Nvidia will report on Q3 tomorrow after the market close.

Let’s revisit a couple of observations from my August note, just following the Nvidia Q2 earnings.

First, we knew going in that the tech giants were buying as many Nvidia GPUs as Nvidia would sell them.  The price was continuing to go up, and they were all willing to spend whatever it took (which still applies).

With that, we had a good idea that demand in the quarter for Nvidia would be strong.

Indeed, it was another triple-digit year-over-year growth quarter – the fifth consecutive one.  And they made a lot of money.  The net income of nearly $17 billion in the quarter was more than the full year revenue of just three years ago.

But we also observed these two things in that Q2 report:

1) the valuation dynamic for Nvidia had changed,

2) And supply constraints seemed to have capped Nvidia’s growth capacity.

On valuation, as the revenues have exploded higher since early last year, so has the profitability of each dollar of revenue.  Operating margins have nearly tripled.

And with that, even though the price of Nvidia shares have skyrocketed over the period, the share price relative to its earnings power got cheaper along the way (i.e. the earnings growth outpaced even the torrid share price growth).

We can see it in the chart below.  When Jensen Huang shocked the world in May of 2023, declaring the “beginning of a major technology era,” Nvidia was trading 77 times the run-rate EPS at the end of that reporting quarter (Q1 2023 EPS times 4).

And for the reasons we just discussed above, this PE metric declined over the subsequent quarters (the stock got cheaper), even though the share price was soaring.

As you can also see, this dynamic started reversing several quarters ago, and even if they beat estimates tomorrow by a similar margin to previous quarters, the stock will be trading somewhere around 44 times this forward EPS metric.  It’s no longer cheap.  

That’s because profit margins are no longer growing, yet the stock price, particularly after the stock split announcement this past May, has been on a tear, outpacing earnings growth.

And this brings us to the second point we observed in the report last quarter, “growth constraints” …

It doesn’t appear that Nvidia will be a triple-digit revenue grower much longer, because of this …

If we look at the trend in the quarterly-change-in-revenues, Nvidia seems to be on a rhythm of consistently adding $4 billion a quarter in new revenue.  

We already know demand is insatiable, so both the rapidly advancing technology in accelerated computing and supply constraints seem to have capped Nvidia’s growth capacity (at least at this point). 

If this trend of $4 billion a quarter of additional revenue continues, Nvidia will be growing at a year-over-year rate closer to 50% by the middle of next year (no longer triple-digits).

We heard from Jerome Powell today for the first time since the November 7th post-FOMC press conference.

He was in Dallas at a World Affairs Council event, where he delivered some prepared remarks and did Q&A.

Here are some takeaways:

With the CPI and PPI data of the past two days, they project their favored inflation gauge, PCE, to come in at 2.3% when it’s reported on November 27th.  That would be an uptick by two-tenths of a percent.

And he said, “the economy is not sending any signals that we need to be in a hurry to lower rates.”

That sent yields higher, stocks lower.  And the interest rate market priced OUT some of the near certainty on a December rate cut.

Add to that, in last week’s post-meeting press conference, Jerome Powell was asked how the Trump agenda is influencing the Fed’s view on inflation and rate setting.

Here’s what he said:  “… in the near term, the election will have no effects on our policy decisions  … We don’t know what the effects on the economy would be … and to what extent those policies would matter for the achievement of our goal variables, maximum employment and price stability. We don’t guess, we don’t speculate, and we don’t assume.”

That wasn’t the case in 2016.  The host brought this up, and Jerome Powell wasn’t too pleased to hear it.

Following the 2016 Trump win the Fed hiked rates in December, restarting what had been a one-and-done rate hike campaign from a year prior (the economy was too weak, and they abandoned the tightening plan after just one hike in 2015).

Also in that December 2016 meeting, the Fed revised UP inflation forecasts, saying “some of the participants” incorporated the “assumption of a change in fiscal policy” into their projections.

So, yes, the pro-growth Trump agenda did indeed influence the Fed’s policymaking back in 2016 (just a month after the election).  They did assume a hotter price pressure environment was coming, enough to proactively hike rates in an economy that had averaged only slightly above 1% PCE inflation that year.

Yesterday, we looked at this chart of the 10-year yield.

Despite 75 basis points of easing from the Fed since September, bond yields have moved aggressively higher, not lower.

And we came into this morning’s October inflation report testing this big trendline.  The inflation number did nothing to change the rate path for the Fed (i.e. trajectory lower), but yields finished higher on the day, again.

And now the benchmark 10-year yield is trading above the election day highs — to the highest level since July 1st.

In my note yesterday, we talked about Scott Bessent’s view on the bond market risk.  I was mistaken in saying he was formally named Trump’s Treasury Secretary nominee.  He wasn’t, but he’s the likely nominee (maybe named tomorrow).

Let’s continue the discussion on his concern about the current Treasury Secretary’s management of the economy, in a way that trades short term gain (in attempt at political gain) for medium and long-term economic pain — leaving the pain for the new administration.

As you can see in the right side of the chart below, the government has been funding the largest deficit spending in peacetime history, by issuing an unusually large proportion of short-term debt (Treasury bills, the blue bars).

By funding more of the deficit with shorter dated Treasury bills over the past year, Yellen paid more to borrow, as short term rates were higher than long term rates (an inverted yield curve).

But by focusing on Treasury bills, and limiting the increase in longer-term bond issuance, Yellen was able to influence longer-term interest rates lower or prevent them from rising further.

Bessent has made the case that this looks like Yellen purposely manipulated financial conditions through this strategy to “goose the economy.”

And now, for the new administration, these short term Treasury Bills will have to be refinanced, creating risks for rate volatility and “the potential for a financial accident.”

As we discussed in my note yesterday, the Trump agenda fueled a rise in bond yields following the 2016 election. 

And bond yields (market-determined interest rates) moved higher heading into the 2024 election as the prospects of a Trump presidency rose. 

Following the election last Wednesday, the benchmark 10-year yield jumped nearly 25 basis points.

So, we go into tomorrow’s October CPI report with yields testing this trendline from the 5% highs of last October.   

Remember, it was that 5% level in the 10-year yield a year ago that forced the hand of the Fed.  Jerome Powell signaled the end of the tightening cycle, concerned about the additional tightening effect that had taken place in bond yields (and the consequences for the economy).

Stocks were in a 10% correction when yields were at this 5% level back in October of last year.

The 10-year yield went on another run in April of this year, up to 4.74%.  It was driven by the escalation of attacks between Iran and Israel, and the prospects of global war.

Stocks were in a 6% drawdown when yields were trading at the highs of that period (4.74%).

And now we have another sharp move higher in yields, trading into this same trendline.  This time stocks are near record highs.

Over recent days, we’ve discussed the optimism surrounding the Trump agenda, which has reduced recession risk that has been priced into the bond market.  That’s good for stocks, and puts upward pressure on yields.

But there is another risk in the bond market, as we discussed last week.

We talked about the prospects that the DC bureaucracy could work to thwart Trump’s agenda, as they did in his first term.

After all, he’s vowed to end America’s participation in the globally coordinated economic and social agenda that has been executed under the guise of “climate action” — which has resulted in trillions of dollars of spending, and has ballooned the size of government.

And he’s vowed to clean up the DC bureaucracy.

We’ve talked about the warnings to the Trump team from former UK Prime Minister Liz Truss.

Her government was taken down by “financial establishment”/UK administrative state — using the bond market (spiking interest rates) to create economic chaos.

With that in mind, today Trump named his Treasury Secretary (correction: likely, but not formally named the nominee).

It’s hedge fund manager Scott Bessent.

And Bessent has talked openly about this bond market risk.

He predicted early this year in an investor letter, that Yellen (which he will now succeed) would dangerously “goose the economy” into the election “to aid Biden’s re-election.”

And last week, he said he’s now concerned that they’ve indeed taken the economy to a vulnerable place, and that they might “spike the cannon on the way out” — trigger an “economic problem” (like a spike in interest rates) to slow down the execution of the Trump agenda.

As we’ve discussed throughout the year, small cap stocks have lagged the broader market.

The S&P 500, Nasdaq and Dow all surpassed the record highs of 2021 around the beginning of this year, and have carried on to much higher highs.  Meanwhile the Russell 2000 (small cap index) was still down almost 20% from its 2021 high just a couple of months ago.

But these underloved, if not left for dead stocks have ripped higher since election day, and the Russell 2000 is now back at record highs.

Remember, in my October 28th note, we looked back at the 2016 post-election performance of the Russell, in the two months following the Trump win.  It outperformed the S&P by more than 2 to 1 (+17% vs. +8%).  It’s on the path again.

And last week we talked about the 2016 election analogue in bonds, where the Trump agenda fueled a rise in the 10-year yield — on growth prospects, not inflation fears.

Likewise, in the 2024 election the 10-year yield went up as the probability of a Trump win went up, and it rose more sharply last Wednesday on the Trump victory (almost a quarter point).

And consider the sharp decline in the price of gold since election day – the historic inflation hedge.  It’s down 5% in four days, which seems to be expressing a view that the reckless fiscal policies are coming to an end.  That includes blank check foreign war funding, student loan forgiveness, and open-ended climate agenda spending.

Meanwhile, Bitcoin has traded to new highs, up 32% since election day.  Why?  It’s not fears of an inflationary Trump agenda.

Trump has floated the idea of holding bitcoin as a government reserve asset.  But far more important than that, Trump is simply not an existential threat to bitcoin, like the current administration.

In this prepared speech back in April of 2022, Biden’s Treasury Secretary, Janet Yellen, gave a clear warning for the “private crypto” market.  We talked about this in my daily notes a couple of years ago.

She said the history of money in the United States was littered with attempts at different forms of private money.  She said it (private money) didn’t work, and they regulated it away.

Their plan for bitcoin was to do the same, and strengthen their monopoly on money through a well telegraphed “central bank digital currency” (a digital dollar).  The Trump presidency changes that outlook.

What else is quickly pricing in an outlook where government regulators are no longer a predatory risk?

Tesla.

With the election results, we now have a President-elect with a pro-growth, pro-business, pro-American economic agenda — and mandate from the people. 

More importantly, the new administration will abandon the globally coordinated radical agenda to transform global energy (the anti-fossil fuels agenda), which was designed to completely transform the global economy, and change the global balance of power.  It was self-sabotage. 

And with that, as we’ve discussed in my daily notes, the Biden administration’s adoption of anti-oil policies was a self-determined path to loss of reserve currency status of the dollar, and therefore a path to the destruction of wealth and loss of sovereignty (a recipe for a “new world order”).

The explicit regulations, policy goals and central planning around this energy transformation agenda both directly and indirectly signaled threats to the future of American businesses and industries.

As we’ve discussed in my daily notes, there has been a clear divergence over the past two years between the stock performance of a handful of tech giants and “the rest” of the stock market.  This past summer, that divergence was at historic extremes. 

And with the response of markets last Wednesday, it’s reasonable to believe that this divergence had something to do, if not a lot to do, with the democrat agenda of radical change.

It’s an agenda that prioritized climate over nearly everything else, which became an existential threat to some businesses, put a finite existence on others, and resulted in a consolidation of power into the hands of a few companies.

Again, if we look at the market response last Wednesday, the broadening of stock market performance, particularly to the benefit of smaller cap stocks, indicates that a Trump administration would restore the long-term livelihood of American businesses, by: 1) lifting restrictions on American energy production, and 2) terminating the Green New Deal initiatives within the Inflation Reduction Act.

We may very well be embarking on a golden era for America.  And a golden era for investing in America. 

The transition to a pro-growth government under Trump and his team, which includes Elon Musk, is more than just a political shift.  

It’s a strategic realignment towards sustainable economic prosperity. 

Just as in 2016, when business optimism skyrocketed, and markets followed, the focus on structural change (domestic manufacturing, energy independence, fiscal responsibility, and corporate repatriation) dramatically changes the outlook — not just in America, but around the world.  

A better U.S. economy can mean a better global economy.  A better global economy is good for everyone.

Add to all of this, we’re in the early stages of an industrial revolution.

Just as the 1920s were defined by innovation (the automobile and widespread access to electricity), with generative AI we have the formula for another “roaring 20s.” 

The Fed cut rates by a quarter point today, as expected.

And Jerome Powell didn’t offer much new information about the policy outlook.

If we look back at their September projections, they saw another quarter point lower from here by year end, and another 100 basis points lower for rates next year.

At that time, it was clear that they wanted to get rates down aggressively to what they consider “neutral,” where policy is neither restrictive nor stimulative to economic activity (most importantly, no longer restrictive).

And the commentary from Jerome Powell in that September post-meeting press conference, and other Fed officials over subsequent days, sounded like they knew they were behind the curve, but they didn’t want to give that signal to markets.

The “cracks” in the labor market clearly had the Fed worried that they had indeed waited too long (held rates too high for too long, damaging the economy).

But if we fast forward to today, there have been three significant changes that have entered the Fed’s calculus.

Change #1:  A week after that September meeting, the BEA (Bureau of Economic Analysis) published revisions to economic output data from the first quarter of 2019 to the first quarter of 2024.

It was all revised UP.

The report also revised personal incomes up, consumer spending up and with a higher personal savings rate — and estimated higher productivity.

From this report, the Fed Chair clearly found relief on the economic picture.  In a Q&A event, he specifically addressed the report, and said that some “downside risks” to the economy they were concerned about had been “removed.”

Change #2:  The Fed has now moved rates down 75 basis points since September.  But bond yields, interest rates determined by markets, have moved UP by about the same amount.

The bond market (arguably) neutralized the Fed’s attempt to ease financial conditions.  Mortgage rates have reversed, from 6.1% back to 6.8% (levels of last July).

Remember, it was the sharp move higher in bond yields a year ago (last October) that led to a reaction from the Fed.  Jerome Powell signaled the end of the tightening cycle, citing the tightening of financial conditions that had taken place in bond yields.

With that, Jerome Powell was asked today about this recent big, adverse move in bond yields.

He seemed unworried.

Why?  Likely because of what is detailed in “Change #1” (above), and “Change #3.”

On that note, Change #3:  The election.  The Trump presidency brings with it a pro-growth agenda.  Remember, we looked at my chart on Monday (here) that showed the 10-year yield rising alongside the rise in the probability of a Trump win.

If we look back at 2016, we saw a similar Trump influence on bond yields …