Summary

Nvidia stock staged a strong intra-day rally of 14% on Thursday after new data showed softer-than-expected price increases in October that harbingers a potential "dovish response from the Fed".

The stock's recent gains as a result of mitigating strategies taken against the newly imposed export restrictions to China is also welcome news, underscoring investors' confidence in Nvidia's longer-term prospects.

Yet, mounting macroeconomic uncertainties still remain a large overhang on the stock's near-term performance, with renewed concerns of a crypto downturn adding complexity to the Nvidia stock's outlook.

The following analysis will walk through some of the latest developments in Nvidia's operating, macro and regulatory environment, and gauge their respective implications on the stock's near-term performance.

Justin Sullivan

The better-than-expected CPI print for October unleashed a rally in both equities and credits on Thursday (November 10), with the tech-heavy Nasdaq 100 index adding close to $1 trillion in market cap over the span of one session. Nvidia (NASDAQ:NVDA) was one of the biggest gainers, staging a 14% intra-day rally to outperform the broader PHLX Semiconductor Index (SOX).

Signs of easing financial conditions is currently a core driver of investors’ confidence, which is corroborated by the strong intra-day gains observed during Thursday’s session. Yet, the broader market climate remains fragile, as the Fed’s monetary policy tightening trajectory has yet to peak, with consumer slowdown only now becoming more prevalent.

And specific to Nvidia, the company also faces operating challenges from worsening geopolitical tensions, though its recent release of the A800 data center GPUs exclusive to the Chinese market in compliance with U.S. regulatory requirements is a step in the right direction. But renewed crypto contagion fears are now sparking fresh concerns on the near-term performance of Nvidia’s GPU segment, which is already reeling from a broader decline in global PC demand this year.

Regardless of the near-term macro and industry-specific headwinds though, Nvidia’s robust one-day gain on Thursday underscores the strength of investors’ confidence in the stock still, given the underlying business’ positive potential in benefitting from longer-term advances stemming from its massive market share across high-growth verticals spanning high-performance computing (“HPC”) to AI-driven innovations like self-driving vehicles and the metaverse. With market conditions still choppy in the months ahead, the Nvidia stock’s latest rally is likely to fizzle, creating more compelling entry opportunities than its current valuation.

Macro Overview

The Federal Reserve maintained a hawkish tone after raising 75 bps for the fourth time consecutively this year in November as inflation remains far from the desired 2% target. With the October inflation print coming in better-than-expected, market participants are becoming more optimistic that the worst of rapid price increases this year are now behind, playing favorably to desires for a more dovish monetary policy trajectory and improving financial conditions ahead.

October headline CPI came in at 7.7%, softer than the average consensus estimate of 7.9%, marking the “smallest annual advance since the start of the year”. Meanwhile, core inflation – which strips the impact of volatile food and energy prices – came in at 6.3%, which is also a welcome improvement from consensus calls for 6.5%. Equities rallied across the board in response to the softer-than-expected inflation print, as it points to early signs of a structural slowdown in pricing increases that the Federal Reserve has been looking for before considering easing its monetary policy tightening plans. The latest improvement in pricing increases is supportive of the Fed’s planned rate hike for 50 bps in December, marking possibly the first deceleration in the pace of tightening since June.

Yet, any possibility of a sustained rally on signs of easing inflation and a potential Fed pivot remains remote. At 7.7%, current price increases remain far removed from the Fed’s desired 2% target, which aligns with Fed Chair Jerome Powell’s commentary earlier this month that the terminal rate could end up being higher than previously anticipated as tightening continues into restrictive territory to ensure inflation is contained. The remarks were further reinforced by Dallas Fed President Lorie Logan on Thursday (November 10):