All Eyes On Nvidia

Hello Traders, we hope you’re having a nice weekend. Here are some of the biggest stories this week:

• UK inflation accelerated by more than forecast.
• A fund manager survey showed exposure to US stocks jumped to an 11-year high.
• But legendary investor Warren Buffett has been shedding his exposure.
• Nvidia brought in record sales and profit last quarter.
• The IEA expects a big glut in the oil market next year.

Dig deeper into these stories in this week’s review.

Macro

UK inflation accelerated more than expected to 2.3% in October from 1.7% the month before, driven by higher energy prices. But even core inflation, which excludes volatile energy and food items, increased to 3.3% in October from 3.2% the month before, defying economist expectations for a small dip. Adding to the bad news, services inflation – a measure closely watched by the BoE for signs of domestic price pressures – rose slightly to 5%. The disappointing figures prompted traders to further scale back their bets on lower interest rates in the coming months. They now expect just two more quarter-point cuts in 2025, with a 40% chance of a third. Earlier this month, three reductions were fully priced in.

Stocks

Every month, Bank of America conducts a global fund manager survey to gauge institutional investor’s positioning and latest thinking. And the most recent one, conducted in November, showed investor exposure to US stocks jumped to an 11-year high, fueled by post-election optimism about stronger economic growth. More specifically, the proportion of fund managers overweight US equities nearly tripled to a net 29% – the highest level since August 2013. The surge comes as the S&P 500 hits new record highs following Donald Trump’s victory in the election, as investors bet that his pro-America policies would fuel economic growth and benefit domestic companies. However, some strategists, including those at Citi, are warning that the rally could run out of steam as investors start to take profits.

Speaking of taking profits, one big-name investor is already doing so: Warren Buffett. The “Oracle of Omaha” has been unloading a hefty amount of stock lately, sending the cash pile at his firm, Berkshire Hathaway, to a new record high. And some observers are worried that this could be a sign that Buffett isn’t feeling great about the market these days.

As of the end of September, Berkshire was sitting on $325 billion in cash (and cash equivalents) – nearly double the amount it had in January. And sure, its cash hoard was already huge and setting new records, quarter after quarter, but investors could generally just brush that off because the pile wasn’t that big relative to the firm’s colossal size. If anything, the increase seemed like a natural consequence of the company's expansion. But that explanation is no longer valid, with Berkshire’s cash pile, relative to the total value of its assets, surging to 28% at the end of June – its highest level in at least three decades.

The last time Berkshire sat on a huge cash pile, relative to its total assets, was back in 2005 – just a couple of years before the global financial crisis. That’s why Berkshire’s surging cash position today can’t be ignored. Even if it doesn’t mean that Buffett is bracing for deep stock-market declines, it tells us that he’s struggling to find attractive-enough investment opportunities in the stock market – especially when he can instead put his money into ultra-safe US Treasury bills yielding more than 4.5%.

Moving on, all eyes were on Nvidia this week as the chipmaker unveiled its latest results on Wednesday. You can understand why investors were paying close attention: the world’s most valuable company is at the heart of the AI frenzy that has helped drive the market higher over the past couple of years. And, once again, Nvidia blew past estimates: its revenue last quarter nearly doubled from a year ago, up 94% to a record $35.1 billion. It was a slower pace of growth from the previous quarter but still well above analysts’ expectations for $33.3 billion. And if that wasn’t enough, profit came in at a record $19.3 billion – comfortably ahead of forecasts.

Speaking after the release, Nvidia’s CEO said that the firm’s highly anticipated Blackwell chips will ship this quarter amid “very strong” demand. However, the production and engineering costs of the new generation of chips will weigh on profit margins, and Nvidia’s sales forecast for the current quarter didn’t match some of Wall Street’s more optimistic projections. That led to a lukewarm response from investors, who had already driven Nvidia’s shares up nearly 200% this year. Following such a massive rally, anything less than a stellar outlook was bound to disappoint…

Commodities

Despite escalating tensions in the Middle East, a region responsible for a huge portion of global oil production, crude prices remain solidly in negative territory for 2024. That’s because a sluggish world economy has reduced crude demand – especially in oil-hungry China, where consumption has contracted for six consecutive months. At the same time, supplies from producers such as the US, Brazil, Canada, and Guyana have continued to grow. In fact, oil production in the US jumped to a monthly record of 13.4 million barrels a day in August. Combined, those factors have created a glut in the crude market – one that’s expected to go into next year and beyond. More specifically, the International Energy Agency expects global oil supply to exceed demand in 2025 by more than 1 million barrels a day, according to a fresh forecast last week.

Thing is, this glut in the oil market comes despite more than two years of production curbs by OPEC+. That explains why the group of oil-producing countries has been forced to twice delay a plan to open the taps a bit. And the IEA’s forecast last week won’t make for happy reading among the cartel: the expected 2025 oversupply of 1 million barrels a day will happen even if OPEC+ completely abandons its plans to restore output. Should the group press on, then the global glut will be even bigger, according to the IEA.

Needless to say, a big global oil glut would most likely lead to lower crude prices. In fact, according to an energy analyst at oil price reporting agency OPIS, a full unwinding of OPEC+’s supply cuts in 2025 would likely see crude prices slide to $40 a barrel – or 40% lower than where they are today. Makes sense: at around six million barrels a day, the curbs represent roughly 6% of global oil demand.

Next week

• Monday: Earnings: Zoom.
• Tuesday: US consumer confidence (November), US home price index (September). Earnings: CrowdStrike.
• Wednesday: US durable goods orders (October), US personal income and outlays (October).
• Thursday: Eurozone M3 money supply (October), eurozone economic sentiment (November), minutes of the Fed’s latest meeting.
• Friday: Japan unemployment rate (October), Japan industrial production and retail sales (October), eurozone inflation (November), UK M4 money supply (October).