Five factors that scare Capital markets in the short term

Persistent inflation threatens to upset the Federal Reserve’s plans, the possibility of a sharp Nvidia correction is shaking the foundations of Big Tech, while the prospect of a new trade war from Donald Trump is creating intense geopolitical uncertainty. With data worsening and scenarios of instability multiplying, investors are looking for answers at a time when even the economic bright spots hide dark sides.  

The Five Risks

In particular, there are five factors that scare us in the short term — many of them the dark side of the positive factors: 1. Inflation Much of the bullish scenario for next year is based on the assumption that fiscal stimulus in the United States will turn positive. Optimists also believe that the Federal Reserve and the Treasury will keep the far end of the yield curve low. So inflation is the biggest risk. If core inflation rises to, say, 4%, the Fed will be forced to raise short-term interest rates again, and fiscal maneuvers will become politically difficult. Historically, inflation episodes come in clusters, and we have just come out of one. We are not out of the woods yet. 2. Cracks in Nvidia Stock Note, there is no concern that Big Tech will fall like dominoes, but that one huge tech stock will fall – and then they will all fall like dominoes. Two bad scenarios for Nvidia: A. Competitors will make a technological leap, and then it will become clear that Nvidia’s pricing will be squeezed sooner than expected. In this case, shares of Microsoft, Amazon, Alphabet and Meta (and others) should rise but will remain stagnant. B. The AI ​​craze will die down and people will buy fewer GPUs than expected. In this scenario, hyperscalers will have finally spent huge sums on data centers without the expected performance, but they will remain excellent businesses and their capital expenditures will be reduced. But everything else won’t be okay. If Nvidia, for example, were to fall in half, $2.2 trillion would disappear into “money heaven.” 3. Margin Shrinkage We used to believe that profit margins tend to revert to the mean. Today, we’re less sure. But we still believe the rule of thumb that it’s very difficult for the U.S. economy to fall into recession or bear market when corporate profits are expanding. Margins have been pretty high recently. What’s worrying is that a weakened consumer, the cumulative effect of margin-squeezing tariffs, and increased depreciation at big tech companies that are investing relentlessly are constraining profitability and profits are starting to decline. But there is an alternative. Stock indexes in the UK, Japan, Taiwan, Hong Kong and Korea have all outperformed the S&P 500 this year. At some point, will the big, slow-moving asset managers (pension funds, insurance companies, sovereign wealth funds) decide that their huge, structurally over-invested positions in the US could be trimmed a bit? Perhaps when Nvidia falls off the cliff? 4. Donald Trump’s second term In his second term, Trump has shown a remarkable tendency to “back off” on his trade policies. But what if, as his term progresses, he decides to re-escalate, for example, his conflict with China? 5. The jobs report The September jobs report is out. It didn’t offer much clarity. The 119,000 jobs created was encouraging and well above estimates — the best month since April. That brings the quarterly average of job growth through the end of September to 62,000, not far from some officials’ estimates of the level of growth that would keep the unemployment rate relatively stable.   And it seems unlikely that this number is a fluke and prone to a significant downward revision, like July’s. The unemployment rate did rise from 4.3% to 4.4%, the highest since 2021, on a big rebound in labor force participation, mostly by younger workers. But a larger labor force is not a bad thing, as long as job creation can cover it. But there are two factors tempering the good news. 1. Seasonality may have inflated the numbers. Leisure and hospitality jobs, which rose by 47,000, had also been up a lot in September.

Cyclical industries were also weak. Excluding government jobs, health care and leisure/hospitality, there was a net loss of 7,000 jobs. A small bright spot in cyclical industries: construction employment rose by 19,000 — the first positive number in four months. 2. The impact of tariffs on employment is also worth considering. Manufacturing employment fell for a third straight month in September, and transportation and warehousing employment also fell sharply. The domestic industrial revival does not appear to have begun. Industries with high or medium exposure to tariffs (due to a high proportion of imported inputs) have been cutting positions since March. Such a mixed report is unlikely to move the tide at the divided Federal Reserve when it meets again in less than three weeks — before the November report. October data is lost forever because of the government shutdown. Data-wise, the Fed and we are all in the dark.