A person might have thought the stock market would breathe a sigh of relief after this morning’s latest report on employment. Expectations were that the U.S. added 165,000 jobs in August, and the unemployment rate would tick lower to 4.2%.
Well, the unemployment rate did back off a little to 4.2%, as expected. And the economy added 142,000 jobs. That’s not too big of a miss – a person might be tempted to say one out of two ain’t bad…
After all, the big picture is that investors want confirmation that the Fed cut rates when it meets in a couple. And the Fed is probably worried the data will spike in some weird way that undermines the justification for beginning the rate cut cycle.
A person might think today’s mostly in-line employment report puts a September rate cut in the bag. And, it does.
You’ll definitely hear it said that the market reacted poorly to the employment report because it wasn’t bad enough to justify the 50 basis point cut the market wants. And there is some truth to that. I think back to the Fed’s response to spiking inflation. After calling inflation “transitory” for 6 months, the Fed finally responded to 8% inflation with – a 25 basis point rate hike.
That’s literally a drop in the ocean. The market didn’t take the Fed seriously at all, inflation kept climbing to 9% before the Fed finally got serious about the issue and started dropping 75 basis point hikes.
The Fed is now doing the same thing in reverse. It is not taking the weakening employment numbers seriously.
The Fed’s slow response to inflation has now set the expectation that the Fed won’t get serious about loosening monetary conditions until the data smacks it in the face.
But that’s only part of the story. The other part is that AI bubble is deflating.
The End of a Bubble
After it reported earnings, I told you that Nvidia’s days of hypergrowth are over…
For the current quarter, which ends September 30, Nvidia said it would take in $32.5 billion in revenue. Analysts were expecting $31.7 billion. Current quarter revenue guidance was raised by…2.5%.
When calendar year 2024 is over, Nvidia will still have doubled earnings per share (after growing EPS 208% in calendar 2023). Next year, earnings are expected to grow 39%. Then 17% growth for calendar 2026 and 15% in calendar year 2027.
The point to all of this: analysts have now finally gotten a handle on Nvidia’s business. In part because they have a handle on what Nvidia’s customers (Microsoft, Meta, etc) are spending. And also because they have a handle on data center construction.
Nvidia has lost ~15% of its value since it reported earnings. And it may not be done. Here’s why:
That chart shows how concentrated Nvidia’s revenue is. It gets 45% of its revenue from just 5 companies. By the end of this year, that will be approximately $58 billion total. Next year, analysts think these 5 companies will spend nearly $80 billion on Nvidia chips…
If just one of them scales back their spending, it’s a problem. If they all scale back, it’s a disaster.
Right now the AI bubble is leaking air because investors are looking at these numbers and starting to think “Is that realistic?”
The AI bubble pops when investors figure out there’s no way in hell that Microsoft, Meta, Tesla, Google and Amazon will spend a combined $80 billion on Nvidia chips.
The first part of a bubble is about open-ended expectations. It’s always fun. The second part of a bubble is when actual numbers can be applied to those expectations. That part is never as fun.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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