This week can be summed up in one word – volatility. While indices look to finish the week down, the volatility index is breaking higher. We can attribute this to heightened uncertainty, particularly with the next Federal Reserve FOMC meeting and whether another interest rate cut is forthcoming. A large part of that calculation involves the labor market and how well it is holding up or slowing. We got a glimmer of hope on Thursday when the September jobs report was finally released. Whether it bodes well or will be revised lower is yet to be determined.
As for the most anticipated news of the week, we learned that Nvidia blew away earnings expectations and at least temporarily put at ease concerns that an AI bubble is growing. Revenue for Q3 reached $57.01 billion with data center sales totaling $51.2 billion. Adding to the exuberance, sales of its Blackwell chips continue to grow exponentially while its cloud GPUs are completely sold out. The stock initially rose 5% after hours but dipped the following day as investors took gains.
However, analysts are concerned by the concentration that AI companies wield. First there is the concentration of returns. Since October 2022, the S&P 500 has been propped up by the Magnificent Seven stocks, which account for 75% of its gains. But additionally, there is the concentration of investment between these companies which account for a substantial portion of their revenues. For example, just three companies (Amazon, Alphabet, and Meta) account for more than 40% of Nvidia’s sales. And lastly, some have noted that capital spending on AI has significantly skewed GDP, accounting for almost half of the economic growth this year. Putting things in perspective, spending on AI data centers is now a bigger chunk of GDP growth than shopping.
As for volatility, we can chalk it up to the absence of data. Specifically, we learned that the minutes from the last Federal Reserve FOMC meeting suggest a sharp divide between voting members on whether to cut interest rates or hold steady pending data. With the release of these minutes, investors panicked believing an interest rate cut was no longer on the table for the FOMC meeting December 9-10. Here’s the kicker… the Bureau of Labor Statistics said it won’t publish a jobs report for October due to the government shutdown, and the November report will be delayed by one week which will be after the FOMC meets. If the Fed acts, it will be doing so without data. For now, the odds are against a rate cut in December.
In closing, I bring you a public service announcement of sorts. With AI finding its way into every aspect of our lives, it should come as no surprise that it is beginning to pop up in the most unexpected places. With Christmas quickly approaching, you need to be aware that AI toys are starting to appear and should give you reason for pause. A recent report by the Public Interest Research Group found that some AI toys it tested were quick to discuss inappropriate topics with minors. OpenAI suspended its relationship with one company after researchers were able to get the toymaker’s teddy bear to discuss how to light a match and where to find knives in the home. Not that long ago it was an issue of privacy and whether these internet-connected devices were spying on us. Parents must now be concerned that these toys could cause real harm. Now you know.
Bruce J. Mason, MBA
