Suddenly, stocks look shaky. After briefly touching 40,000 earlier this month, the Dow has since shed more than 1,000 points, as worries flare about where interest rates are headed next . The index posted another loss on Wednesday, down 411 points, or 1.06%, to 38,442.
While volatility can be frustrating. It has always been part of the two-steps forward, one-step back nature of the stock market. So keep in mind: Stocks may still have room to run , and they perform their best when investors feel least confident.
Here are three smart rules for interpreting the current market culled from new stock research.
Don’t assume the market is in a bubble
Anytime the market hits a new high, then pulls back sharply, it’s natural to wonder: Could it be all downhill from here? It isn’t an idle concern. Even after the recent dip, stocks are trading at more than 25 times trailing 12-month earnings, their highest level since 2021, according to FactSet.
Still, investors shouldn’t necessarily assume the market has become irrational, suggests a recent note by Leuthold Group, a stock research firm known for compiling dozens of bespoke indicators to measure market sentiment.
Leuthold recently compared large capitalisation stock prices to four separate valuation thresholds it thinks mark out bubble territory.
The results? This year, prices have approached three of these thresholds—one focused on forecast earnings, one based on average earnings and one based on cash flow. But after getting close, stocks didn’t blow through these thresholds as might be expected during a bubble. Instead, they stalled or pulled back. “‘Resistance’ proves formidable,” the firm concluded, citing a term common in technical analysis.
The fourth valuation threshold, which Leuthold calls “P/E on trailing peak GAAP EPS” has yet to be reached. The indicator compares stock prices not to companies’ most recent earnings, but to the market’s record for earnings, in this case set in the first quarter of 2022.
While stocks are trading at 25 times their peak earnings—a very high figure by historical standards—they are still below the 30 times level Leuthold thinks signals bubble territory. The upshot: “We don’t think U.S. large caps quite qualify as a mania,” writes Chief Investment Officer Doug Ramsey.
Don’t sweat the short-term
It’s natural after a short, sharp pullback to worry where the market is headed next. But trying to make short-term market calls is usually a fool’s errand, according to Trivariate Research, another investment firm.
Trivariate recently tested more than two dozen stock market metrics it says are commonly used to predict short-term stock market declines. These indicators included the S&P 500 put-to-call ratio, mutual fund flows, the futures-based VIX fear gauge, the price of oil and more.
The results were “terrible,” according to the firm. “The factors’ large loss predictions were correct at about the same rate as random selection,” Trivariate said in its note.
The firm found that during many months when signals like the VIX and the Conference Board’s Leading Economic Indicators Index predicted a big drop, the market actually showed bigger-than-average gains. The indicators were signalling volatility not declines, the firm noted.
In another test, a model that Trivariate built based on several other indicators also wasn’t much help either. When the model predicted a large stock market loss, defined as a 2.5% monthly drop, the decline failed to materialise 60% of the time.
Do embrace the uncertainty
While uncertainty isn’t always comfortable, it can be to investors’ advantage. If you are willing to run with it.
Retired Wall Street economist Jim Paulsen points to a metric known as the Monetary Policy Uncertainty Index , which tallies newspaper reports and other data to measure uncertainty about what the Fed will do next.
Since 1985 the index has averaged just under 100, but since 2020 it has been elevated most of the time. It’s currently at 144, a higher level than during about 80% of its history.
Still, Paulsen argues this is good news. He compares the Fed’s Jerome Powell era, where the index has averaged 110, to eras of three earlier Fed Chairs: Ben Bernanke, Janet Yellen, and Alan Greenspan, where it averaged about 75.
Investors have been rewarded for enduring the lack of clarity. The S&P 500 has posted average annual returns of more than 12% during Powell’s term, compared with less than 10% under his three predecessors, according to the note.
“All investors long for clarity,” Paulsen writes. “But the stock market never does that well when you and I are comfortable. The great bulk of the returns generated by the stock market typically occur when most are still in their bunkers waiting for conditions to improve.”
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Nvidia’s earnings will test Wall Street’s confidence in the AI boom.
Chip makers are fighting to assure investors that the artificial-intelligence boom is racing forward. Wall Street might not believe it until Nvidia’s NVDA -0.98%decrease; down pointing triangle Jensen Huang says so.
When Huang steps up to the mic for his company’s earnings call Wednesday, he will have the world’s attention. What he says about Nvidia’s present will preview the future of AI, dictate the path forward for a tech-crazed stock market and influence an American economy increasingly tethered to hopes that the boom won’t go bust.
The $5 trillion chip maker has provided the key building blocks for AI since the launch of ChatGPT in 2022 set off a race for dominance among OpenAI, Anthropic and established Silicon Valley giants. Now, as Nvidia backstops sprawling data-center projects and an exotic money pipeline to boost chip demand, the company’s influence is arguably bigger than ever.
But there are signs of trouble ahead. Political pushback to AI is growing. A bond selloff propelled borrowing costs to their highest levels in years. The hyperscalers that include some of Nvidia’s key customers—once cash-printing machines—are relying more on debt. OpenAI recently told investors its revenue rose by a tepid 18% in the second quarter while its losses deepened.
Nvidia is increasingly stepping in to shore up potential weak points across the market. Earlier this month, the company teamed up with six of Wall Street’s biggest firms on a $500 billion AI-financing plan, pledging to backstop lending to customers that can’t afford its chips otherwise. The chip maker last week also took a stake in Cloverleaf Infrastructure, which arranges power for data centers, and struck a $6 billion deal with startup Poolside aimed at developing a powerful open-weight AI model.
After watching shares in other chip makers and the so-called Magnificent Seven tech companies swing wildly in recent months, Wall Street is hoping Nvidia can beat expectations—again. The countdown is on.
“It’s kind of becoming more and more like the World Cup final than the Super Bowl at this point,” said Brian Mulberry, chief market strategist at Zacks Investment Management. “It’s just gotten to be that big.”
The company has smashed analysts’ earnings estimates for each of the 14 quarters since the AI boom kicked into high gear. Nvidia posted 210% annual growth in net income in its last three-month period, according to FactSet, making Wall Street’s 126% projection look pedestrian.
Expectations for a blowout second quarter have risen rapidly over the course of this year. All Nvidia will have to do to beat this target: outrun 95% annual earnings growth to more than $51.5 billion. Analysts project the chip maker will report record sales of $92 billion for the period, up from a forecast of $78 billion at the start of this year.
In July, big-tech earnings sparked volatility. Concerns about runaway capital spending spread across the sector after Alphabet’s and Tesla’s results, driving a $890 billion wipeout that contributed to the unwind of hedge fund Situational Awareness. Microsoft posted the largest one-day gain in market capitalization by any company, ever, after a quarter proving that it could still show investors the money. SpaceX rocketed higher after a record-breaking initial public offering, only to see $1 trillion in value evaporate.
Surging memory prices and borrowing costs have fueled fears that those and other companies will be unable to keep plowing more money into supplies including Nvidia chips. Shaia Hosseinzadeh, founder of OnyxPoint Global Management, has recently bought dips in AI-infrastructure stocks when Wall Street has strained to absorb massive debt issued by Silicon Valley.
“The macro data is really quite robust,” he said. “Of course, there’s a level at which everything breaks.”
Investors have kept pumping money into the AI trade despite concerns around chip consumers—and to the benefit of chip producers. That is why Nvidia’s outlook for semiconductor demand could send ripples through counterparts such as Micron Technology and Sandisk, developers of the data centers in which their chips reside, and a supply chain of power producers, contractors and other specialists that underpin the globe-spanning AI build-out.
“We joke internally that we’re all Nvidia analysts now,” said David Lefkowitz, head of U.S. equities at UBS Global Wealth Management.
The irony is that investors have tended to sell Nvidia stock immediately after blockbuster earnings, with shares falling each trading session after its four past quarterly reports. Some are betting that will be the case this time around, too.
The options market is pricing in a 5.3% swing, higher or lower, in Nvidia shares during the session following earnings, according to Option Research & Technology Services. That is higher than the 4.8% average move in Nvidia’s stock over the last 12 months after the company reports quarterly results.
In recent days, some of the most actively traded Nvidia options have been put contracts tied to the stock falling from its Friday value of $214.75 to $205 and $210 apiece, according to Cboe Global Markets data. Put options give the right to sell a stock by a set price and typically represent a bearish wager.
Many analysts remain optimistic. Frank Lee, global head of tech hardware and semiconductor research at HSBC Global Investment Research, recently raised his price target for Nvidia shares to $360 from $325, citing, among other things, Nvidia’s strategic partnerships with suppliers and its role as a top contributor to open-source AI.
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