After hitting record highs, markets have pulled back as volatility returns and investors question whether the AI rally can keep up its pace. In this week’s episode, Gary breaks down what’s driving the recent swings, NVIDIA’s headline-grabbing earnings, and why expectations for another Fed rate cut are fading.

Watch the full video below.

TRANSCRIPT:

Hello, everyone. Welcome to this week's 7 Market Movers. My name is Gary Quinzel, Vice President of Portfolio Consulting at Wealth Enhancement. Equity markets have been anything but quiet these past few days.

After reaching yet another new all time high late last month, we've seen major indices reverse lower as volatility has spiked, and investors have begun to question both the strength as well as sustainability of the AI trade. Today, we're gonna cover what's driving those sharp swings, talk about NVIDIA's earnings, and also why expectations for another rate cut have been quickly fading. Now for perspective, November is usually a strong month for markets. Historically, it's averaged around 2% returns and has been positive around 74% of the time.

As mentioned, though, this year, volatility has dominated. The VIX index, which measures volatility, has surged from around 12 to roughly 27 in just over a week, which tells us that traders are getting a little uneasy about what's been an exceptionally strong year for the markets.

Even after this pullback, the S&P 500 still trades at a valuation of around 22x forward earnings, which is well above its 10-year average of about 18x. So valuations remain elevated. And as mentioned, investors are beginning to ask, has the market already priced in too much optimism around AI? Those concerns have come to a head these past few days.

The Bloomberg Magnificent Seven Index, which tracks those seven mega cap names that we all know, That that index has fallen around 8% from the end of October through mid November as investors have taken profits and, as mentioned, questioned whether or not the AI growth can keep up with expectations. We've also talked a lot about circularity, what analysts refer to as when companies buy from each other, invest in one another, particularly within the AI supply supply chain, which is a phenomenon that we also observe in the dot com period. So NVIDIA's latest results have captured the overall tensions perfectly.

Once again, the company easily beat expectations. Q3 revenues were up sixty two percent to around $57 billion, and they also put out guidance for Q4 revenue of $65 billion in Q4, which initially sent shares up around 5%. But by midday on Thursday, those gains evaporated.

Investors shifted gears and started focusing on the rising accounts receivables of NVIDIA, which are now up to $33 billion, up from $23 billion earlier this year. Also, noted growing concentration of of those hyper-scaler companies that are amongst those accounts in accounts receivable. So we all know that NVIDIA remains a powerhouse, but this report just reminded markets that even great stories need a flawless execution, especially when valuations are this high. We're also seeing some little itty bitty stress signals elsewhere.

We've observed that demand for credit default swaps, in particular on Oracle, which has been a major spender within the of the big AI players, has surged in recent weeks. It's just another sign that some traders are beginning to hedge some of their exposure to the broader AI trade.

Switching gears to the macro front, the overall picture is somewhat mixed. Now labor data, the September payrolls came in at 119,000 new payrolls, which beat expectations, But that's really old data. Because of the government shutdown, the Bureau of Labor Statistics just now released September's data and already announced that they won't even publish October data. So it's created a major blind spot for policymakers and those investors that rely on that data to predict what's gonna hap what the next move for the Fed is going to be. The lack of current data is one of those reasons why the odds of the December rate cut have dropped to roughly 40%, down from almost a 100% roughly a month ago.

Another major reason that, odds of a rate cut have gone down is simply because inflation is still too high at 3%, and it's something that's being brought up by current Fed governors questioning whether or not we need another rate cut right now.

All of this does raise a really important question. If the Fed is on pause for the remainder of the year and AI enthusiasm is somewhat cooling, what is going to be the catalyst or what is going to drive a year end rally? I think that's why the markets are taking a little bit of a breather right now. But let's keep perspective.

Overall, markets are still having a terrific year. The S&P 500 is up 13% year to date. Nasdaq, even better at 16%. Overseas, even better.

Emerging markets are up roughly 30%, and even bonds are doing quite well at almost 7%. So it could be that just as this pullback could be nothing more than a healthy correction rather than something more structural in nature. Our advice for advisers and investors is to stay diversified and disciplined. We know that the tech trade is strong and remains influential, but leadership needs to broaden.

We also advise our investors to pay attention to liquidity and credit conditions. These spikes in volatility often precede good opportunities. And also to use weakness selectively because quality companies or funds that invest in quality companies with solid fundamentals often can become more attractively priced as the market digests all of these moves.

So to recap, volatility is certainly back. The AI trade is now being tested, and rate cut expectations are fading, but the markets remain resilient overall. Just another reminder to stay in tune with your long term investment objectives. And if you have any questions, please reach out to your financial adviser.

We'd be happy to get back to you and answer those questions. Thanks for tuning in. We'll see you next week on seven Market Movers. Take care.

This information is not intended as a recommendation. The opinions are subject to change at any time and no forecasts can be guaranteed. Investment decisions should always be made based on an investor's specific circumstances.

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