The rise of artificial intelligence has many investors – or perhaps we should call them speculators – desperate for tech stocks that will allow them to participate in Wall Street’s modern gold rush. It is the fear of missing out on a dynamic that typically coincides with market bubbles, although the debate over whether we are currently in a bubble is still ongoing. Now, Nvidia’s giant AI conference, GTC 2024, could add fuel to the fire of FOMO this week, drawing even more money into AI-related stocks, according to Ed Yardeni of Yardeni Research.
“We may see a scenario where FOMO buyers jump into Nvidia and other tech stocks during Nvidia CEO Jensen Huang’s speech from 4 to 6 pm EST on Monday,” the veteran economist and Wall Street strategist wrote in a note Sunday to customers, calling the conference “Nvidia’s three-day AI lovefest for developers.”
But investors hoping for another AI-induced stock market rally should be cautious. The Federal Reserve’s Open Market Committee (FOMC) meets Tuesday and Wednesday to discuss monetary policy, and Chairman Jerome Powell may pour cold water on the stock rally in his follow-up press conference.
“Bearish traders could take the market down on Tuesday afternoon,” Yardeni warned, adding that fear could spread if the Fed chair signals a “more aggressive” outlook.
For about two years now, Fed officials have been trying to tame inflation using rising interest rates as their main weapon. The tactic has increased borrowing costs for businesses and consumers nationwide, but it has also been quite effective, reducing the annual inflation rate from its high of 9.1% in June 2022 to just 3.2% in February . Powell said earlier this month in his semiannual monetary policy report to Congress that falling inflation gave him confidence that he “probably” will be able to cut rates at some point this year.
But Yardeni noted that Powell and company won’t like what they saw in February’s consumer or producer price inflation reports. Both reports surprised economists, coming in warmer than expected and signaling that the slow decline in inflation has now largely eased.
Yardeni said he believes this new evidence will lead Powell to be more aggressive this week. He also argued that the Fed’s Summary of Economic Projects (SEP), a baseline estimate of Fed officials’ economic forecasts, will likely show that Fed members now expect inflation to moderate at a “slower pace.” and they expect only two, rather than three, rate cuts this year.
With higher-than-expected interest rates set to weigh on corporate profits, Yardeni warned that markets could face short-term trouble, despite the AI FOMO that will be reinforced by the Nvidia event. “[Investors and traders] could continue to sell if Powell curbs his talk of easing restrictions,” he warned.
Yardeni noted that markets have already spent the last few weeks adjusting to the prospect of smaller interest rate cuts. In his view, both 10- and 2-year Treasury yields have risen about 6% since March 8, to 4.34% and 4.74%, respectively. And the iShares 20+ Year Treasury Bond ETF, which tracks Treasury securities with a maturity longer than 20 years, has now fallen for a record eight consecutive days, a sign that investors are pricing in fewer rate cuts and, therefore, an increase in Treasury bond yields.
Despite investors’ new outlook for smaller rate cuts, major market indexes are still in “overbought” territory, leaving them vulnerable to a correction, according to Yardeni. “If the Fed remains in pause mode longer than expected, the stock market rally could also take a pause,” he said.
To support his view that investors should be cautious, Yardeni referenced comments from Michael Brush, a MarketWatch columnist and publisher of the Brush Up on Stocks newsletter, who noted that insider sales trends don’t look great.
“Domestic buying continues to remain significantly limited relative to selling, indicating a cautious view of the stock market among corporate executives and directors,” Brush said. “The buying we had seen in the biotech sector and regional banks has also dried up.”