Markets cautious ahead of NVDA earnings as AI server costs surge and Iran sanctions escalate

Ok – so stocks began the week cautiously…. The Dow gained 140 pts, the S&P lost 21 pts, the Nasdaq lost 200 pts, the Russell gave back 23 pts, the Transports lost 140 pts, the Equal Weight S&P added 9 pts, while the Mag 7 lost 62 pts.

All that talk of choking Iran off from the rest of the world, did not cause stocks to plunge. But news that the companies actually building Nvidia-powered AI servers are warning some of their biggest data-center customers - think MSFT, META, GOOG, AMZN & ORCL - that server prices could jump more than 15% next year, driven largely by soaring memory costs – think MU, SK Hynix, & SAMSUNG. Semi’s (SOXX) lost 2.6% while Memory names (DRAM) got punched in the face – falling 6%.

And that naturally caused all eyes to focus on NVDA – which fell by 3% yesterday as we await their earnings tomorrow after the bell. The expectations call for earnings of approximately $2.09 per share, but the headline number isn’t what matters most. We want to hear about Blackwell and Vera Rubin demand, data-center revenue, hyperscaler spending, gross margins, HBM memory costs, networking demand and whether Nvidia can pass rising component costs through to its customers.

Investors want to hear that AI demand remains strong, that hyperscaler spending is NOT slowing, that margins are holding up and that the guidance continues to justify the ongoing enormous spend.

Because here’s the rub – higher memory prices aren’t necessarily a problem for NVDA IF Jensen can pass those costs along. The question is what happens when the guys writing the checks are suddenly paying 15% more and start asking questions? At what point do MSFT, META, GOOG, AMZN and ORCL say ‘enough!’.

Now the options market is pricing in about a 5.4% move in either direction depending on how the report is interpreted – putting NVDA somewhere in the $198/$218 range – which means Jensen could create, or erase, some $280+ billion in market value in the wink of an eye. And the clock ticks…. T-35 hours.

And then we had the whole Scotty thing and the Economic D-Day announcement – now known as ‘Operation Economic Outcast’ - an economic assault designed to cut Iran off from the global financial system and, in his words, ‘sever the economic lifelines keeping the regime alive’. And here’s the key — this isn’t just about sanctioning Iran anymore. It’s about sanctioning anyone who helps Iran.

Scotty is targeting five key areas — digital assets, gold, technology, aviation and shipping - while putting countries, companies, banks and other financial institutions on notice – saying – If you continue doing business with Tehran then you risk losing access to the U.S. financial system.

But Scotty didn’t drop the hammer completely yet.

He deliberately stopped short of immediately going after the biggest foreign financial institutions – think Chinese banks – because doing that could create a much bigger disruption across the global financial system. Instead, he’s giving Iran’s trading partners a chance to step away before the next round hits.

And THAT is where this gets interesting – because China remains Iran’s most important oil customer. Scotty essentially put China on notice – You can continue doing business with Iran – but understand that doing so may eventually cost you access to America and the dollar-based financial system. Analysts this morning suggest that China will not be deterred, so let the games begin.

And don’t go to sleep yet – Bessent suggested there could be more to come later this week.

Now, Oil traders didn’t panic because they don’t believe Bessent’s threat will materially disrupt physical supply. And THAT is the key. Yesterday oil fell by $2 and this morning it is down another $2.80 – now trading at $82.25. Trendline support is down at $80 – a level it feels like it wants to test.

The drop in oil helped bonds catch a bid, pushing yields lower. The TLT gained 0.6% while the TLH gained 0.5%. The 10- yr is now yielding 4.69% and the 30 yr is yielding 5.22%. Ok great – yields fell a bit, but let’s be honest – they are still kissing what I call the danger zone. But that’s me – you may have your own definition of what the danger zone is – and that will drive your investment decisions.

Which brings us right back to Scotty and the treasury…Last week he surprised the bond market with plans to increase buybacks of longer-dated bonds as he tries improve liquidity and relieve pressure on the long end of the curve. On Friday he upped the ante and then yesterday there were even more reports saying that Treasury could potentially use some of its massive cash pile to repurchase older, higher-yielding securities – suggesting an even more aggressive use of funds.

Ok – but remember – none of this fixes the problem. It may temporarily improve liquidity, change the maturity profile and try to relieve pressure on the long end. But it can’t buy back its way out of $40 trillion in debt and trillion-dollar deficits.

Ultimately, the markets will determine the clearing price and the yield required to finance US bonds. And considering the amount of issuance that is coming to the market – both gov’t and corporate – my gut says yields are not going down (very much).

Next up—gold – it rose $48 yesterday to end the day at $4,650 – that’s up 15% in 3 weeks…. Why? Because investors are concerned about the debt, the deficit, inflation and in my view, they are also becoming increasingly uncomfortable with the blurred line between managing the bond market and interfering with its natural price-discovery process. This morning gold is down $14 at $4,637 and remains in the $4,380 (trendline support) and $4,750 (near term resistance) trading range.

Now let’s talk earnings and while NVDA will be the star of the show – it isn’t the only report that matters. Today we hear from Dick’s Sporting Goods, Intuit and Zoom. Wednesday brings Salesforce, Okta, HP, Kohl’s, and Abercrombie & Fitch. Thursday brings Marvell, Workday, Autodesk, Affirm, IREN, Best Buy, Dollar General, Hormel, J.M. Smucker and Bath & Body Works.

So, by the end of the week, we should have a much clearer picture of three important investment themes: AI infrastructure spending. Corporate technology budgets. And the health of the American consumer.

NVDA and Marvell will tell us whether the AI arms race is still accelerating.

Salesforce, Intuit, Workday, Autodesk, Okta and Zoom will tell us whether corporate America is still spending on technology and productivity.

And Dick’s, Kohl’s, Abercrombie, Best Buy, Dollar General and Affirm will tell us about the health of the consumer. Are they still good or are they beginning to bend under the weight of higher borrowing costs and persistent inflation.

The economic calendar - Today brings the Case-Shiller Home Price Index, New Home Sales and Consumer Confidence. New Home Sales are expected to be a bit weaker (no surprise) while Consumer Confidence is expected to slip to 90.1 from 90.8.

Wednesday brings Durable Goods Orders and the July PCE report—the Fed’s preferred inflation gauge and that is expected to be down just a bit. But I wouldn’t be celebrating just yet, because next month’s is expected to surge again.

Thursday brings the second estimate of second-quarter GDP and that is expected to be unchanged at 1.5%. It is also the opening of the annual Jackson Hole Economic Policy Symposium which runs thru Saturday.

Now, while all eyes may be on Kevy Warsh – I don’t think he will say anything that we don’t already know. He has been very clear – less transparency is more. I do not expect him to box himself in.

This morning – European markets are higher…..all up between 0.4% and 0.8%.

US futures are catching a bid…Dow futures are up 240 pts, S&P’s up 36, Nasdaq up 278 while the Russell is up 13 pts.

Remember – it is the last week of August – most of Europe is on vacation and here at home – many are away from their desks as summer comes to an end…. Moves will be exaggerated in both directions – as volumes decline. Much of the action driven by the algorithms rather than human beings. Reactions to the eco data, earnings or any headline can be swift (and will be swift) – If you are looking for an opportunity – put in some good til cancelled orders below and above the market to take advantage of the volatility and then go to the beach.

The S&P closed at 7,652 – down 21 pts…. We are now down 2.5% off the highs seen in mid-August. I continue to think we move lower as we move into September…We’ve got another round of inflation data that will hit just prior to the FOMC meeting on September 16^th…Fed Fund Futures are putting at 40% chance of a rate hike on the table…which means that there is a 60% chance of no change. No one is suggesting a rate cut at all.

The midterms will now start taking center stage – with only 11 weeks to go, expect the rhetoric and volatility to increase. Markets will begin handicapping what each potential outcome means for taxes, spending, regulation and the deficit. Historically, markets tend to prefer a divided government because gridlock reduces the probability of dramatic policy changes – so expect every shift in the polls to become the headline that day.

Penne Alla Vodka

Ok – like this market, it’s all about balance. There’s plenty of heat coming from Iran, inflation and the bond market, but there’s also plenty of richness coming from AI, earnings and an economy that continues to hold together. The trick is not letting any one ingredient overwhelm the dish – because too much heat, too much cream or too much vodka and the whole thing falls apart.

Prep time: 15m

Cook time: 30m

Total time: 45m

Serves: 4-6

Ingredients

1 LB Penne Rigate

2 tbls olive oil

2 tbls butter

1 onion -diced

1 garlic cloves - sliced

1/2 tsp red pepper

3 tbls tomato paste

1 - 28 oz can San Marzano tomatoes - hand crushed s&p

1 c heavy cream, Parmegiana - reggiano, Pecorino Romano, basil

Preparation

Step 1

Bring a large pot of well-salted water to a rolling boil.

Step 2

Heat the olie oil and butter in a large sauté pan over medium heat. Add the onion and cook for 4–5 minutes until soft and translucent. Add the garlic and red pepper flakes and cook for another minute — don't burn the garlic!

Step 3

Add the tomato paste and cook it for 2–3 minutes, stirring constantly, until it turns a deep brick red and begins to caramelize. Don't rush this part — that's where you build the flavor.

Step 4

Now add the vodka. Let it bubble away for 2–3 minutes, scraping up everything stuck to the bottom of the pan, until most of the alcohol has cooked off.

Step 5

Add the hand-crushed San Marzano tomatoes, season with salt and pepper, bring it to a gentle boil and then lower the heat. Let the sauce simmer for 15–20 minutes until it thickens.

Step 6

While the sauce cooks, drop the penne and cook it 1–2 minutes shy of al dente. Before draining, grab at least a cup of that pasta water.

Step 7

Lower the heat under the sauce and slowly stir in the heavy cream. The sauce should turn that beautiful orange-pink color. Add the Parmigiano and Pecorino and stir until smooth.

Step 8

Now add the penne directly to the sauce with about ½ cup of pasta water. Turn the heat back up and toss aggressively for a minute or two until the sauce becomes silky and grabs onto every piece of pasta.

Step 9

Finish with torn basil, another handful of Parmigiano and a drizzle of good Olive oil.