Ahead of Nvidia’s (NVDA) quarterly earnings report on Wednesday, the Nasdaq closed at a record high yesterday. The market’s scrutiny of the GPU chip maker has more to do with sentiment than with fundamentals.
Last month, Super Micro Computer (SMCI) posted strong quarterly results and a great outlook. Yet the stock fell. It managed to erase around $200 a share in declines when it rallied from below $700 to close at $903.94.
The hunt for AI widened when Micron Technology (MU) gained 2.96% on Monday. The memory supplier traded to $129 when Morgan Stanley upgraded the company to “equal-weight.” Cautious investors should be wary of chasing MU stock. Memory and storage suppliers face weakening sales momentum first when customers inevitably cut back on AI spending.
Corporations will eventually review the ROI (return on investment) for AI projects. If costs do not offset savings from cutting staff, AI-related spending will fall.
Watch the Fed
Market participants buying AI stocks excessively ignore the Federal Reserve. They need the Fed to start lowering rates. This lowers the risk premium for stocks, potentially sparking a further rally. Still, the odds of a rate cut are very low. Inflation in April fell by only 10 bps. This drop was less than markets expected, fueling a stock rally in the last week.
