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Nvidia and Inflation: Stock Market’s 2024 Make or Break

  • Potential Nvidia earnings miss could trigger a selloff in megacap tech stocks
  • Economic data showing signs of reflation could be a bigger threat to stocks
  • Policymakers at the Federal Reserve may allow the economy to “run hot” leading to inflation
  • Inflation revival could cause a reversal in equities and contraction in valuation multiples
  • Nvidia shares slide, impacting the S&P 500 and Nasdaq Composite
  • Just four stocks have driven nearly 75% of the S&P 500’s total return in 2024

Introduction

It’s a question that has been on the minds of many market strategists: What could cause this top-heavy stock market to topple over? One longtime equity-derivatives strategist has some thoughts. In his latest note to clients, Nomura’s Charlie McElligott discussed two things that could trigger a selloff in the megacap technology stocks that have driven most of the year-to-date advance in the S&P 500.

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Potential Nvidia Earnings Miss

The most immediate concern for the market-leading tech names would be a potential Nvidia earnings miss. The company is set to report quarterly results on Feb. 21, according to FactSet. Analysts polled by FactSet expect the chip maker and artificial-intelligence darling to post earnings per share of $4.53 for the final three months of 2023. That’s compared with 88 cents per share from the same quarter a year earlier. Nvidia shares have gained 35% since the beginning of 2024, establishing the chip maker as the best-performing stock on the S&P 500, FactSet data show.

Reflation and Inflation Threat

Beyond the immediate concern, the bigger threat to stocks in 2024 could arrive in the coming months, with economic data showing signs of reflation. According to McElligott, practically the entire investing community has left the prospect of a rebound in inflation for dead. However, McElligott thinks policymakers at the Federal Reserve could allow the U.S. economy to “run hot,” leading to a revival in “animal spirits” and, with them, inflation. Such a revival would likely kick off a “brutal equities thematic reversal,” causing crowded bets on the largest growth stocks to unwind as expectations for higher interest rates and Treasury yields cause a sharp contraction in valuation multiples.

Conclusion

While the immediate concern lies with Nvidia’s upcoming earnings report, the bigger threat to the stock market in 2024 could be the revival of inflation. Despite the current low inflation levels, there is a possibility that policymakers may allow the economy to “run hot,” leading to a resurgence in inflation. This could result in a reversal of market trends and a contraction in valuation multiples. Investors should closely monitor both Nvidia’s earnings and economic data in the coming months to assess the potential impact on the stock market.

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