Nvidia Results Breathe Life Back Into the AI Trade -- But Make No Mistake, This Is Still a Major Price Bubble

Nvidia sparks a broader rally with strong revenue and earnings — but its hyperscaler customers are the ones to worry about.

Key Takeaways

• Nvidia Earnings Reverse the Recent Declining Trend: It has been many decades since one stock could move the market like Nvidia. Then again, it is a near-$5 trillion mega cap that accounts for 8% of the S&P 500, and the company did indeed deliver across the top line, bottom line, and forward guidance after the bell yesterday. The results kyboshed the malaise in the growth arena of the past several weeks.

• Valuations Look Excessive Even with Strong AI Growth: This remains a bubble of epic proportions, keep that in mind, and while not in the same league as the late 1990s, a 38x P/E multiple for the Tech sector is about 60% above the two-decade average of 24x. Do the discounted cash flow assumptions really make sense even in the aftermath of Nvidia’s results? Color me a skeptic that the total size of the AI market is going to swell eightfold in the next half-decade, which is what is currently being priced in.

• Market Concentration and Debt Strains Remain Concerning: The S&P 500 has become concentrated like never before, with the top ten companies comprising 40% of the total market capitalization — and even within that group the concentration has really narrowed to a Mag Three — Nvidia, Microsoft, and Alphabet (the only three of the Mag Seven that have managed to outperform the index this year). What was not resolved in Nvidia’s results were all the issues still overhanging the rest of the Tech sector — the circularity of the deals being announced, the debt binge, the strains on the energy grid, and the intensifying competition coming out of China.