Nvidia’s stock surge helped markets hit record highs. What is happening?

A sign to a Nvidia office building is shown in Santa Clara, Calif.

Nvidia, the chipmaker underpinning a much-hyped artificial intelligence revolution, saw its market capitalization pass US$2 trillion for the first time after markets opened Friday morning.

Shares of the Santa Clara, Calif.-based company continued a surge that began Wednesday after it reported earnings that surpassed expectations and that set out lofty expectations for demand in the year ahead.

Nvidia’s stock briefly crossed US$800 per share on the NASDAQ Friday morning and floated around that mark in the early afternoon.

Nvidia added US$277 billion in market value Thursday, setting a new record for a single-day gain on Wall Street and helping push the S&P 500 and the Dow Jones Industrial Average to an all-time high.

At the same time, Canada’s main stock index closed at a 22-month high on Thursday, buoyed by gains in technology and healthcare stocks.

That has helped the company vault from to US$2 trillion from US$1 trillion market value in around eight months — the fastest among U.S. companies and in less than half the time it took tech giants Apple and Microsoft.

Barry Schwartz, chief investment officer and portfolio manager at Baskin Wealth Management, tells Global News that Nvidia’s rise is “something impossible to comprehend.”

“Nvidia has been one of the most stunning performers the world has ever seen,” he says. “It all has to do with the insatiable demand for AI and what’s coming.”

Schwartz says that the large cap tech companies such as Amazon, Google, Meta and Microsoft have all signalled in their recent earnings calls that they intend to collectively invest billions this year to build out their capacities to handle the cloud computing workloads needed to power AI tech.

AI uses have exploded over the past year from engines like ChatGPT writing essays to more recent applications like Sora, which are capable of rendering full video based on simple prompts.

Since Nvidia is the market leader in producing the kinds of semiconductors that power the massive computing needs for these AI tools, Schwartz says that many of those companies’ investments are going to go directly to Nvidia in the years ahead.

Nvidia’s rapid ascent in the past year has led analysts to draw parallels to the picks and shovels providers during the gold rush of 1800s.

“The people who made the most money in the gold rush of the mid-1800s were the ones providing the tools to get the job done, not those hunting for the precious metal,” said Russ Mould, investment director at AJ Bell, per Reuters.

“Nvidia is effectively playing the same role today in this tech revolution.”

One of the biggest risks for Nvidia making good on the lofty goals it has benchmarked are holdups in supply, Schwartz says. Semiconductor shortages were a hallmark of the supply chain snags that came to define the COVID-19 pandemic, and he cautions there’s a chance the company doesn’t have the raw materials needed to meet demand.

“There’s limits to how many chips it can produce. There’s limits to how many factories it can build and foundries it can produce and supplies and components it can get. So that’s one of the biggest risk for Nvidia,” he says.

Schwartz cautions that there will likely be “boom-bust” cycles for AI and that Nvidia may not hold onto its market share as competitors like AMD and Taiwan Semiconductor try to edge out the current titan in the space. He also says there’s a chance giants like Amazon and Microsoft get into the semiconductor business themselves rather than rely on external suppliers.

“Unless Nvidia comes up with faster, innovative and proprietary technology that no one can duplicate, there is a risk at some point that its lead starts to get eroded for sure,” Schwartz says.

“But the tailwinds for the next two to three years for Nvidia, because of the spend by the technology companies to rush into this goldmine of AI, it means that you’re looking at some pretty decent results from Nvidia going forward.”

News from inflation in both Canada and the United States is also set to have an impact on interest rate paths and growth outlooks for stocks.

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Annual inflation cooled more than expected to start the year north of the border, Statistics Canada reported Tuesday, dropping below the three per cent bar in January.

That led markets to raise the odds of an interest rate cut from the Bank of Canada as early as April, though most forecasters are expecting easing to begin sometime in the summer.

There were some positive bits of inflation news in the U.S. on Friday morning as well, with revised figures for December showing prices rose less than initially thought for the month.

But the U.S. Federal Reserve this week pushed back on expectations for rate cuts to begin in the months ahead after hotter-than-expected inflation data last week dampened stock growth. Traders firmed up bets against any U.S. interest rate cuts before June after Fed Governor Christopher Waller on Thursday said he was in “no rush” to lower rates.

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BMO chief economist Doug Porter said in a note Friday that the stock market surge is likely to make a further case to the Fed not to rush its rate cut timeline. Amid sticky services inflation and a tight jobs market, a rally in equities could spur an uptick in consumer and business spending and “hardly calls out for the need for rate relief,” he wrote.

Interest rate expectations are critical for stock valuations for a few reasons, Schwartz explains. Firstly, businesses have debt to handle just like any household, so a lower path for interest rates removes some of the burden from borrowing costs on their bottom lines.

But investors are also more keen to put money in the stock market when interest rates are lower, he adds. When fixed-income products like guaranteed investment certificates (GICs) are providing bigger returns amid higher rates, there’s less incentive to jump into the riskier stock market. But as benchmark rates fall, investors are more likely to put their money in higher risk, higher growth opportunities to realize a return.

“What you need to know is when interest rates are high, stock valuations should be lower. When interest rates are lower, stock valuations are much more attractive,” Schwartz says.

That’s why day-to-day news on inflation and messaging from central bank officials can send aftershocks through the stock market.

While news month-to-month can shift market expectations for when those rate cuts will come and how steeply they’ll decline, Schwartz says there’s confidence among most analysts that interest rates in Canada and the U.S. will start to drop at some point in 2024 as the current inflation fight nears its end.

That’s part of what’s been fuelling a strong run for stock markets so far in 2024 and high-growth prospects like Nvidia, he says.

There’s a chance that these stock valuations have gotten ahead of themselves, he notes, and that there’s room for a correction if the current rate cut timelines priced into the market turn out to be overly bullish. But Schwartz says that corporate earnings in the first quarter of 2024 have so far been giving an “upbeat” impression for growth in the year to come.

“If interest rates aren’t going up anymore and inflation has been tamed, then that’s a pretty robust environment for stock prices,” he says. “Have stocks gotten ahead of themselves in the short term? Time will only tell.”

– with files from Reuters

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