SUMMARY: NVDA is up +26% this morning. That’s +$196 million float-adjusted market cap. That’ll certainly be a boost to our Early Cyclical call, though it’ll take the gas out of a near-term Deep Cyclical mean reversion play and make fading Tech dead wrong so far. Hard to take a victory lap off one company’s performance, but it is somewhat emblematic of the macro themes we want to isolate. NVDA is Cyclical, but its tailwinds (AI) are isolated from the slowdown in global economic growth, unlike Deep Cyclicals.
Snowflake, another AI/Tech play, is down -13% this morning. Correlations are breaking down, and there is more alpha in stock picking again now that macro intensity is fading.
EUROPE RISK: European equities had their worst day in two months yesterday, underperforming -1.1% relative to the S&P. 6mo outperformance is still an 85th percentile event. Throughout this period of outperformance, US recession risk was perceived as higher given concerns about a possible wage-price spiral and bank failures. The energy shock from the Ukraine-Russia war was also fading and China was reopening, both of which were supposed to support Europe.
Recent data has shaken up the narrative though. Inflation in the UK surprised to the upside (again) while recent manufacturing PMIs showed more pessimism. Germany’s economy shrank by -0.3% in 1Q, after contracting -0.5% in 4Q. GDP was expected to be flat. French business confidence fell in May to its lowest level in two years. Yet services data are still fairly strong and inflation expectations in the eurozone are rising, reminiscent of the service strength the Fed is fighting in the US. Core CPI across the Eurozone is 5.6%.
Inflation trends mean the ECB and BOE may have farther to go than the Fed. Inflation expectations in the Eurozone have been rising relative to the US too, while investors are unwinding some of acute recession risk positioning in the US (HERE). Recession risk in Europe may need to be recalibrated if data stays too hot and central banks need to tighten FCI further. That would be a near-term tailwind to the US closing the performance gap.
MARKET VIEWS: NVDA is up +26% this morning. That’s +$196 million float adjusted market cap. That’ll certainly be a boost to our Early Cyclical call, though it’ll take the gas out of a near-term Deep Cyclical mean reversion play and makes fading Tech dead wrong so far. Hard to take a victory lap off one company’s performance, but it is somewhat emblematic of the macro themes we want to isolate. NVDA is Cyclical, but its tailwinds (AI) are isolated from the slowdown in global economic growth, unlike Deep Cyclicals.
Snowflake, another AI play, is down -13% this morning. Correlations are breaking down, and there is more alpha in stock picking again now that acute macro risk (nearby recession odds) are fading.
Market internals have been mixed as well. Risk-on is ahead of risk-off, but both groups are down on an absolute basis, the spread is narrow, and day-to-day volatility has been high. Value and Growth have both gained, with Value leading. Macro uncertainty as eased with recession odds, but the debt ceiling and TGA concerns are keeping market correlations elevated.
EUROPE RISK: European equities had their worst day in two months yesterday, underperforming -1.1% relative to the S&P. 6mo outperformance is an 85th percentile event. Throughout the period of outperformance, US recession risk was perceived as higher, what with a possible wage-price spiral in the US and not in the EU and bank failures in the US. The energy shock from the Ukraine-Russia war was fading. China was reopening.
Recent data has shaken up the narrative though. Inflation in the UK surprised to the upside (again) while recent manufacturing PMIs showed more pessimism. Germany’s economy shrank -0.3% in 1Q, after contracting -0.5% in 4Q. GDP was expected to be flat. French business confidence fell in May to its lowest level in two years. Yet service data is still fairly strong and inflation expectations in the eurozone are rising, reminiscent of the service strength the Fed is fighting in the US. Core CPI across the region is 5.6%.
The ECB and BOE have farther to go than the Fed does. Recent inflation data is keeping the pressure on. Inflation expectations in the Eurozone are rising relative to the US too. Investors are unwinding some of the acute recession positioning in the US (HERE) and may have to recalibrate recession risk in Europe if data stays hot and central banks have to deliver slower growth. That’d be a near-term tailwind to the US closing the performance gap.
Of note, Europe doesn’t have nearly the same concentration of equity performance as the US. We think mega cap tech is set to cool off in the US, which would be a drag on the S&P. With NVDA’s continued strength, that has yet to materialize and demonstrates concentration can be a good thing when it’s the fastest growing mega caps in the world. Strength in Europe has been broader based.
Source: Bloomberg, 22V Research
