Market Summary
Following Nvidia’s earnings the prior week, the market was able to take a sigh of relief heading into the extended Labor Day weekend, hovering just below fresh all-time highs with second quarter earnings supporting the recent rally from April’s lows.
Looking ahead, the focus will shift towards economic data related to the future path of Fed rate cuts – which is what we saw last week. Expectations for rate cuts to resume in September have helped the market maintain recent levels near all-time highs, with some pockets of hesitation stemming from weakening labor market data.
The consideration has always been – is the Fed cutting rates because it is able to, or because it needs to.
The latter thought would be due to an overly weakening labor market, characterized by rising unemployment, which would be a negative in terms of supporting consumer spending and economic growth.
The former would be due to the Fed successfully taming inflation without overly slowing down the economy – a soft landing. Thus far, the Fed has largely been able to obtain this goal despite the added uncertainty of tariffs.
To be clear – the labor market isn’t necessarily weak, as unemployment remains at a healthy 4.3%. But recent data suggests a trend of weakening. Hiring activity has notably slowed with average hourly earnings growth decelerating and a modest rise in unemployment. The latest data from August continued this trend with only a 22,000 increase in job adds, following July’s upwardly revised 79,000.
United States Non-Farm Payrolls
Prior to this report, the market was pricing in 50 bps worth of cuts before year-end – following the August report, the market quickly priced in at least 75bps worth of cuts. The market’s reaction was on the optimistic side, with a more aggressive rate cut path and less restrictive monetary policy being seen as a positive for continued momentum within equities. At the same time, a layer of concern exists from the idea that the Fed is already too late to the game.
Tariffs
Tariff news contributed to the market solidifying rate cut expectations, as a U.S. court of appeals ruled most of President Trump’s tariffs are illegal. In particular, the ‘Liberation Day’ tariffs, also known as reciprocal tariffs, were ruled to be exceeding the President’s authority under the International Emergency Economic Powers Act IIEEPA). The ruling does not take effect until October 14th, with the expectations for the administration to appeal the decision to the Supreme Court.
Thus far, the market’s reaction has been mixed. The decision fits expectations that market participants have had for a while – as the same initial ruling was made earlier in May. Despite this, the recent ruling has contributed to some uncertainty. Concerns primarily relate to potential impacts on economic growth, inflation, and national debt, which the market will continue to speculate on until receiving more clarity. For now, tariffs remain in effect, and the continued delay will likely result in some inflationary pressures.
Earnings & Corporate News
Nvidia (NVDA) – The leading AI-chip giant once again reported an impressive earnings beat with data center revenue growing 56% from the prior year to $41.1 billion driven by Blackwell chip architecture and continued AI demand. Nvidia’s most difficult competitor is itself with investors needing to adjust expectations from the explosive growth seen in prior quarters. Given the strong rally into earnings, NVDA was susceptible to some profit-taking following the report with China export uncertainty still a key factor in the company’s outlook. Despite the company securing export licenses, export restrictions and suspension of older H20 chips to China continue to weigh on sentiment. Nvidia remains the AI market leader and a crucial holding in our portfolios. The company remains extremely well positioned for continued AI infrastructure growth with near-term considerations of China and slowing data center growth the primary risk considerations.
Broadcom (AVGO) – Following Nvidia’s lead, Broadcom (AVGO) reported stellar fiscal Q3 earnings with revenue growing 22% year-over-year to $16 billion stemming from clear demand for AI-chips. AI remains the distinct growth agent with forward guidance driving further enthusiasm despite the stock’s strong run. Notably, AVGO boasts an order backlog of $110 billion, giving investors impressive revenue visibility into year-end. Margins remain incredibly strong (gross margins ~78%) along with free cash flow (~44%). The partnership with OpenAI to supply custom chips beginning in 2026 has spurred further buying interest, as well. Broadcom is another key AI-driven chip company we believe will continue to display industry dominance. Near-term risk considerations stem from relatively weaker business segments outside of AI and valuation sensitivity.
Salesforce (CRM) – Enterprise software leader, Salesforce, reported a strong earnings beat with an 11% year-over-year growth in remaining performance obligations (cRPO) to $29.4 billion. Ultimately, forward-guidance was not enough to overly impress investors. Software focused companies like CRM are an AI-adjacent investment with unique considerations – specifically related to customer demand fluctuations. Historically, the company has wavered during times of macro uncertainty when businesses pull back on enterprise spending. This year, the stock price has struggled for this reason and a few others – namely the lack of visible results from AI investment – which is a theme for many software companies like Adobe (ADBE) and Service Now (NOW). In the case of Salesforce, the main pain points center around the slow adoption of Agentforce – the company’s AI-powered customer service agents. Combined with valuation concerns and broader macro uncertainty, investors will likely need to see AI-driven results before regaining conviction. For our portfolios, we believe the valuation gap has created a welcomed buying opportunity.
Week Ahead
This week, focus will turn towards inflation with August numbers releasing on Thursday. Investors will be looking for a continued downtrend in inflation to support rate cut expectations and help mitigate labor market worries. Sparse earnings include Adobe Systems (ADBE), which will report on Thursday, as well.
As always, if you have any questions or comments please do not hesitate to reach out.
Michael Neill, CFA
Chart source: Tradingeconomics