Global Investors Navigate Nvidia’s Volatility, Balancing Short-Term Gains with Long-Term Strategy

Global investors are navigating a volatile landscape characterized by a tug-of-war between short-term profits and long-term strategic positioning, particularly amidst recent turbulence in artificial intelligence-related stocks.

AI bellwether Nvidia initially injected buoyancy into a market grappling with uncertainty after reporting robust earnings post-market close on Wednesday. This sent Nvidia’s stock soaring, pulling along related names in its wake. However, the euphoria proved short-lived, as the rally reversed course on Thursday, with Nvidia ultimately closing the trading session 3% lower. This highlights the inherent risks and speculative nature underpinning the AI sector’s rapid ascent.

While the U.S. chipmaker’s earnings initially soothed concerns over an AI bubble, macroeconomic anxieties, particularly diminished expectations of a December rate cut by the Federal Reserve, quickly overshadowed the positive sentiment. The upcoming U.K. Autumn Budget also adds another layer of complexity to the global economic outlook, contributing to investor caution.

Asia-Pacific markets experienced a downturn on Friday, spearheaded by tech heavyweight SoftBank, which plunged more than 10%. European stocks mirrored this trend with a negative open. Stateside, however, market appetite appeared to shift again, with futures rising, suggesting the possibility of yet another reversal in sentiment. This whipsawing action underscores the heightened sensitivity of the market to economic signals and geopolitical undercurrents.

“I think the market is quite confused as to why this is happening,” Ozan Ozkural, founding managing partner at Tanto Capital Partners, observed on CNBC’s “Squawk Box Europe” on Friday. He suggests the market’s bewilderment stems from the confluence of various factors, making it difficult to pinpoint a single catalyst for the sell-off.

Market movements this year have largely been fueled by sentiment, momentum, AI enthusiasm, and innovation, punctuated by geopolitical risks, Ozkural explained. “Although we haven’t got a specific reason why there has been a sell-off on the back of the strong Nvidia results, to me it’s not that surprising, because [it’s] only a matter of time until sentiment just shifts, because we just live in a much more uncertain world.” This sentiment reflects a broader unease about the sustainability of current valuations in the face of global uncertainty.

Ozkural argues that a specific catalyst isn’t always necessary to trigger a market correction. He cautions, however, that a sustained sell-off, even a gradual one, poses the most significant risk. Such a scenario could prompt portfolio managers to lock in gains and reduce exposure, exacerbating the downward pressure.

Reflecting on the behavior of asset managers, Ozkural highlights the influence of compensation cycles, which often incentivize short-term performance over long-term strategic planning. “No one cares about the long term. Everyone is dead in the long term. No one even cares about the medium term. It’s all about short term cycles,” he said, pointing to the potential for short-sighted decision-making.

“But the reality is, it’s year end, people need to get paid their bonuses, and it doesn’t pay to be bearish unless we see a sustained level of a sell-off.” This comment alludes to the inherent tension between individual incentives and the overall health of the market.

The year-end phenomenon of investors cashing out of AI-focused ETFs and indices reflects a combination of risk management strategies and persistent doubts about the long-term viability of the AI boom. Some likely made significant profits from the AI trade and are likely looking to capitalize on these gains, according to Stephen Yiu, investment chief at Blue Whale Growth Fund, which holds a position in Nvidia. This profit-taking behavior can contribute to selling pressure.

The Federal Reserve’s upcoming December rate decision represents a closely watched event for the financial markets; investors had anticipated a rate cut, but expectations are now bifurcated.

Although the central bank’s decision to hold rates steady isn’t inherently problematic, it could still prompt a recalibration among investors, particularly those expecting a cut, according to Yiu. Such a move could lead to a pause and reassessment of investment strategies going into the new year.

“I think people just want to probably lock in and derisk, and take a break from [President Donald] Trump as well, who knows what Trump is going to next,” he added. This reflects the combined influence of economic factors and political uncertainties on investor sentiment.

Despite the current hype, discerning the long-term winners and losers in the AI landscape remains a challenge, Yiu acknowledges. He foresees a clear distinction emerging between companies actively investing in AI and those providing the underlying AI infrastructure. Yiu’s firm strategically leans towards the latter, placing emphasis on foundational technologies that enable AI development and deployment.