on data releases
The US Dollar Index has weakened, falling to around 101 as the likelihood of a 50-basis point rate cut by the Fed is growing. Weak labour market data and dovish signals from Fed Chair Powell have increased the chances of further easing.
The euro is holding around $1.10/€, supported by a softer greenback. Meanwhile, the British pound is holding firm at around $1.31/£, buoyed by diverging monetary policies, as the BoE is expected to take a more cautious approach to cutting rates than the Fed.
In South Africa, the rand has strengthened, gaining back most of the losses witnessed on Wednesday, to hover near the R17.70/$ mark. With the rand now largely taking its cues from global factors and risk appetite, today’s key US employment data will likely act as a new catalyst for the local currency.
Key Indicators:
USD/ZAR: 17.68
EUR/ZAR: 19.66
GBP/ZAR: 23.31
GOLD: $2,518.57
BRENT CRUDE: $73.09
Sources: Reuters/Refinitiv, Investing.com, Trading Economics and Bloomberg.
Written by: Citadel Advisory Partner and Citadel Global Director, Bianca Botes.