What's More Important for Investors, Nvidia's Earnings or Fitch's US Credit Downgrade?

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Two stories are dominating financial media early this morning, and they are causing a rarely seen level of divergence in the major indices. The first is the amazing blowout quarter and even more impressive hike in guidance reported by chip maker Nvidia (NVDA). NVDA has been trading close to 30% above yesterday’s close as a result, dragging the Nasdaq futures around 300 points higher as I write this.

The second story is the news that ratings agency Fitch has placed America’s AAA credit rating on negative watch as politicians play chicken with the “full faith and credit” of the United States. That news pushed Dow futures significantly lower yesterday afternoon, although as I write they are bouncing back somewhat.

The question for most investors, particularly for those who neither trade futures nor have big holdings in NVDA is whether these two market-moving stories have implications for the market as a whole, and if so, which will be more influential in the coming weeks and months. Should we be encouraged by NVDA’s success or worried by Fitch’s concerns?

On the surface it seems that, of course, the ratings story is more impactful. If no agreement is reached on the debt limit over the next week, America will run out of money and, just as would happen to any of us that failed to pay our bills, the country’s credit rating will be dinged. That is bad enough for an individual, but for a country whose currency and debt form the basis of the global financial system, it has the capacity to be devastating. Nor is that all from a market impact perspective. If government workers and social security recipients don’t get paid, it will have a huge impact on overall economic activity and a knock-on effect that will hit just about every market sector and industry.

The thing is, though, that all only happens if there is no agreement, and history tells us that there will be one. The whole idea of a debt ceiling and the political posturing that needing to formally raise it invites is stupid in so many ways, but the individuals doing that posturing are not. They have seen in the past that the ritual can be used to gin up the base, with talk of reining in big government on one side and protecting welfare programs that ensure the survival of vulnerable citizens on the other, but that as long as a last-minute deal is reached, blame will be equally apportioned and short-lived.

Brinkmanship, as ridiculous as it may seem, is a win/win for them. It is often said that in a democracy we get the government that we deserve, and until voters start to hold individual politicians accountable for this regular, potentially damaging display of partisanship, it will continue. The two main protagonists, Joe Biden and Kevin McCarthy, are very aware of that, but they are also aware that in order for them to garner favor from their respective bases without destroying whatever legacy they may have, they have to reach a last-minute deal that can be spun as heroic.

To be clear, Fitch voicing concern is the right thing to do, even if they know as well as anyone that a late deal is the almost certain outcome. They cannot completely ignore even a very remote possibility of something so cataclysmic. They would be derelict in their duty if they didn’t announce the obvious, that they are watching what happens for potential negative signs, and similar announcements from other ratings agencies can be expected. However, markets work on probability, and the miniscule chance that Biden and or McCarthy will willingly destroy their reputation for the rest of time means that any wobbles caused by the debt limit saga will be temporary.

Nvidia’s quarter and outlook, however, do have long-lasting implications. They are indicative of a fundamental shift in the balance of economic activity, but it is one that has been playing out for around a quarter of a century. Wealthy nations have always owed their wealth in part to technological breakthroughs, but the nature of technology has evolved. Whereas once it was focused on more efficient manufacturing of goods, it is now more service-oriented, with NVDA’s chips exploiting the trend towards AI, autonomous vehicles, and data analysis.

That means that the Dow Jones Industrial Index, once the only benchmark that anyone paid attention to, is less relevant today than it has ever been. Therefore, for investors to capture overall market gains, their main focus should be on the more tech-oriented Nasdaq through something like QQQ than the Dow through DIA. QQQ will be more volatile than DIA, with periods when growth is out of fashion such as we saw last year causing some big downturns, but over time, it better represents the market’s future.

These two stories are understandably dominating the news this morning but, as is the way with news, both will be forgotten in a few weeks. In the case of the tragic comedy that is the debt ceiling negotiations, that will be fully justified, but the Nvidia story is indicative of a fundamental change that should influence investors for years to come. So, if you are going to react to one of them, it should be that, and bolstering tech holdings at the expense of industrials and manufacturing is a good way to go about it.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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