It’s never a good sign when markets sell off on good news, but that is exactly what happened on Thursday. The Nasdaq is lower by 1.5% and is weighed down by the Magnificent 7. Nvidia is down by more than 4.5% today, and $200bn has been wiped from its market cap because its results were just too good.
Nvidia’s history of weak response to earnings
Nvidia is not a stranger to its stock price selling off after an earnings report, it slumped more than 8% a year ago, which is the stock’s largest ever post-earnings sell off. However, ahead of its earnings release, there were hopes that massive revenues and strong guidance would placate markets and even soothe fears about the AI trade. This has not turned out to be the case. Although Nvidia tried to calm concerns about AI demand last night, for example, saying that corporate demand for AI agents was skyrocketing, this was not enough.
The Maleficent 7
Other victims of today’s sell off include Broadcom, Amazon, Google and Tesla as the Magnificent 7 turn into the Maleficent 7. Combined, these companies have lost nearly $400bn of market cap between them so far today. Nvidia is still the world’s most valuable company, but Apple is snapping at its heels and is closer to returning to the top after today’s reaction to Nvidia’s earnings report.
Investors ditch US tech, and defensives
The mood music has shifted for tech stocks, and this is evident in today’s price action. The S&P 500’s tech sector is down more than 2% so far, followed by communications and materials. The top performing sectors include financials, energy and real estate. Interestingly, typically defensive sectors of the stock market, like consumer staples and utilities, are not rallying in response, which suggests that the sell off is not about a rotation into defensive stocks, and is instead investors ditching tech.
Tech sector rotation: Software stocks catch a break
Interestingly, software stocks, which have been hit hard by the AI scare trade, are in the green today and are avoiding the worst of the sell off. IBM, Gartner, GoDaddy, Applovin and ServiceNow are all higher. This suggests that there is a rotation within the tech sector. Software stocks have sold off sharply in recent weeks, while semiconductors have been spared. This is now reversing, as fears rise about whether the hyperscalers will be able to maintain current levels of capex spend grow.
This suggests two things: AI is a dominant theme this year, but not for positive reasons. Secondly, all of tech is at risk from a sell off as AI makes greater inroads into the global economy. The market is telling us that it is not ready to buy back into the AI trade, even though many tech stocks, including members of the Magnificent 7, are now cheaper on a P/E basis than the overall S&P 500.
Gilt market assuming Labour will win Gorton and Denton byelection
Events in Cuba are also driving risk aversion on Thursday, and sovereign bonds are catching a bid. The US and the UK are leading the charge. Demand for UK bonds may not last, depending on the outcome of the Gorton and Denton byelection. Voting is taking place today, with the results coming later this evening/ tomorrow morning. It is a three-way race between Labour/ Greens/ Reform, and it is also seen as a referendum on Kier Starmer’s premiership. If Labour lose the once safe Gorton and Denton seat, will Kier Starmer be forced to step aside for a more radically left-wing PM?
There is a lot resting on these results, and the pound is selling off on Thursday, and is the weakest currency in the G10 FX space. There could be further pain for sterling if a Labour loss leads to a change in PM, this could also weigh on Gilts as we move to the end of the week. Bonds and sterling are giving us mixed signals today, the fact that UK Gilts are the top performers globally today, could be a sign that the market assumes Labour will win, even if the victory is slim.
Source: https://www.fxstreet.com/news/us-stocks-sell-off-on-nvidias-good-news-as-traders-wait-for-results-of-key-uk-election-202602261937
