The earnings results from Nvidia (NVDA) is a huge blowout, but the stock is poised for a market-cap gain of around $180 billion, which may be a record single-day response to a quarterly report. And the strength in NVDA is boosting other artificial intelligence-related stocks and pushing the Nasdaq 100 (QQQ) up about 1.8% as it retests recent highs.
AI names have just started to cool a little, but the Nvidia report reignites the frenzy and will accelerate the narrow strength that has been in place for months now.
While this is great news for holders of AI names, it creates great difficulty for the broader market because these leading stocks are not acting as leaders. In a normal, healthy market, strength in key stocks usually spreads to other names and creates strong breadth. Prudent investors that are leery about chasing extended and expensive stocks hunt for other opportunities, and this leads to even broader market strength.
This is not happening and presents a dilemma for investors who have little choice but to chase a small group of big-cap names that are producing superior relative strength. In the early going on Thursday, the DJIA is indicated to be slightly lower, and the Hang Seng Index in Hong Kong is down almost 2%, while the semiconductor group (SMH) is up over 5.5%.
There are some headlines about progress in the debt-ceiling negotiations, but rating agency Fitch has placed the United States AAA credit rating on watch for a negative revision as the deadline fast approaches.
A debt-ceiling deal has been widely anticipated as a potential topping event for the market. There was some anticipation of this the last few days as the indexes struggled on poor breadth, but the AI sector is going to create conditions again where the indexes don't reflect what is really going on with the broader market.
If leading stocks such as NVDA acted like real leaders, then this would be a wildly bullish market, but that isn't happening, and it doesn't look like it is about to change.
When positive stock-picking broadens out, and there is sustained momentum in stocks beyond the AI group, then we can call this a bull market. It is still possible for this to happen, but leaders need to start leading.
