How AI Speculation Is Fueling the Small-Cap Stock Rally

**SPEAKER_1** (0:00)
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**Miriam Gottfried** (0:18)
Hi, everyone. It's Miriam. Telis is out on vacation this week, but we are lucky enough to have his boss, Heard on the Street editor, Aaron Back. Welcome to Take On the Week.

**Aaron Back** (0:27)
Hello, Miriam.

**Miriam Gottfried** (0:28)
Good to see you.
Today, we're going to talk about something that we don't talk about a lot, and that is small cap companies. We spend so much time talking about the biggest companies that are driving the market forward, and we haven't been talking about the little companies. We're going to talk about specifically why they have been outperforming, why small cap companies have been outperforming large cap companies over the past 12 months. It's a really interesting conversation.

**Aaron Back** (0:55)
It's an unusual situation because they've been underperforming for a long, long time prior to that.

**Miriam Gottfried** (0:59)
It's an unusual situation and we're going to dig into why that's been happening with our guest Dan Rasmussen of Verdad Advisers.
But before we get to that, I want to talk about what's happening this coming week. And one of the big things is the jobs report. All eyes are on these reports, especially as the market tries to evaluate what the Federal Reserve is going to do with interest rates. So, Aaron, the jobs report last time was actually kind of disappointing, right?

**Aaron Back** (1:31)
Yeah, the last jobs report was a little bit weak. And there was also a big downward revision in the number of jobs created for the couple months prior to that.
This jobs report is going to be the most closely watched one that I can remember in a long time, to be honest. And that's because, for one thing, people weren't really sure what to make of that last jobs report. I never want to overreact to one report.

**Miriam Gottfried** (1:56)
Like it could be an anomaly, a one-off.

**Aaron Back** (1:58)
People said there was some issue with the seasonal adjustment, a lot of times in the summer, with back to school and stuff like that. There are distortions in the data. And there's also going to be a CPI report a week later.
So those two sets of data, I think, are going to be really decisive for where the market heads from here. So another weak jobs report, and the last CPI number was also a little bit weak. If those come in on the soft side again, I think the market is going to conclude that a September rate hike is off the table.
You know, obviously, if they both come in a little bit hot, then people are going to start betting on a September rate hike potentially again. If they're in opposite directions, if CPI is hot, inflation looks a little high, last week we had a PCE reading, which is an alternative measure of inflation that was a little bit too strong for comfort. So if that shows up in the CPI again, but the jobs are weak, then Kevin Warsh is in a really tight spot.

**Miriam Gottfried** (2:54)
We'll see how that plays out. But I want to turn our attention to what was the big news of this past week, and that was Nvidia's blowout earnings. I think there was a lot of doubt around whether they could deliver again. I mean, there's so much built into expectations for this company that it's hard to move the needle. And I think the stock had been falling after earnings because expectations were just so high. But that's not what happened.

**Aaron Back** (3:21)
The last few quarters, the stock has fallen after they reported. This time, the stock rallied. And, you know, I mean, they really knocked it out of the park.
They said that their revenue next fiscal year is going to grow 70%.

**Miriam Gottfried** (3:33)
That's unreal.

**Aaron Back** (3:35)
Yeah. And they said it would be growing even faster if it wasn't for these supply chain challenges.

**Miriam Gottfried** (3:41)
They just can't produce enough chips to sell, to meet demand, I guess.

**Aaron Back** (3:46)
Yeah. So, for example, memory prices are going way up. Memory pairs with the sort of chips that Nvidia makes to make these chip systems. And memory is getting more expensive. So their margins are going to fall.
But you know, I mean, the bottom line is, for the time being, they're growing like gangbusters, and the market's finally impressed by that, as opposed to being underwhelmed in the last few quarters.