To my clients:

It was a down week for North America stock markets with the Canadian TSX finishing down 0.6%; the U.S. Dow Jones Index down 1.9%; and the U.S. S&P 500 down 2.0%.

Market volatility, which picked up at the beginning of November continued this week. This volatility was in spite of stellar earnings results from the world’s most valuable company – Nvidia. Nvidia easily beat market expectations its three most meaningful metrics: earnings growth, revenue growth and forward guidance. On forward guidance, the company expects $500 billion (yes, that’s half a trillion!) in revenues in 2026 with gross profit margins of over 73% and a net profit margin of over 50%! Collectively, these are unprecedented numbers and the reason why the company is now the world’s most valuable. Yet markets sold off yesterday in the first market session after Nvidia released earnings. The question is, why? I’ll preface my answer by noting that there is no definitive answer to the question of “why”. But I do have some opinions which I will now share…

First, lets begin with the obvious. Artificial Intelligence (AI) related investments have had a stellar run ever since OpenAI released its first iteration of ChatGPT almost exactly 3 years ago. This stellar run has led to chatter about a “bubble” in AI related stock valuations. Readers will know that I don’t agree with the “bubble” worries, but I do admit valuations are getting stretched and a breather (i.e. a pause and slowdown in continued share price growth) at some point was much needed. Perhaps now is that time.

Second, there were sharp declines in crypto currencies this past week. Rationale for why the crypto-currency declines might have occurred are beyond the scope of this update, but it’s conceivable that losses in crypto currencies (such as bitcoin) may have triggered selling in other assets (such as stocks, particularly technology stocks) as a means to cover those crypto currency losses.

And third, yesterday’s sell-off may have resulted from the release of the long-delayed September U.S. Employment Report. This report showed that job gains in September came in at 119,000, more than twice what economists expected. The thinking here is that, all else equal, a resilient job market would reduce the likelihood of a Fed rate cut in December and possibly well beyond. Certainly the messaging from Fed officials, and Fed Chair Jerome Powell in particular, has recently been tempering market expectations for further rate cuts. But this morning, New York Fed Chair John Williams (who, in addition to U.S. Fed Chair Jerome Powell and Vice Chair Philip Jefferson, is one of the three most influential voting members at the U.S. Federal Reserve) suggested in prepared remarks that he sees “further adjustment (to the Federal Funds rate) in the near term.” Given Mr. Williams prominent position at the Fed, it is believed that he would not have made such a comment in prepared remarks without first coordinating with Fed Chair Powell, Everything I’ve learned over more than two decades of closely watching the Fed leads me to agree with the perspective that Mr. Williams remarks were a coordinated message to the markets and that a rate cut will be forthcoming soon. For what its worth, market odds of a December rate cut shot up from around 20% before Mr. Williams speech to over 70% thereafter (and the stock markets reversed from slightly negative to up very strongly).

Overall, I think all three of my offered explanations contributed to this week’s market machinations, but I personally attribute the most weight to the third, While more volatility may lie in the weeks ahead, I certainly do not think we are on the cusp of a sustained and dramatic market downturn.

Lastly, and related to the Nvidia comments that kicked off this week’s update, I initiated a small starter position in Nvidia this morning (roughly 1% of overall client stock exposure). Nvidia is a name I’ve been watching ever since ChatGPT launched three years ago, and just was never quite able to pull the trigger (although I came very, very close about a year ago). The greater than 10% pullback in Nvidia from its recent highs combined with its stellar earnings results this week allowed me to finally add a position on behalf of clients. I’d like to bring it up to a full-weight position in client portfolios in the weeks and months ahead, but will be very selective in doing so.

That’s it for this week. All the best,

Nick

Nick Scholte, CIM, FCSI

Senior Portfolio Manager
RBC Dominion Securities Inc. │ Tel: 604.257.7569
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