PPI Ahead as Market Grapples with Nvidia Fallout

Colette Eau Claire (0:05)

Welcome to the Schwab Market Update Podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead.

I'm Colette Eau Claire, and here is Schwab's Early Look at the Markets for Friday, November 13th. The weekend approaches with investors still digesting Jensen Huang's resignation as Nvidia's CEO yesterday. Huang's sudden downfall followed a New York Times report that he'd engaged in an extramarital affair with an executive at his company. He'd already admitted an affair with a woman alleged to be a Chinese spy. Investors will also be on the lookout for today's 8.30am October producer price indexer, PPI, after a hot consumer price indexer, CPI, earlier this week, sent yields to one-month highs. Huang's departure left one of the largest chip names in the world looking rudderless, with no obvious successor. While Nvidia still has a great product and the stock's valuation is cheap, there is a lot of uncertainty around future leadership and whether there is any disruption to customer relationships, said Nathan Peterson, director of derivatives research and strategy at the Schwab Center for Financial Research, or SCIFR. Nvidia said chief financial officer Colette Kress will serve as interim CEO and remain CFO while the board searches for Huang's replacement. At least on Thursday, that seemed to calm the market somewhat. Broader markets had up relatively well, given the volatility and decline in Nvidia's shares. For the week, S&P advances were outpacing decliners by a 4-1 margin as of midday Thursday. The market's somewhat muted reaction could reflect that leadership was already broadening prior to the scandal. In fact, Nvidia isn't even in the top 10 of this year's S&P 500 return contributors, even though it is second in terms of market cap, trailing only Apple. The rotation away from Nvidia also continued to lift the shares of its competitors, Advanced Micro Devices and Broadcom, which rose more than 5% each Thursday. Nvidia fell 5% Thursday and is down 30% from its October 6th peak, wiping out hundreds of billions of dollars in market capitalization. The rest of the market followed Nvidia lower on worries about possible market impact on Nvidia from the fallout, as Nvidia remains the world's largest AI chipmaker and is wrapped in deals across the industry. Before Huang's announcement, Nvidia received downgrades from Bernstein, William Blair and Oppenheimer. Analysts think even with Huang out of the CEO suite, continued investigations into his relationship with the alleged Chinese spy could overhang shares. The investigation might take months, extending the risk of damaging headlines. Analysts point out that the company has no succession plan and may struggle to execute, amid what could be negative sentiment, within the firm and more intense competition from other chip companies that smell blood in the water. Nvidia and other chip firms had been under pressure for months from bipartisan anti-data center sentiment across the US, and the scandal could reinforce those fears. Congressional hearings are expected to put Huang and the industry in the hot seat relatively soon. The AI sector peaked on June 22nd and is down about 29% from that day's close, as measured by the Philadelphia Semiconductor Index. Despite that, the SOX, or the Philadelphia Semiconductor Index, is up 48% year-to-date, and tech stocks were having their best week since May. The negative correlation Nvidia has within the Semiconductor Index has softened significantly, said Kevin Gordon, Head of Macro Research and Strategy at Skiffer, in a CNBC appearance Thursday.

Gordon added that beyond Nvidia, the consumer backdrop remains relatively positive, and robust recent jobs growth hasn't been reliant on the AI data center build-out. Economic fundamentals haven't changed due to the Nvidia developments.

NASDAQ's stumble came a day after the chip market appeared to pick itself up thanks to solid results from CoreWeave. Another neocloud firm, Nebius, deflated sentiment around the sector Thursday despite reporting better than expected quarterly results. The focus instead turned to its heavy spending and somewhat weak revenue outlook, dragging shares. Cisco and Applied Materials wrapped up most of the week's earnings news after the close. Applied Materials beat consensus on both earnings and revenue and offered guidance roughly in line with estimates. Shares reacted little in initial post-market trading. Cisco also exceeded expectations and provided better than expected guidance. Shares got an initial 4.6% pop in post-market action. Turning to PPI, the briefing.com consensus is 0.4% for headline and 0.3% for core, down from September's parabolic 1.3% headline and 0.7% core rise. Core excludes food and energy. Treasury yields not a factor Wednesday, with trading closed for Veterans Day, opened again Thursday and resumed their ascent, climbing double digits across the curve ahead of PPI.

Tuesday's hotter-than-expected October Consumer Price Index, or CPI, triggered hawkish remarks from Federal Reserve officials and sent odds of a December rate hike to 100% from 80%, according to the CME FedWatch tool. The market even builds in 15% chances of an unusual 50 basis point rate increase next month, after Fed Governor Christopher Waller mentioned that as a possibility this week. Chicago Fed President Austin Goolsbee said this week he's worried about consumer inflation expectations. Next week's retail sales report for October, along with earnings from Walmart, Home Depot, Lowe's, Target and other big box stores, will likely provide a better sense of consumer sentiment. Though AI spending could be somewhat shielded from higher rates, due to deep pockets of the hyperscalers and immense demand for compute, the rest of the market isn't necessarily immune. Interest rate-sensitive stocks like automakers, home builders and big box stores could suffer effects. Next week's highlight is likely Nvidia's earnings report late Tuesday. It's first without Huang. The company's sales outlook is key to see if any fallout is factored in from the scandal. Any clarity on future leadership is also front and center.