Economic implications of rising inflation and how Nvidia’s future may be affected by its CEO’s departure.
If you are reading this note, Microsoft finally restored service following yesterday’s outage. For a few hours, I was reminded of what life looked like before the constant stream of emails, alerts and notifications. I took a walk, listened to my kids debate their favorite sports teams, talked to my husband about the holidays, and was asleep before 11 p.m. It was like a return to another era, before emails bombarded every second of your life. But I knew they were accumulating in the background. Borderline disturbing.
Also described as “borderline disturbing” was inflation, at least in the words of Chicago Federal Reserve President Austan Goolsby. The consumer price index rose 0.4% in October, as energy costs climbed 0.7% following a 5.2% increase in September. Food prices rose 0.5% for their largest gain since April. We don’t have annual figures because the government was shut down last October and the data is missing, but the ongoing acceleration in inflation underscores the now dangerously elevated momentum in prices.
Higher fuel costs are seeping out into the economy via transportation, food and the broader manufacturing supply chain. Today’s producer price report was no different and equally disturbing, showing an annualized gain of 6.5% in prices for the highest annual increase since November 2022.
Importantly, inflation is no longer confined to energy, tariffs or goods. Core service inflation remains elevated, suggesting that price pressures are becoming more deeply embedded throughout the economy. Reflecting those concerns, Fed Governor Christopher Waller recently indicated that another rate hike remains very much on the table. He took it one step further and said, “maybe we see a 50-basis-point hike” or a half-percentage-point increase.
Investors are understandably wrestling with what this means for economic growth and asset prices. The challenge is that inflation and higher interest rates are not affecting everyone equally. A commuter who relies on public transportation experiences higher fuel prices differently than someone driving long distances each day. Likewise, a homeowner with a lower-interest, fixed-rate mortgage is less sensitive to rising rates than a recent homebuyer. Businesses carrying significant debt burdens are facing a very different environment than companies with strong balance sheets and ample liquidity.
The result is a K-shaped economy in which the experiences of households, businesses and investors increasingly diverge. While a recession does not appear to be the most likely outcome, a moderation in economic growth seems increasingly probable. As that occurs, market leadership may narrow, returns may become less uniform and security selection may matter more than it has in recent years.
For investors, the appropriate response is not prediction but preparation. Diversification, quality balance sheets and ample liquidity remain valuable tools for navigating an environment that may prove more nuanced than the one we have experienced over the past several years.
While investors continue to focus on inflation and interest rates, another development this week reminded us that markets are influenced by more than macroeconomic forces alone. The resignation of Nvidia CEO Jensen Huang following reporting from The New York Times of extramarital affairs with executives at his company, as well as a woman and business associate alleged to be a Chinese spy, challenged not only Nvidia stock but markets overall. Nvidia Chief Financial Officer Colette Kress will serve as interim CEO and remain CFO while the board searches for Huang’s replacement.
Nvidia’s stock is down 30% from its Oct. 6 peak, wiping out hundreds of billions of dollars in market capitalization. At its high point, Nvidia’s market capitalization topped $5 trillion and represented about 7% of the S&P 500’s value.
Analysts think that even with Huang out of the CEO suite, continued investigations into his relationship with the alleged Chinese spy could overhang shares. The investigation might take months, extending the risk of damaging headlines.
While some have asked if this is a buying opportunity, it is hard to say that with conviction as, without a strong succession plan, Nvidia may struggle to execute amid what could be negative sentiment within the firm and more intense competition from other chip companies that smell blood in the water. There might also be ramifications for Nvidia’s business if the U.S. government enforces tighter restrictions on sales of its products—not only to China but to other parts of Asia.
More broadly, Huang, who founded Nvidia 33 years ago, was the public face of the entire AI boom and had a near cultlike following, the so-called “Jensanity” of fans who adored him, his slick black leather jackets and his boyish charm.
This is a blow to the AI boom and industry at a time when broader questions are swirling about the speed of AI transformation, monetization and regulation. That said, the company is more than the man, with over 60,000 engineers, researchers and professionals who continue to drive product development and customer relationships. The depth of Nvidia’s talent, intellectual property and market position will matter far more over the long term than any single headline.
That does not mean investors should dismiss the significance of this moment. Leadership is an asset, and strong leadership often commands a premium valuation. When uncertainty emerges around management, markets frequently reassess risk, sometimes aggressively.
For all the discussion of technology, valuation and market share, investing ultimately remains a people business. Products can be replicated, strategies can be copied and competitive advantages can narrow. Trust, credibility and leadership are harder to replace.
This week’s events serve as a reminder that character and stewardship remain important components of long-term investment success, even in an era increasingly defined by artificial intelligence.
Written by a human.