Nvidia shares fell 17% last Monday, but it was not due to concerns about the Federal Reserve’s interest rate plans. Instead, the drop was caused by near-term investor worries that the company’s ability to earn dollars associated with its valuation is uncertain.
The stock price reflects market expectations of a company’s future earnings. Nvidia’s market cap has remained relatively flat since its IPO in 1999, despite expectations that it should have soared during periods of “easy” monetary policy. However, when the Fed raised interest rates starting in 2022, Nvidia shares rose 239% in 2023.
This suggests that fundamentals drive stock prices, not central bank interventions. Markets gain strength from weakness as the future replaces the past. The fact that Nvidia’s shares performed well despite Intel struggling indicates that equity markets are not addicted to Fed “ease”.
The true driver of market strength is the replacement of bad and mediocre companies with good and great ones. If the Fed could prop up stocks, its interventions would be beneficial for both Nvidia and Intel, but this would come at the cost of stifling dynamism in the economy.
Nvidia’s recent correction was due to concerns about its ability to maintain earnings growth, not because of the Fed’s rate cuts. As Barry Ritholz said, “nobody knows anything” about the future, except that it is being rewritten by present-day events. The good and great will drive this future, not the Fed.
Source: https://www.forbes.com/sites/johntamny/2025/02/02/nvidia-reminds-us-that-stocks-gain-strength-from-fundamentals-not-fed