What a Title Fight Would Look Like Between AI Leaders & Economic Data

Thought to ponder…

“Persistent and consistent effort over time can yield results. “So far” and “not yet” are the foundation of every successful journey."

-- Seth Godin, "The Practice"

The View from 30,000 feet

The highlight of last week was a showdown between two of the major forces in the markets: AI Earnings vs. Economic Data. Thursday last week had all the hallmarks of a Las Vegas title fight between the two heavyweight contenders. The fight got off to a vicious start as Nvidia stormed out of their corner in the first round with a flurry of jabs, brandishing an earnings release showing year-over-year quarterly revenue up 265%, with data center revenue up 409%. Their early move sent the stock from $950 to $1,033, generating follow-through in the markets as the S&P500 surged from 5,307 at the previous day’s close to an opening print of 5,341. It looked like Nvidia had a solid lead.

Then, Economic Data lumbered into the center of the ring and unloaded a powerful left hook, S&P Global PMI data, which came in stronger than expected. The Economic Data connected with the chin of the markets and buckled its knees. Within minutes, expectations for rate cuts fell and the 10-year Treasury spiked from 4.42 to 4.49, sending stocks into the danger zone. By the end of the day the S&P500 had collapsed from a high of 5,341 to close at 5,267. Economic Data had won the fight, highlighting an important lesson – AI Earnings matter, but Economic Data is running the show. This is an especially poignant lesson because last week also marked the end of Q1 earnings season releases, so all will be quiet on the earnings front for another six weeks with Economic Data being the only game in town. Given the propensity for Economic Data to land hard blows, it’s likely the next six weeks will provide some volatility. For their, part the Fed is engaged in theatrics around the ring by employing a barbell approach to messaging, where Powell gets out in front of audiences and provides market support with dovish comments, and the rest of Fed Presidents engage on an endless roadshow of speeches with hawkish comments. Last week’s Fed Minutes provided a classic example of the strategy as the dovish Powell press conference was juxtaposed against the hawkish meeting minutes. The Fed is attempting to carefully guide the markets to a soft-landing, using barbell messaging as a tool to buffer volatility that could otherwise threaten financial stability and create the need for more extreme measures of intervention.