Markets Focus on Chip-Fueled Hopes Colliding with Credit Worries

Markets are betting on chips to counter the weight of stretched valuations and tightening credit.

Key Takeaways

• Chips Earnings in Focus as Ballooning Debt Faces Skepticism: This is an important day for AI-driven market sentiment as Nvidia’s results are due after the close. The focus will probably be less on earnings and more on further investment and financing plans, as the market’s early euphoria gives way to anxiety about ballooning debt. Even Amazon’s $15 billion bond sale saw its order book shrink from about $80 billion at its peak to roughly $47 billion once spreads were finalized. A clear sign of rising risk aversion in credit.

• Yen Slides Toward ¥156, Forcing BoJ Closer to the Line: The Japanese yen continues to weaken. The U.S. dollar/Japanese yen exchange rate is testing ¥156, a remarkable move from levels near ¥140 in April. This is partly policy-driven and partly a reflection of risk-on sentiment in global markets. Today, the BoJ signaled plans to phase out its in-house inflation gauge and instead use CPI to steer policy, which is expected to improve communication with markets. At these levels, the odds of some policy action or communication to stabilize the yen are rising.

• CAPE Near 40x Puts U.S. Equities in Rarefied Bubble Air: The CAPE multiple has expanded by almost +5 points since May to 39.5x, which exceeds every prior bubble peak in the past century outside of the unprecedented Tech mania in the late 1990s and early 2000s. This compares to the 1929 bubble peak of 33x, the Nifty Fifty peak in the late 1960s of 24x, and the 1987 pre-crash peak of 18x. The average bubble peak in this valuation metric is 26x. It is now pressing against 40x. We are in the stratosphere.

While We Were Sleeping

This is an important day for AI-driven market sentiment as Nvidia’s results are due after the close. We think an upside surprise on headline EPS is more likely than not, while a negative surprise could become yet another reason for the stock market sell-off to continue. This time, however, the focus will probably be less on earnings and more on further investment and financing plans, as the market’s early euphoria gives way to anxiety about ballooning debt. Tech “hyperscalers” have already issued about $121 billion of investment-grade dollar bonds this year (around $81 billion since September alone), prompting questions about who will ultimately earn an adequate return on this massive capex funding.