I. Jensen Versus The AI Trade
Charlie Munger famously warned that there are three ways smart men can go broke: "Liquor, ladies, and leverage." NVIDIA co-founder and now former CEO Jensen Huang has run into trouble with the second of Munger's three L's. He won't go broke, but he is out of a good job.
On Thursday, NVIDIA announced that Huang had resigned as CEO after 33 years at the helm of the company he co-founded in 1993. His departure followed revelations of extramarital affairs, including a reported relationship with a Chinese businesswoman suspected by US intelligence officials of spying for Beijing. Her Singapore-based company, Megaspeed, allegedly purchased NVIDIA's high-powered GPU chips and re-exported them to China, violating US export restrictions. The longtime CFO Colette Kress was appointed interim CEO while the board searches for a successor.
Huang's departure rattled the AI trade, with NVIDIA shares plunging 4.3%, sending its forward P/E to 11.7 (charts). We promised you buying opportunities after the midterm elections. There were a bunch last Thursday and a few more today.
Competitors AMD and Broadcom advanced 5.9% and 5.5%, respectively, on expectations of market-share gains (chart)
As a result, the Nasdaq Composite held up relatively well, falling just 0.4% today (chart).
Neoclouds also tumbled, with CoreWeave down 6.7% and Nebius down 16.8%, amid concerns about NVIDIA-backed financing (chart). Nebius was additionally pressured by disappointing revenue guidance and rising capital spending.
Despite the latest AI jitters, the two-year Treasury yield rose 15bps to 4.87% this evening, remaining well above the federal funds rate and signaling that further Fed tightening is warranted (chart). The 10-year Treasury yield is back above 5.00% at 5.13% this evening.
Yields rose on higher oil prices, with Brent crude up 3.1% to $95.66 this evening, after President Donald Trump dismissed the need for an Iran deal, and on hawkish Fed commentary following October's hot CPI report (chart).
Markets now price a 100% probability of a December Fed rate hike: 84.7% for 25bps and 15.3% for 50bps. Futures imply more than 3 rate hikes over the next 12 months (chart).
The combination of higher Treasury yields, driven by rising oil prices and hawkish Fed commentary, and renewed AI jitters weighed on the broader stock market. The S&P 500 fell 0.4%, its equal-weighted counterpart declined 0.9%, and the Russell 2000 lost 1.7% (charts).
II. Nvidia: The Bear Case
