With apologies to Ron Burgundy, that escalated quickly. After weeks drifting sideways in a somnambulant shuffle – nervous, yet oddly inert – last week financial markets suddenly awoke with a jolt. Investors, lulled into complacency, suddenly found themselves thrown out of their beds and into the churn of a fully fledged market squall.
Nvidia reports into the market maelstrom
The catalyst was the most consequential firm in global markets; Nvidia, the shovel merchant in the artificial intelligence (AI) gold rush.
It is hard to overstate just how astonishing Nvidia’s growth has been. The company boasts net margins north of 50% and has delivered average annual revenue growth of more than 40% every year, for 10 years running. Its market capitalisation, now above $4.3-trillion, has ballooned at a compound annual rate of nearly 80% over the same period, for a total return of an extraordinary 23.936%, or about 239-fold.
Expectations for last Wednesday’s quarterly results were therefore not merely high, they were stratospheric. Investors knew that this single earnings release could make or break the global stock market for the past few months of 2025 and into 2026. A set of blowout numbers would reinforce the narrative of unstoppable AI-led expansion, but any hint of slowdown in demand and spending from the AI “hyperscalers” would puncture the froth across markets and asset classes. No other company so clearly embodies the hopes – and hazards – of this present cycle.
And, sure as anything, Nvidia did not disappoint. Jensen Huang, its leather-jacketed CEO, opened the earnings call with characteristic swagger, addressing head-on the murmurs that AI had entered bubble territory. “There’s been a lot of talk about an AI bubble,” he declared. “From our vantage point, we see something very different.” The numbers seemed to validate his arrogance. Revenues rose 62% in the three months to the end of October, reaching $57-billion, which was comfortably above analysts’ $55-billion consensus, compiled by Visible Alpha.
Initially the market soared, the gasp of relief from traders practically audible. Nvidia’s shares climbed 4.5% in early trading on Thursday and the solid earnings boosted other tech stocks and wider markets. For a fleeting moment the rally looked renewed, the AI trade vindicated, and the bull market reinvigorated.
But suddenly things took a turn for the worse.
The harbinger was bitcoin. The benchmark cryptocurrency has become not just a barometer for liquidity but market sentiment in general. When it started crashing on Thursday, dropping almost 15% in 24 hours and erasing all its gains of the past 12 months, fear ricocheted through markets. Within hours Nvidia’s post-earnings surge was eviscerated. The stock continued sliding, ultimately falling more than 10% from its peak on 20 November, a loss of nearly half a trillion dollars in market value.
The forecast is cloudy
Where does that leave investors? While the market outlook is less serene, two reasons for optimism remain, albeit with caveats.
Washington hopes
The first comes from Washington, where Republican policymakers seem determined to keep the economic party going, whatever it takes. Their fiscally ruinous “One Big Beautiful Bill” is front-loaded with near-term stimulus; household tax cuts and rebates, business exemptions and investment incentives. After a period of fiscal drag – exacerbated by the government shutdown – the US fiscal impulse is poised to turn positive in 2025.
This package will, all else remaining equal, provide a meaningful quarterly boost to real GDP. Principal Asset Management calculates that the average household will receive roughly $700 more in tax refunds, and that the corporate tax sweeteners should push next year’s effective tax rate down to 16%, from the current 21%.
Republicans have so far resisted President Donald Trump’s push for $2,000 “tariff dividend” stimulus cheques for low- and middle-income families. Yet, should economic momentum stall, particularly before the mid-term elections, such populist, inflationary fiscal treats may resurface. Economic policy in the world’s largest economy has entered deeply unconventional territory.
Corporate resilience
The second support for markets lies in corporate resilience. Even excluding the so-called Magnificent Seven technology giants, US company earnings continue to rise at a healthy mid- to high-single-digit pace. Revenues in the S&P 500 have been growing comfortably faster than inflation, and profit margins are widening – a sign that pricing power and efficiency have not been exhausted. For all the attention lavished on AI stocks, the broader business environment remains sturdier than the recent volatility suggest, which should on some level provide a base for equity markets.
All eyes on the Fed
Yet both fiscal recklessness and corporate strength pale next to the force now dominating the narrative: interest rates. More precisely, the likelihood – and scale – of future Federal Reserve cuts in late 2025 and 2026.
And therein lies the rub. The greatest threat to global markets and the economy is not an AI bubble bursting but the re-emergence of inflation. Should core CPI climb back above 4%, forcing the Fed to restart monetary tightening, the elaborate financial edifice built atop the American economy would wobble dangerously. In such a scenario, even a White House eager for cheaper money would struggle to pressure the Fed into cutting. Any hint of easing in a high-inflation environment would shatter what remains of the Fed’s anti-inflation credibility. The dollar, already sagging, would collapse like a flan in a cupboard.
Recent market moves underscore just how intently markets are now looking for signals on rates. Comments from John Williams, president of the New York Fed, suggesting support for a quarter-point cut at the central bank’s upcoming meeting, helped spark a rebound in equities. Investors are now pricing a more than 70% probability of a December cut – up from about 40% the day before, according to futures market data. As if we needed any further reminders of the 1990 dotcom bubble, it seems as if we are back to those days of the “Greenspan put”.
This leaves investors in a precarious position. Asset prices are calibrated for perfection; strong growth, falling rates, docile inflation and unbroken momentum in AI. Remove any one of these pillars and last week’s turbulence may prove merely an hors d’oeuvre to the main event.
Better, then, to keep those seatbelts fastened. The ride is unlikely to smooth out soon. DM