NVIDIA's Cracks, Oil's Surge, & Higher Rates for Longer

Back to school update on the most important narratives of 2023.

NVIDIA's Cracks, Oil's Surge, & Higher Rates for Longer

First time reading Lykeion? Sign up here.


Update on the Key Narratives of 2023

Bad Year for Bonds

So far, it’s been a bad year for bonds, and we might see the third consecutive year of losses for 10-Year Treasury‘s – a historical first.

The reality of higher rates for longer is gradually setting in, but the market, for now, seems unfazed by it, with volatility coming down to levels last seen pre-COVID (now might be a good time to re-listen to our chat with Cem Karsan).

After Jackson Hole, the odds of another rate hike (bad for bonds) before November/December increased slightly (still not base case though) thanks to Jerome Powell’s moderately hawkish speech. The overall story of bond yields is nonetheless unchanged – the consensus is that rates need to come down, and they’ll need to come down fast over the next couple of years.

Strong Year for Equities Despite Macro Outlook

On the US equities side, we’re not too far away from all-time highs, credit due to strong performance from tech and a stronger-than-expected performance from the economy (led by COVID-19 excess liquidity and government-led fiscal spending).

This performance comes against a worsening outlook for real estate, retail sales falling for 9 consecutive months when adjusted for inflation, negative industrial production, the Leading Economic Index declining for 16 consecutive months (the longest since 2007-08), and excess savings forecasted to run out over the coming months.

We wrote in previous months about how Goldman expected market breadth to widen, but that has yet to take place in a significant manner.

The big air gap in the market to watch for continues to be the performance of tech versus bond yields (usually negatively correlated). No predictions here – the market can stay irrational longer than you or I can stay solvent.

Internationally, the outperformance of non-US markets that took place over the last year or so has reverted in the last couple of months, credit due to a stronger dollar led by the move higher in US rates.

US markets now find themselves at premium valuations versus their 25-year average, whilst the story is slightly different for the rest of the world.

Oil Breaks Its Trading Range

During the summer, we wrote about oil’s underperformance both in our Markets update and especially warned readers in our July Research report of how some strong tailwinds were building for oil in the short term:

Since then, oil has decisively moved higher but, most importantly, it has broken an important technical level: the 50DMA crossed the 200DMA – what’s known as the golden cross. The last time that happened, oil entered a bull market that lasted almost 2 years and got everyone worried about energy scarcity.

We’ve also had, for the first time since we started draining the SPR, four consecutive weeks of reserve increases.

Additionally, Saudi Arabia and Russia extended their voluntary cuts through year-end, leading oil to its highest value since November last year.

Despite that, it’s still the sector in the US market that trades at the largest discount to its 20-Year PE average – by a wide margin. We’ve said it many times, but the oil supercycle is here to stay and there’s still plenty of upside left.

AI Boom Show’s No Signs of Bust

From The Information: "OpenAI is currently on pace to generate more than $1 billion in revenue over the next 12 months from the sale of artificial intelligence software and the computing capacity that powers it. That’s far ahead of revenue projections the company previously shared with its shareholders, according to a person with direct knowledge of the situation". OpenAI made $28 million in revenue last year.

These kinds of headlines are continuing to add momentum to the AI bubble that started earlier this year.

NVIDIA is close to all-time highs again (despite yesterday's move lower), now trading at 17x next year’s sales, with revenue expected to grow annually by 30% for many years to come.

To be clear: living up to 17x sales is not impossible, but it is a significant hurdle to overcome. How high of a hurdle you might ask?

And to close this one out, there’s a growing narrative out there in social media (still to be properly picked up by financial media) that highlights how NVDA might have been manufacturing GPU demand… if this is true, gravity should come in and hit hard not only NVDA but the market overall. Recommended read.

If you’re not already signed up for our Research tier, here’s a nudge to give it a shot. This is where we break down the frameworks that help us inform about current opportunities and risks within macro and geopolitics. Last month we focused on:

Thanks for reading through! Obviously, none of this is investment advice.

As always, we'll see you out there...

Published in: Markets
Diego Tremiterra

Co-founder and Editor-in-Chief. Covers Markets, Business, and Thematic Oversight. Currently a hedge fund Jr. PM, ex-Goldman Sachs capital markets and startup COO.

View articles

Great! You’ve successfully signed up.

Welcome back! You've successfully signed in.

You've successfully subscribed to Lykeion.

Success! Check your email for magic link to sign-in.

Success! Your billing info has been updated.

Your billing was not updated.