Why Nvidia is more important to Wall Street than the debt ceiling

Investors have been concerned about the debt ceiling discussion and the potential for a US default on its debt for almost six months now. However, Wall Street seems to be mostly brushing the current negotiations off as unimportant noise and concentrating instead on a better-than-anticipated first-quarter earnings season.

What’s going on: Treasury Secretary Janet Yellen’s estimate of when the United States must raise the debt ceiling or risk becoming not able to pay some of its debts on June 1 is just three trading days away. President Joe Biden with Republican House Speaker Kevin McCarthy’s talks are still at a standstill.

A default, according to economists, would be a disastrous occurrence that may stifle growth, cause the dollar to lose its standing as the world’s reserve currency, and send markets into a tailspin.

However, instead of fretting about the debt ceiling on Thursday, investors chose to congratulate semiconductor manufacturer Nvidia (NVDA) on a solid earnings report. The artificial intelligence chip manufacturer saw its shares leap about 25% as it surpassed earnings estimates and provided solid guidance for the coming year, helping the tech-heavy Nasdaq Composite gain 1.7%. The company produces chips used in artificial intelligence.

Nvidia’s share price has increased, bringing its market capitalization just a little bit closer to $1 trillion.

The rise of Nvidia was advantageous to other chip manufacturers. Taiwan Semiconductor (TSM) and AMD (AMD) both experienced gains of 11% and 12% on Thursday. Gaining 8.6% was the VanEck Semiconductor ETF (SMH).

Also read: Over the Past Decade, US Stocks Have Outperformed Indian Equities by Roughly 310 Basis Points CAGR

The direction of corporate profits is all that matters for markets, according to David Bahnsen, chief investment officer at The Bahnsen Group, in a note.

“Our main message to investors is to ignore the debt ceiling noise and pursue investments that provide growing cash flows,” he continued.

Almost all S&P 500 companies have already released their first-quarter earnings, and according to Factset statistics, 78% of those companies’ earnings-per-share exceeded analyst expectations. Since the fourth quarter of 2021, S&P 500 businesses are on track to post their greatest performance in comparison to analyst predictions.

According to FactSet, very few executives have brought up the debt ceiling as a potential obstacle during earnings calls. Only 13 S&P 500 corporations have mentioned the “debt ceiling” on their calls between March 15 and May 18.

According to Jeffrey Buchbinder, chief equity strategist for LPL Financial, “solid earnings results compared with expectations have helped keep stocks afloat in recent weeks amid debt ceiling jitters, regional bank concerns, and louder calls for recession.”

The bottom line: Yesterday, we discussed a “market vibe shift” in which investors began to recognize the dire repercussions of a potential US government default. And even if Washington’s brinkmanship has increased stock market volatility, traders continue to prioritize corporate fundamentals.

Bond market jitters are growing

Bonds haven’t fared as well throughout the tension over the debt ceiling as US equities did.

As worries over the US debt ceiling get more serious, Treasury yields, which move in the opposite direction of prices, have been rising.

On Thursday, the yield on the one-month Treasury bill, which is particularly vulnerable to the debt limit crisis, surpassed 6%, while in the previous week, the yields on the 2- and 10-year Treasury notes reached their highest levels since March.

According to Dave Sekera, chief US market strategist at Morningstar, “if there were an actual payment default, based just on the size and scale of the amount of US Treasuries that are outstanding, I do think that this could be something that could hit the markets pretty hard.”

So what is a shareholder to do? Hold on, Sekera said.

For investors who do hold US Treasury securities, he said, “I don’t think you’re going to end up losing any principal, and I fully expect that once the debt ceiling is raised, you will get your principal and interest.” It’s even possible that the US government will continue to pay you interest up until you receive your principal payment back.

In spite of this, Sekera emphasized that “there’s really no way to know exactly what would happen, and I don’t think anyone really can understand the full ramifications of it right now.

JPMorgan will eliminate 1,000 First Republic Bank positions

According to my colleague Matt Egan, JPMorgan Chase (JPM) told around 1,000 First Republic Bank workers on Thursday that they would be losing their jobs.

The majority of First Republic’s assets were acquired by JPMorgan earlier this month when the government seized the regional bank with headquarters in San Francisco. The second-largest bank failure in US history occurred as a result.

According to a JPMorgan representative, the bank informed all First Republic employees about their future job status on Thursday, and the vast majority of them, or approximately 85%, have been offered a temporary or full-time positions.

A total of 1,000 First Republic employees, or 15%, are still waiting on a job offer.

According to JPMorgan, not all workers were included in the company’s May 1 agreement with the Federal Deposit Insurance Corporation to purchase the majority of First Republic.

JPMorgan stated in a statement, “We’ve been open and honest with their employees and maintained our promise to update them on their job status within 30 days. We acknowledge that since March, they have been experiencing stress and uncertainty, and we anticipate that today will provide a resolution.