Nvidia Soars While Treasury Yields Rise

After a rally in May, Nvidia's stock price consolidated between $200 and $235, hitting the lower bound of that range multiple times. This period of consolidation often precedes a more powerful upward movement once the stock breaks past its resistance level.

The stock has twice bounced off its 200-day moving average, a key technical support level. Josh Brown of The Compound noted that a prolonged testing process at the $230-$235 breakout level suggests a more significant eventual breakout.

Currently, the Relative Strength Index (RSI) stands at 58, indicating there is still ample momentum for the stock to grow within bullish territory before becoming overbought.

Nvidia’s 50-day and 200-day moving averages are both on an upward trend, indicating a strong and sustained buying interest in the stock.

The stock also showed a robust price reaction to recent news, surging after a brief dip below its 50-day moving average, as observed by Matt. Crucially, no negative RSI divergence has been noted, which confirms that the current price movements are supported by underlying momentum.

Despite projections for a record $96-98 billion in free cash flow this fiscal year, Nvidia's forward P/E ratio is currently at its lowest level since 2016.

Matt pointed out that the company has the potential to generate $360 billion in free cash flow on $680 billion in revenue in the near future, indicating that the stock's valuation is becoming more attractive relative to its earnings power.

This combined commitment totals $235 billion through the first quarter of 2028, signaling strong confidence from the company's management in its future prospects and a commitment to returning value to shareholders.

Theoretically, this aggressive buyback plan is expected to reduce the number of outstanding shares by 4.3%, which can boost earnings per share and stock price.

Josh Brown noted that this announcement came just two weeks after Daario's recommendation to slow down buyback paces, highlighting Nvidia's independent strategy.

Historically, following such a streak, yields have typically fallen by an average of 90 basis points in the subsequent 12 months, suggesting a potential future reversal.

The current rise in interest rates is not primarily fueled by an expectation of surging inflation, as inflation break-evens remain well-anchored.

Matt clarified that geopolitical issues, such as oil transit disruptions in the Strait of Hormuz, are contributing to inflationary pressures, rather than an increase in domestic demand.

At Treasury yields above 7%, the S&P 500 median forward price-to-earnings (P/E) ratio drops to 13.6 times, and the NASDAQ 100 falls to 12.6 times.

These figures represent the lowest multiples observed across all yield buckets, from 0% all the way through 7%, indicating a critical valuation threshold.

High yields attract capital away from stocks, as investors can find attractive returns in bonds, eventually pulling liquidity from the equity market.

AI's growing demand for capital is now integrating equities, credit, the dollar, and foreign flows into a single interconnected trade, according to Josh Brown.

Major technology firms are increasingly shifting from self-funding through free cash flow to borrowing in bond markets to finance their substantial AI investments.

This trend means that investors holding traditional bonds may be inadvertently gaining exposure to the AI sector, as the funds are channeled into AI-related projects.

The extensive AI spending also diverts capital from traditional corporate share buybacks, which could potentially increase market volatility as a key support for stock prices is reduced.

The percentage of S&P 500 constituents trading above their 200-day moving average has fallen significantly, from 73% to 51%, indicating a notable deterioration in market breadth.

Since July, only five stocks have contributed to 93% of the S&P 500’s gains, highlighting a concentration of performance in a very narrow segment of the market.

This shift signifies a decline in the 'Great Broadening' market theme, where a wider range of stocks previously contributed to overall market growth.

Defensive sectors are exhibiting historically weak market breadth, with only 3% of utilities and 27% of staples trading above their 50-day moving average.

The primary appeal of these dividend-yielding stocks, historically, has been their steady income. However, investors are now comparing these dividend yields against the more attractive 5% treasury rates.

Matt explained that higher Treasury bond yields are directly competing with these areas of the stock market, drawing capital away from them. The real estate sector also shows extreme weakness, with 0% of its stocks trading above their 50-day moving average.

Despite broader market weaknesses, the technology and financial sectors are demonstrating robust performance, with only 1% of tech stocks and 0% of financial stocks hitting 52-week lows.

These sectors are considered vital indicators of the economy's growth trajectory. Their resilience provides a counterbalance to the observed weakness in other areas of the market.

Josh Brown suggested that the strong performance and lack of new lows in financials and tech should reassure investors regarding the overall market's headline numbers, indicating underlying constructive forces.

Quantitative analysis from Barclays highlights a dangerous disconnect between market breadth and the S&P 500's current pricing.

The cumulative NYSE breadth has fallen by 5,300 over the past 21 trading days, a significant drop that has historically preceded market corrections.

Similar divergences in the past have led to an average S&P 500 drop of 9.6%. Current conditions resemble October 2014, when the market experienced a 5% decline in the following week.

Data suggests a potential peak-to-trough drawdown of 520 basis points for the S&P 500 over the next 21 days if this historical pattern holds.

The market narrative has completely flipped from anticipating rising interest rates and economic pressure to expecting rate cuts.

Historically, such a significant shift in expectations might have suggested a considerable market downturn, potentially a 15% drop, according to Josh Brown and Matt.

However, the broader market has demonstrated resilience contrary to these historical expectations. The speakers emphasized that investors should prioritize this market resilience rather than extrapolating negative sentiment from the rate narrative.

The S&P 500 is in a 5% or greater drawdown from its all-time highs 61% of the time, illustrating that market pullbacks are a common occurrence, not an anomaly.

Investors are often conditioned by recent bull markets to perceive any failure to hit new highs as an impending crisis, leading to undue anxiety.

Historical data confirms that for any 15-year holding period, there is a 100% probability of experiencing a bear market, defined as a 20% or more decline. This underscores the cyclical nature of market performance.

While extending one's investment horizon does increase the probability of higher returns, it also statistically increases the likelihood of encountering multiple significant bear markets, highlighting the need for psychological preparedness.

S&P 500 forward earnings have shown remarkable growth, increasing by 36.7% year-over-year.

In contrast, the actual S&P 500 index return over the past year is 17.9%, meaning forward earnings are more than doubling the stock market's return.

Matt highlighted that historically, forward earnings align within 1% of actuals, suggesting that this strong earnings growth fundamentally supports and justifies current market price increases.

This data underscores the importance of consistent investment rather than attempting to time the market, which is presented as the primary strategy for long-term success.

Financial charts illustrating this phenomenon are used to discourage impulsive trading behaviors that can lead to significant underperformance.

The complexity often found in financial charts can frequently frustrate clients, making clear demonstrations of the cost of missing market gains crucial for investor education.