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Two themes dominating markets in 2023—artificial intelligence and interest rates—threaten to collide this week with

Nvidia

earnings and the Jackson Hole economic symposium. With risks skewed to the downside, investors should look past short-term tech hype and fear the Federal Reserve.

Wall Street’s bullishness over

Nvidia

(ticker: NVDA) has reached fever pitch, with many analysts upping their estimates ahead of the chipmaker’s earnings due Wednesday and betting it will rejuvenate a rally in the wider stock market and tech sector.

“We expect a bullish outlook from Nvidia that should be the fuel in the engine to continue this tech rally into the rest of the year despite the tough talking Fed,” said Dan Ives, an analyst at broker Wedbush, exemplifying the mood among tech bulls.

This sentiment is understandable. Betting on more gains for a stock that has already increased 220% this year—buoying the

S&P 500
and

Nasdaq
indexes—is a classic momentum trade. But the excitement might be setting traders up for disappointment. While there are signs the AI bubble can still get bigger, will Nvidia earnings really be so good as to lure in investors that have so far stuck to the sidelines?

“You get the sense that a lot is hanging on Nvidia delivering blistering numbers and a very strong outlook. Imagine buying Nvidia at [a valuation of] 244 times trailing earnings—you have to be feeling lucky,” said Neil Wilson, an analyst at broker Markets.com.

Nvidia stock rose 8.5% on Monday and another 1.5% in Tuesday’s premarket. Optimism has yet to be tempered, and it looks concerning taken in the context of the bond market—and might be evidence that investors are thinking of fighting the Fed.

U.S. Treasury yields have surged in recent weeks, with the yield on the benchmark 10-year note topping 4.35% to sit at its highest level since 2007. 

Behind the advance in yields are expectations among investors that the Fed will keep interest rates at a generational high for longer than once thought. A commitment to bringing inflation down to 2% and few signs of a slowing U.S. economy give little incentive to the central bank to loosen financial conditions. And futures markets are pricing in a near 50/50 chance of another interest-rate hike by November. 

The latest leg higher for yields came on Monday, when the tech-heavy Nasdaq snapped a four-day losing streak. Typically, bond yields and tech stocks do not rise in tandem, because higher yields tend to dampen demand for equities that have valuations pinned on growth years into the future.

The sharp bond market moves puts Fed Chairman Jerome Powell’s speech on Friday at Jackson Hole in focus. The Fed chief is likely to caution that the central bank will keep rates restrictive for some time and may take them higher if needed.

So, between Nvidia and Jackson Hole, let’s tally the risks for markets. Realistically, Nvidia needs to beat, not meet—or, heaven forbid, disappoint—analyst expectations to keep the AI and tech party going. Meanwhile, what’s the likelihood that Powell will spin a dovish yarn at the central bank world’s version of Woodstock?

Not only do these risks seem skewed to the downside, but the latter force—the Fed—is structurally more dominant than the former. AI and Nvidia have driven big gains for tech stocks this year, but the Fed’s role in slowing the pace of rate hikes shouldn’t be discounted either. Yet it was the central bank and its dramatic campaign of rate hikes that in 2022 delivered the stock market its worst year since 2008.

If the Fed keeps rates high through 2024 and investors can earn a cool, risk-free 5% on Treasuries, there is little incentive to pile into riskier bets like tech stocks.

No matter how much Nvidia earnings want to make investors dance, Powell’s Jackson Hole speech may be like turning the lights on early at the party.

Write to Jack Denton at [email protected]