US-China trade tensions may spell eventual trouble for Nvidia

US equity markets (^IXIC, ^GSPC) — except for the Dow Jones Industrial Average (^DJI) — are coasting on positive intraday gains after Nvidia (NVDA) outpaced fiscal first-quarter earnings estimates in its figures reported after the bell on Wednesday.

Charles Schwab Chief Global Investment Strategist and Managing Director Jeffrey Kleintop joins The Morning Brief to discuss where he expects outstanding market performances to broaden out past the tech sector and AI megatrends, especially as international trade tensions percolate on President Biden's new tariffs on Chinese imports and ban on selling semiconductors to China.

"It's a safe place to find growth in a global economy that's been struggling for the past several quarters. but maybe that's not the case anymore. I'm arguing for a broadening of market performance outside of the tech sector, outside some of these AI darlings," Kleintop says. "This morning we got the PMI data from Europe and it was booming. In fact, Europe is really coming out of the recession that it experienced last year and that means better growth for more cyclical sectors."

For more of everything Nvidia, catch Yahoo Finance's exclusive interview with CEO Jensen Huang.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Luke Carberry Mogan.

Video transcript

It's great to have you here.

So let's talk about NVIDIA in the context of the broader market.

When you see this type of growth, what does that tell us about the excitement surrounding A I and how big of a driver that's going to be for the broader markets going forward?

You know, it's not easy to find any negatives for the market in Nvidia's earnings.

But I found one that might be increasingly important to the market.

We know A I is a huge and rising theme for the markets but so are trade tensions.

One element in Nvidia's earnings report that left a market.

An otherwise bright picture was the drug in Nvidia's data center revenue in China, a country that's accounted for 20 to 25% of its data center revenue in recent quarters.

And of course, that's the result of a US ban on selling high performance chips to China.

The tech giant is introducing alternative chips that don't require a special license from the US.

But those don't appear to be catching on data center revenue in China was quote down significantly from the level prior to the imposition of those new export control restrictions according to NVIDIA CFO on yesterday's call and that is going to become a bigger issue and not just for chip makers in the coming quarters as trade tensions continue to climb.

Wow.

Ok.

So, I mean, that kind of spells out some, some larger threats that are outside of even Nvidia's control here.

But the, the markets have looked to NVIDIA as the pulse of where they feel comfortable moving here.

How, how long can that continue to be the case?

Well, it it's a, it's a safe place to find growth in a global economy that's been struggling for the past several quarters.

But maybe that's not the case anymore.

I'm I'm arguing for a broadening of market performance outside of the tech sector, outside outside some of these A I darlings, you know, this morning, we got the PM I data uh from Europe and it was booming.

In fact, Europe is really coming out of the recession that it experienced last year and that means better growth for more cyclical sectors.

In fact, the May survey uh of of the PM I uh showed really strong growth.

In fact, Germany is seeing the strongest uh activity here in over a year.

So this is suggesting that earnings growth in Europe may actually exceed earnings growth in us in the second half of this year.

That's what analysts are now forecasting and some of the state is supporting that.

And that means broader performance just outside of the US tech sector, Jeffrey when we got the big news last night that the time for one.

So, but, and NVIDIA, I bring that up because there has been some chatter this morning whether or not that makes it a more likely candidate here for the Dow in the future.

Do you have any thoughts on that?

I don't really, I mean, you know, index indices are important in the sense that they uh impact how we look at the markets.

But the truth is the Dow has really adapted a lot over time in terms of what are the types of companies that are in that index?

I look at much broader indexes like the S and P 500 for example, that has a lot of different sector exposure in it.

Uh That's what I'm looking at and usually use that to compare it to other markets around the world.

And interestingly, China is outperforming the S and P 500 so far this year.

That's something that might catch a number of investors by surprise.

We we ultimately here as well.

We spoke to NVIDIA founder and Ceo Jensen Huang yesterday about robust demand for its A I chips.

I wanna get you to take a listen here and we'll get your reaction.

On the other side, copper demand grew throughout this quarter after we announced Blackwell.

And so that kind of tells you how much demand there is out there.

Every part of our data center is the most complex computer the world's ever made.

And so it's sensible that almost everything is constrained.

So the demand picture that we've continued to see spelled out by NVIDIA there and then by some others who've kind of added on or next themselves on to the generative A I conversation.

I mean, at some point it, it feels like the spending that corporations are doing, at least in the B to B relationship for the these products and services.

It, it's gotta dry up at some point.

Right.

Yeah, I, although we're in the early stages of it, you know, if you, if you take a look at the ramp up and spending around things like the.com, I know that was a while ago, but many of the uh new technology that have taken place over the last 20 years did take a few years to really ramp up as companies try to figure out how to implement these technologies and these solutions.

And so I still think we're fairly early in it.

If you look at corporate cap X on information software and hardware, it's still barely ticking up.

So I think we've got a ways to go here.

The real issue may be supply constraints from TS MC, the maker of those chips for NVIDIA who's having trouble cranking out enough chips to meet that demand.

That might be the binding factor here rather than corporate budgets.

Jeffrey Kleintop.

Charles Schwab, chief Global investment strategist and managing director.

Great to see you, Jeff.

Like, turn me on.