Q4 GDP Revisions Signal Higher Rates, Stagflation

Stocks jumped higher at the open this morning on strong Nvidia (NASDAQ: NVDA) earnings before paring back their gains entirely through noon. The Dow, S&P, and Nasdaq Composite all traded lower following another wild early session as Q4 GDP revisions diminished today’s bullish rebound.

Nvidia reported an adjusted EPS of 88 cents last evening, beating the estimate of 81 cents. Revenue topped expectations as well ($6.05 billion reported vs. $6.00 billion estimated) but the biggest surprise came from the company’s data center division, which produces AI chips.

“Generative AI’s versatility and capability has triggered a sense of urgency at enterprises around the world to develop and deploy AI strategies,” said Nvidia CEO Jensen Huang.

AI investing recently exploded in popularity since the release of AI chatbot ChatGPT. In the earnings call, Huang added that AI is at an “inflection point” that has caused businesses to buy Nvidia chips for machine learning development purposes.

This statement made Nvidia the defacto “AI stock” in one fell swoop. NVDA shares exploded 8% higher after hours before rising another 5% when trading opened this morning.

Goldman Sachs analysts upgraded the stock from “neutral” to “buy” as a result of the earnings report.

“The combination of positive estimate revisions and a potential expansion in the stock’s multiple – consistent with historical recovery phases – will drive continued outperformance in the stock,” explained Goldman strategist Toshiya Hari.

Rival chipmakers surged, too. Advanced Micro Devices (NASDAQ: AMD), Qualcomm (NASDAQ: QCOM), and Micron (NASDAQ: MU) all opened significantly higher, albeit not nearly as much as NVDA.

The bullish blast was short-lived, however, once investors had time to digest the latest GDP revisions. Q4 GDP was revised lower from the previously estimated quarter-over-quarter (QoQ) gain of 2.9% to 2.7%. Annual consumer spending growth also dropped, falling from 2.1% to 1.4%. This drove most of the downward revision in total GDP.

Despite the revision in spending, the core Personal Consumption Expenditures (PCE) Index – the Fed’s favorite inflation gauge – was revised much higher. Core PCE climbed 4.3% QoQ vs. the prior estimate of 3.9%.

The red-hot reading beat the Q4 consensus estimate of 3.9%. When combined with slumping consumer spending numbers, it was a major sign of stagflation.

“Although the U.S. economy is still growing, it is losing steam,” said Economist Intelligence Unit economist Cailin Birch.

The Fed has repeatedly stated that a slowing economy won’t alter its rate hike path if inflation remains high. A hotter-than-expected core PCE revision will only shift Powell & Co. more hawkish than dovish.

The market seemed to realize that today, and that’s why stocks made an abrupt “about face” shortly before noon.

Yes, AI is very cool. And AI-related stocks should outperform so long as the “AI revolution” persists.

But will AI hype save the broader market from a bearish reversal? Not if economic data continues to show that growth is slowing, inflation is high, and labor is tight.

Today’s GDP revisions indicated that two of the three (slowed growth, high inflation) are still a problem. A slew of reports coming out tomorrow – January PCE index, personal income, consumer spending, new home sales, and consumer sentiment – might make things worse.

Five Fed officials (that are not named Powell) speak tomorrow as well starting at 10:30 am EST. Given that Fed officials tilted hawkish last week, tomorrow’s speeches could easily do additional damage to stocks, especially if tomorrow’s data adds to “stagflationary” fears.


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