Why the Market Is Still Nervous About AI Despite Nvidia’s Blowout Quarter
Hi. Steve Eisman here. This week felt like one long anxiety loop for the market. Even with Nvidia posting incredible numbers Wednesday night, the nervousness around AI did not go away. So I want to break down what really happened, why the market reversed, and what else mattered this week.
Waiting for Nvidia felt like an eternity
The week started with a correction on Monday that bled into Tuesday. Nobody wanted to make bold moves until Nvidia reported. Wednesday night felt unusually far away. Emotions ruled the tape.
Then Nvidia finally reported. And the company essentially sang an operatic aria. The numbers were spectacular. Earnings per share was 1.30 dollars versus 1.25 expected and up over 65 percent from last year. Revenue was 57 billion versus 55 billion expected and up 62 percent from last year and 22 percent sequentially.
Think about that. A 4.4 trillion dollar company growing revenue 62 percent without selling a single chip to China because of export restrictions. And guidance for the next quarter went up too. Growth actually accelerated. It is astounding.
Not surprisingly, Nvidia ripped after hours and took the whole AI complex with it. The market opened strong on Thursday. Nasdaq was up more than 2 percent at the open. Nvidia was up 5 percent. Then the entire thing reversed. Nvidia closed down 3 percent and the major indexes finished solidly red.
Why?
What the Fed said did not cause the reversal
Some people blamed the Fed minutes. I don’t buy that. We have seen stronger reactions to firmer policy language in the past. The reversal had a different flavor.
I think the market is trying to grapple with something much bigger about AI. And to explain it, I want to reference a very interesting essay by historian Niall Ferguson published earlier this week.
The best analogy for AI might not be the dotcom boom
Ferguson points out that the last period of transformational American capex on this scale was the railroad boom from the end of the Civil War to the mid 1890s. Capex was enormous. Railroads absolutely transformed the U.S. economy from regional agrarian to national industrial. But many railroads went bankrupt because they overbuilt, duplicated each other’s routes, or simply expanded faster than returns could justify. There were two major crashes in 1873 and 1893.
Ferguson draws three parallels to today’s AI race.
Maybe AI turns out to be more of an upgrade to search engines rather than a once in a century productivity miracle.
Competition may intensify so much that returns fall. There are many overlapping LLMs being built right now. We clearly do not need all of them.
Chinese AI models might end up being just as good or close enough and cheaper.
All of this points to one thing. We are incredibly early in the AI story. Nvidia, AMD and CoreWeave are essentially selling the steel for the railroad tracks. We have not yet seen clear evidence of how profitable or transformative the AI applications will be. Until we do, anyone can create whatever narrative they want and both the bull and bear stories sound plausible.
That is the uncertainty the market was reacting to. Not the Fed minutes.
Oracle is the canary in the AI correction
One example is Oracle. It spiked after earnings but has now corrected more than 30 percent and given back the entire move. Why? Because unlike Microsoft or Google, Oracle cannot fund its huge AI spending from cash flow. It needed to raise 18 billion dollars in debt. Its total debt load is now 100 billion dollars. Investors noticed.
When returns are uncertain, companies that need leverage to fund capex will always make the market nervous.
Housing is still frozen, and the impact showed up in earnings
Home Depot reported this week and the numbers were simply weak. EPS missed. Same store sales were barely positive at 0.2 percent and below expectations. Guidance for the year was lowered.
This is all tied to the frozen existing home market. During Covid, everyone refinanced into 3 percent mortgages. Now rates are above 6 percent. Sellers cannot afford to sell and buyers cannot afford to buy. That ecosystem is stuck, and Home Depot feels the pain. The stock is down 14 percent this year.
Lowe’s showed similar weakness. Target was even worse. The company cut guidance again, saw negative sales growth, and the new CEO would not give a timeline for improvement. The stock is down 39 percent this year.
Walmart is the outlier, but for a slightly worrying reason
Walmart reported strong numbers. Revenue grew 6 percent. EPS grew 7 percent. Same store sales rose 4.5 percent. That is superb for big box retail.
But I do not think this means the consumer is strong. Walmart is gaining share across all income segments, including the higher end. That usually means the consumer is becoming more price sensitive. In other words, Walmart looks great, but the consumer might not.
Another crack in private credit
We also saw a troubling development in private credit. Blue Owl attempted to merge a smaller non-traded credit fund into a larger publicly traded one. Investors in the smaller fund would have taken an immediate 20 percent haircut because the larger fund trades at a discount to NAV. They pushed back and the merger was canceled.
Private credit issues are surfacing slowly but consistently. First Tricolor, then First Brands, now Blue Owl. I expect more.
Mailbag: Incentives, valuation anxiety, India, and Progressive
A few questions I got this week:
Is the two and twenty model fair?
The incentive structure can absolutely push some managers toward excessive risk, especially in BDCs where the management fee is charged on gross assets instead of equity. With leverage, that fee base is far larger and creates temptation. But most serious firms play the long game. Blow up once and you are out of business.
How do you know when a stock is fairly valued versus in a bubble?
Some investors are strict about valuation metrics. I am not. In a bull market, as long as the fundamental story remains intact, stocks trend higher. The dotcom bubble did not burst because valuations were stretched. It burst when fundamentals deteriorated during the 2001 recession. Nvidia’s fundamentals are still intact.
What do you think of Indian markets?
I invested in India when I ran my hedge fund. I made money some years and lost money others. My conclusion was that India’s markets are highly idiosyncratic. You need to be deeply embedded to understand what truly matters. I stay focused on the U.S. where I have an edge.
Thoughts on Progressive?
I own it. The company is simply more efficient than competitors. Think Walmart or T-Mobile. They take market share slowly and consistently. The stock is inexpensive right now on next year’s earnings. Competition is heating up in the short term but long term the story is intact.
Final thoughts
This week reinforced just how early we are in the AI cycle. Nvidia is selling picks and shovels in a gold rush, and demand for those tools is exploding. But until the world sees clear, repeatable proof that AI applications generate transformational productivity and profits, volatility will continue.
We will get that clarity eventually. Maybe next year. For now, the market is still trying to figure out what the AI era really means.
If you want more of these weekly wrap-ups, interviews and financial literacy content, check out our YouTube channel and realismanplaybook.com. And I’ll see you next week.
Thanks for reading this week’s wrap.
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This post is for informational purposes only and does not constitute investment advice. Please consult a licensed financial adviser before making investment decisions.
