Why Nvidia earnings couldn't sustain market rally: Strategist

Markets are slightly rallying (^DJI, ^IXIC, ^GSPC) as they recover from recent losses, defying the expectations of investors who hoped that Nvidia's (NVDA) earnings would substantially boost markets. To shed light on this dynamic, Truist Co-Chief Investment Officer and Chief Market Strategist Keith Lerner joins the Morning Brief to discuss the underlying factors behind current market behavior.

Lerner attributes the muted market reaction to the elevated expectations surrounding Nvidia's earnings report. He compares "the anticipation of this report" to the level of anticipation typically seen for inflation or economic data releases. However, he notes that in such instances, "regardless of the number, the markets often act differently than you would expect."

As earnings season draws to a close, Lerner notes that market focus is shifting away from individual company results and toward the broader question of "what is the Fed gonna do?" Lerner notes the next catalyst that could propel markets higher would be the emergence of "more disinflationary pressures."

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

This post was written by Angel Smith

Video transcript

Futures.

Moving to the upside.

It's looking to regain some of that momentum that it lost yesterday.

The dow coming off its worst day of the year.

Now, the move lower yesterday coming despite the fact that NVIDIA once again posting another record breaking earnings report, it was not enough though to keep that market rally intact.

We're here to break it all down and where we could see maybe buckets of strength going forward.

We want to bring in Keith Lerner, he's truest, co chief investment Officer and Chief Market Strategist Keith.

It's great to see you.

So talk to me about how you're looking at some of the losses that we saw yesterday and whether or not the narrative surrounding NVIDIA and some of that excitement has faded just a bit when we talk about the broader market action.

Yeah.

Well, first, uh Shawna and Brad always great to be with you, especially out of this long weekend.

Hopefully you guys get some downtime as well.

Um So, you know, our view is this, first of all, we, we, we did upgrade um equities in late April um when we were down about 5% because we thought the risk reward had improved.

Now, we moved up 7% expectations into that NVIDIA print was really high and it almost seemed like the anticipation of this report felt like AC P I Employment Day.

And if, you know, you have been doing this for a long time that on those days, regardless of the number, the market often acts differently than you would expect.

And I think that's the case yesterday.

But I also think what's kind of happening now is that we're moving past earnings season.

One of the most steady things in our work has been forward, earning estimates have been moving higher.

But now that you move past earnings season, the market hasn't now start focusing again on what is the fed gonna do and inflation and each economic data.

So that just makes for a more volatile market.

Our underlying message is we still think the primary trend is higher.

I think their term, the market will be searching for a catalyst, which likely means that we're in more of a choppy period after that 7% rip up.

But again, we think the primary trend is still one that is positive.

Who do you think is that next catalyst that could emerge?

Keith?

Well, I, I think, um, you know, first of all, we're gonna go through the summer months.

So it's, I mean, even just kind of going through just back and forth, um, is, is actually, I think fine, I think the catalyst for the market um is, is probably to start seeing more disinflationary pressures, which as as Sharon just mentioned, we got almost the, the opposite of that yesterday.

So for the market to actually move high in a meaningful way, we likely need rates to actually break below this 430 level on the 10 year treasury and the market get more comfortable.

But that, that there's more this inflationary pressures that will allow the fed later this year to at least cut, you know, once or or twice.

I don't think it matters if it's June or September.

I think the main most important thing for the market is that it's more likely that they cut.

If the message really starts to change that they had to raise rates, which is not our base case.

I think that would be the biggest concern for the overall overall market.

Keith.

Are you seeing any signs of exuberance in the market at this point when you take a look at valuations and where we are today?

Well, so I think there, there's some signs in the last week or so.

I mean, we saw some signs as far as the meme stocks, we saw some strategists on the street really just lift their targets, you know, pretty meaningfully in a short period of time.

If you look at the options market, there's almost no demand for, for downside protection.

Um So I think that's more of a, a shorter term.

I don't think it's, you know, exuberance.

I just think that it's one of those things where you, where when you have those type of things happen, it's not unusual to have a little bit of, of a, of a gut check or gut check in the overall market.

And that's what I think we're, we're having.

And I also think, listen, when we get back from Memorial Day, you get into June, you're gonna start seeing the presidential election.

Um And I think people are gonna start focusing on that.

That's gonna add another dynamic as far as just this kind of more of a two way trade even within that uptrend that we still think is intact.