Analyzing the underlying logic of the current market decline: the wave of deleveraging in the technology sector triggered by NVIDIA's slowing growth

Abstract : Last week, the risk asset market faced certain pressure, especially after the release of key data such as US August non-farm employment and unemployment rate on Friday, there was a significant pullback. However, from the data, although it was not as expected, it was not particularly bad. Therefore, for this price trend, we still need to peel off the cocoon and see what happened. Therefore, the author summarized the relevant logic over the weekend and shared some insights with you. Overall, the core reason for this round of decline, on the surface, is that the US non-farm payroll data "rebounded less than expected", which to some extent triggered the market's concerns about the US recession. Essentially, with the release of NVIDIA's Q2 financial report, the growth rate of performance slowed down. As the core driving force of this bull market, Yingwei began to kill valuations. As a result, capital accelerated the pace of deleveraging in the technology sector to avoid risks.

 

Non-Farm Payroll Data is lower than expected, but not particularly bad

Firstly, let's take a brief look at the changes in data such as non-farm employment and unemployment rate, which fell in the crypto market on Friday. The number of new US jobs added in August increased by 142,000, higher than 89,000 in July. This indicates that the job market has improved, but there is still some gap with the expected 165,000. The unemployment rate has also declined to 4.2% from 4.3% in July, which is in line with market expectations.

 

I have analyzed in my previous article that this data can actually be observed in advance through the changes in the number of first-time applicants for unemployment benefits in the week. It can be seen that in August, both the number of first-time applicants and the number of consecutive applicants showed a downward trend, indicating that the job market has recovered well. Therefore, the non-farm payroll data far exceeded expectations, causing serious panic in the market about the recession. Personally, I maintain a wait-and-see attitude, so the decline in the cryptocurrency market is likely to be a feedback to the deleveraging cycle as a trigger.

 

So why did such data, which doesn't seem particularly bad, cause violent fluctuations in the cryptocurrency market? I think the fundamental reason is a feedback from the deleveraging operation triggered by the slowdown in NVIDIA's Q2 financial report growth.

 

The continuously slowing performance growth rate cannot meet the expectations of capital, and Nvidia begins to kill valuation, accelerating deleveraging in the technology sector

 

The core driving force of this bull market can be said to be the growth of the AI sector represented by NVIDIA. The Q2 2024 financial report was released on August 29th. Although it still showed a growth trend, it triggered a market sell-off. The core reason is the accelerated decline in EPS growth rate, which triggered panic and the market began to kill valuation. Here is a brief explanation of the logic behind it. Usually, the stock price is the market's feedback on the company's valuation, and the value of assets is evaluated through various financial data, forecasts, and market information. The core goal of stock valuation is to judge whether a company is worth investing in and whether the price matches its potential profitability or asset status. One of the most basic valuation methods is to calculate the Price-To-Earnings Ratio (P/E Ratio) and compare it with the average level of the company's industry to determine whether the current stock price is overvalued or undervalued. The calculation method of Price-To-Earnings Ratio is to divide the stock price by the US stock earnings, which is EPS, because the core value of the stock is dividend rights.

 

Actually, this value can be understood as investing in a stock and earning back the principal in a few years based solely on the company's dividends. Usually, due to the high growth characteristics of the technology industry, the market will give a higher Price-To-Earnings Ratio standard, which is easy to understand because the market believes that with the continuous realization of high growth, the company's dividend growth will become faster and faster. Therefore, this discount on future growth will be reflected in the market's tolerance for high stock prices.

 

After sorting out these backgrounds, let's take a look at what problems NVIDIA's financial report reflects. In fact, the essence is that the accelerated decline of EPS has caused concerns about overvaluation in the market. From this chart, we can clearly see this impact. The upper part is NVIDIA's stock price, and the is the year-on-year growth rate of EPS. It can be seen that the EPS growth rate in the second quarter has shown a significant decline compared to the performance in the first quarter, and the downward trend has increased.

 

Let's recall that in the past six months, there has been a widespread discussion in the market about whether NVIDIA's stock price is overvalued. Every time the quarterly financial report is released, there will be price fluctuations. However, every time NVIDIA breaks the market's doubts with an impressive growth data and returns to the Price-To-Earnings Ratio by far exceeding expectations. This has given the market a certain inertia of thinking. Even though its market value has once reached the first position, this high growth expectation still remains. Of course, this is also due to the current restrictive interest rates, which have put considerable pressure on most industries. Therefore, such a growth seedling is obviously favored by capital, and capital chooses to stick together to fight against the high-interest environment. However, the growth performance this time does not seem to meet the expectation of continuous strengthening of capital, and it did not pull the PE back to the reasonable range of around 46 as scheduled, which means that the stock price seems to be overvalued, so the market began to kill the valuation. Therefore, it can be seen that after the market fully digested the financial report information on August 29th, NVIDIA's stock price quickly fell after the opening on September 3rd after US Labor Day, causing the Price-To-Earnings Ratio to adjust to around 46. However, whether there will be further decline in the future still depends on the outlook given by various institutions. Currently, the attitudes of all parties seem to be relatively optimistic, and there is no further bearish information.

 

 

In previous articles, it has been mentioned that the Japanese yen is a source of cheap funds in the entire high-interest environment, as well as the relationship between the Japanese semiconductor industry and NVIDIA. Therefore, in the process of pushing up NVIDIA's stock price, the Japanese yen is the core source of leveraged funds. With the development of valuation killing, we can see that although the Bank of Japan has repeatedly appeased, the market has actually started deleveraging operations to avoid risks again. Starting from September 3rd, the USD/JPY exchange rate quickly lifted DNU from 147 to 142, challenging the low point of 140 resistance level at the beginning of the year.

 

The rapid appreciation of the yen has further increased the cost of leveraged funds, which will further squeeze the profits of arbitrage operations, and this will further stimulate deleveraging operations. Therefore, we need to be vigilant about the negative feedback risks brought about by this.