Markets take a breather after record Nvidia rally, but can the good news spread to other sectors of the market

European stocks had a quiet start on Friday, after the tremendous rally for risk assets on Thursday that pushed the S&P 500, and the Nasdaq to all time highs. The focus of financial markets in the last 48 hours has been Nvidia’s earnings report and its upbeat commentary about the future take up of AI. Nvidia’s market capitalization gained $277bn on Thursday alone, the biggest one day increase in market cap ever. The market also expects it to continue its rise on Friday, and its stock price is expected to rise by more than 2% in the pre-market. This suggests that there are still investors who want to jump on the AI bandwagon, and they are doing this through Nvidia.

However, after the euphoria of this week’s rally, comes the focus on the future. Interest rates are high, and Nvidia and other tech stocks continue to dominate. AI is the theme of the 2020s so far, and AI infrastructure spending is set to continue to grow strongly. While that is a powerful backdrop for tech stocks to continue to rally, market breadth remains a concern for investors. The question now is, can the rally in tech spread to other sectors?

To highlight how shallow market breadth is right now. Only 17% of companies on the S&P 500 have made new 52 week highs. Also, although 366 companies on the S&P 500 rose on Thursday, it is still worth noting that 136 companies declined. This is a great rally if you are in it, but there are a number of stocks that aren’t rising with Nvidia, and this seen as a concern. As you can see in the chart below, the equal weighted S&P 500 index, has trended higher, but is lagging the unweighted S&P 500, which is dominated by tech.

Chart: S&P 500 and S&P 500 equal weighted index, normalized to show how they move together.

Source: XTB and Bloomberg

EUR/USD focus: ECB rate hike expectations get scaled back  

While the market has been focused on Nvidia, it is worth noting that traders have been scaling back their expectations for rate hikes from the ECB. Earlier this year, the market had expected the ECB to be the first of the major central banks to cut rates in April, however, the market now thinks that the ECB won’t start to cut rates until June. There are currently just over 3.5 rate cuts priced in for the ECB this year, that is half the amount that the market had priced in at the end of last year! The recalibration comes after better than expected February PMI data from the currency bloc, with the service sector PMI reaching 50 for the first time since October. Added to this, European wage data for Q4 did not fall as much as some expected, and there is some concern about wage growth picking up again in Q1 2024. There has also been some hawkish commentary from ECB members this week, including Austrian central bank governor Robert Holzmann. He made the point that it is better to cut interest rates later and faster rather than cut them too early and then have to hike rates again later.

ECB may not cut rates  before the Fed

Crucially he also said that the ECB did not have to cut rates before the Fed, and right now both central banks are expected to make their first rate cut around June/ July. Key Eurozone data is due next week including the Eurozone’s CPI estimate for February. The market is expecting the all-important  core inflation rate to fall to 2.9% from 3.3% in January, but if core inflation proves more stubborn than the market expects then we could see further upside for the euro, as the interest rate differential with the US improves. EUR/USD is up by 0.3% so far this week, and is still above $1.08, however, it has backed away from Thursday’s $1.0880 high, suggesting  that there could be some reluctance to push this pair higher ahead of the Eurozone CPI.