Two reasons have been repeatedly offered to explain why the economy and the stock market have proved so resilient since the coronavirus pandemic: the unexpected strength of consumer spending and the revolutionary impact of artificial intelligence.
Both of those drivers are about to be tested.
After the market closes Wednesday, Nvidia (NVDA-Q), the chipmaker that has become the poster company for the AI boom, will report its latest quarterly financial results. Its statement will be bookended by earnings from two bellwethers of consumer spending.
Target (TGT-N) lowered its full-year forecast Wednesday and warned of slumping holiday sales as consumers pull back on spending; its shares fell 2 per cent in premarket trading. Walmart (WMT-N) will report earnings Thursday.
Also on Thursday, the Labor Department will release delayed jobs data for September, with the potential for the numbers to add to concerns about a slowdown in hiring.
It could be a bumpy ride. The S&P 500 is forecast to move 1.4 per cent in either direction, according to Citi analysts and based on bets in the options market. Nvidia is expected to move more than 6 per cent. In early trading Wednesday, the index rose close to 1 per cent, while Nvidia climbed over 2 per cent.
Adding to the uncertainty, the approaching end of the year is a time when investors who have already notched decent returns are likely to pull back from the market, said Stuart Kaiser, an analyst at Citi.
“The calendar really matters,” he said. “It has been a hard year. If you are having a decent year at this point, then the last thing you want to do is risk that.”
Investors have already become jittery. The S&P 500 fell 0.8 per cent on Tuesday, its fourth consecutive day of losses. Nvidia’s stock price slumped more than 2 per cent, adding to a downturn over the past couple of weeks that has dragged the company into a stock correction, defined as a drop of 10 per cent or more from the recent peak.
These jitters are not unique to Nvidia. Oracle (ORCL-N) lost a quarter of its value after announcing further, debt-financed investment in OpenAI, worrying investors about overspending. An exchange-traded fund from Global X that invests in a basket of stocks linked to AI has fallen around 8 per cent this month. On Wednesday morning, both Oracle and the AI fund were up.
The market slump has not been indiscriminate; it has homed in on companies with stretched valuations, mounting debt and unproven business plans. The stock price of Alphabet, a cash-rich company that has dived into AI, remains roughly flat this month. On the other hand, CoreWeave, a newer AI company, is down more than 40 per cent for November.
“There is some AI fatigue,” Kaiser said.
For Nvidia, investors expect another bumper round of earnings but will be alert to signs of competitive pressures that have been largely absent in its recent ascent.
Given the size of the company, it will not be just tech investors who are paying attention. Roughly half of the S&P 500’s 17 per cent rally this year through October can be attributed to a small group of tech behemoths known as the Magnificent Seven, which includes Nvidia.
If these companies start to retreat, just as concerns over consumer spending are mounting, then two of the primary drivers of the stock market and the economy in recent years could fade at the same time.