AI finds a tough crowd, blockbuster earnings buoy markets and the Fed’s inflation problem.
It’s Memorial Day weekend, and the start of the U.S. driving season that extends to Labor Day. Gasoline now costs more than $4.50 a gallon across the U.S., the highest heading into Memorial Day weekend since 2022. If you think that’s bad, wait until you go to the grocery store to buy some steaks and burgers to barbecue.
Stock markets traded sideways this week, even though the almighty Nvidia posted earnings that more than impressed. The chipmaker’s first quarter revenue surged 85% year over year to $81.6 billion, driven by explosive data center demand and the success of its Blackwell 300 GPUs.
Energy stocks were the hot commodity this week, so to speak, as other sectors and segments saw recent momentum stall out. In an unhappy but related development, bond yields surged as inflation woes increased, with the 10-year yield reaching one-year highs and trading at 4.6% and the 30-year bond yield moving above 5%, its highest level since 2007! The offshoot of that is average U.S. mortgage rates are over 6.50%, yet another downbeat data point for young people looking for their dream house with a picket fence.
Those young people are also worried about jobs, judging from the range of boos coming at commencement addresses toward speakers ranging from former Google CEO Eric Schmidt to real estate executive Gloria Caulfield in recent weeks. The audiences were not impressed as these business mavens heralded the possibilities of AI in their speeches to graduates who have a 5.4% unemployment rate (compared to 4.3% for all workers in April), according to the St. Louis Fed, with an average debt of $35,000 on their personal balance sheets.
Can you blame the students for their frustration? AI market disruption narratives are at a fever pitch, and that fever is only getting hotter as IPO mania is here. Cerebras, CoreWeave, OpenAI, Anthropic, Databricks, SpaceX—all are on the docket. Indeed, SpaceX’s long-awaited IPO filing described how the company is going after a $28.5 trillion addressable market “to build the systems and technologies necessary to make life multiplanetary, to understand the true nature of the universe, and to extend the light of consciousness to the stars.” Nobody ever accused Elon Musk of being short on ambition.
But, while AI evangelists may tell you otherwise, the technology looks more like a margin tailwind than a labor-market wrecking ball that will portend the onset of a dystopian reality. Companies are running leaner and hiring less, but widespread layoffs are not occurring. For sure, though, apprehension to over-hire is real and that is driving higher profitability in an indirect way.
The S&P 500 companies reported 28.4% year-over-year earnings growth in the first quarter. Over the long-term, investors get excited when earnings grow 6% to 8%, and really excited when they grow 8% to 12%. Plus, S&P 500 companies posted their highest margin on record—a 13.4% net profit margin, compared to a 6% to 7% long-term average.
This is why markets are holding up so well despite the headlines of war and the fears of irrational exuberance in stock price valuations. Are investors too complacent about risks? Maybe, but maybe not with that context of earnings growth and profitability. Of course, some will say those numbers are being driven by a narrow group, and they are correct, as the rest of market looks more like those long-term averages. Hence the uneasiness we all feel, and why in the quarters ahead, the ability for the broad market to show the benefits of AI to growth and profitability, and for AI companies to demonstrate robust monetization, will dictate the market narrative.
Those are the factors that will drive markets in the short-term, but it is notable that investors also started worrying about the risk of an interest-rate hike this week. Following the release of the FOMC meeting minutes and comments from Chicago Fed President Austan Goolsbee saying, “we’ve got an inflation problem,” fed funds futures started pricing for higher rates for longer.
At times like these, I try to remind myself that two things can be true at the same time: We can be way too complacent on the risks while we are also way too constructive on the benefits of AI. Therefore, we keep coming back to the conclusion that maintaining balance in your plan is the best path. Outsized bets beyond what are already outsized in your market index exposures is probably not a great idea, and the recent surge in energy prices has taught us that even the most unloved sectors can have their day in the sun. But in order for us to build a path to your day in the sun, keeping a balanced approach and having a current financial plan is key.
This Memorial Day weekend, please join me in honoring our heroes who died for our country. May we never forget their ultimate sacrifice and those of our veterans and those currently serving in the military.
Written by a human.