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Introduction

For weeks, we have been highlighting the steady degradation occurring beneath the surface of the market. We have repeatedly advocated remaining selective with new buys while harvesting gains and opportunistic trades into strength. We also discussed the macro backdrop as the single greatest risk factor facing equities.

All of that remains true.

However, for today, the spotlight shifts squarely onto the godfather of the AI trade: NVIDIA, which reports earnings after Wednesday’s close.

More on that later.

Some will point out that the indexes barely corrected during the latest reversal from the highs (~2.5% peak-to-trough for the SPX and roughly ~3.75% for the Nasdaq 100 Index (NDX)). That is true. But remember, we never made an outright bearish call. Our expectation was for a pause or mild retracement following the relentless rally off the March lows—and in that sense, the market largely behaved as anticipated.

Of course, after the type of lockout rally we have experienced over the last several months, calling for digestion was hardly a heroic stance.

What many investors missed, however, was that a significant amount of the damage was masked beneath the surface through aggressive rotation.

For example, the Goldman Sachs Momentum Basket declined roughly ~20% in just four trading sessions. That is a meaningful factor de-grossing event, and if you were a late buyer chasing the crowded momentum trade, there is a good chance you are now experiencing some pain.

Per Goldman Sachs, the unwind during the initial two-day stretch ranked among the worst momentum de-grossing events seen over the last four years.

We also should not be particularly surprised by Bank of America’s findings, which showed hedge funds aggressively selling U.S. equities, with record outflows concentrated in large-cap technology and momentum-driven names.

So yes, it has been painful if you found yourself on the wrong side of that unwind, and hopefully our guidance over the last several weeks helped mitigate at least some of the damage.

Interestingly, since yesterday’s lows, the Goldman Sachs Momentum Basket has already retraced nearly 50% of its recent drawdown.

Which naturally begs the question:

Is the correction already over?

The answer to that question likely sits on the desk of Jensen Huang and his team at NVIDIA, whose earnings report after Wednesday’s close will almost certainly dictate the market’s next near-term move. A strong report would likely help fuel another push toward all-time highs.

The issue, however, is that NVDA has not exactly had the best track record with post-earnings reactions recently. Four of the last five earnings reports have largely been duds from a price-action perspective.

That said, it also has not meaningfully stopped the broader market—and arguably should not. At NVDA’s current size, it becomes increasingly difficult to sustain the same rate-of-change growth profile seen across many of the secondary and tertiary AI infrastructure companies, whose earnings trajectories continue to dwarf even NVDA’s impressive numbers.

And it is not just NVDA that tends to experience a post-earnings hangover—the broader technology and semiconductor complex often does as well.

This implies that even a strong NVDA report could still get sold and potentially act as a catalyst for further rotation beneath the surface of the market. Determining the next major directional move will likely require additional weekly close data and broader confirmation across sectors and internals.

As we write this, NVIDIA has reported better-than-expected sales, strong Data Center revenue growth, and raised guidance. Yet despite the strong numbers, the stock is seeing only a muted reaction and is currently trading roughly flat after-hours.

Maybe the recent trend of the “NVDA earnings hangover” persists once again.

If you recall, we suggested looking for alpha opportunities within Software in our May 10th report.

Since then, the outperformance versus Semis has been substantial (~500 basis points). The question now becomes whether this is the beginning of a sustainable rotation or simply a temporary blip before the Semiconductor trade resumes leadership.

At this point, we simply do not know.

Software has admittedly been a difficult area to maintain conviction in, particularly given how aggressively recent rallies have been sold. However, the bottoming pattern we outlined in that May 10th report remains very much intact.

Again, we think it is simply too early to make a definitive call regarding sustained rotational continuation. The setup still requires more information and confirmation across sectors, positioning, and price action.

Our suspicion is that by Friday’s close, we will have a much clearer picture.

Moving on.

The biggest development from a macro perspective has been the sudden collapse in oil prices. That move has produced a meaningful gap lower in price, aided by the usual opaque and headline-driven communication out of the Trump administration suggesting a potential Iran deal is now in the “final stages.”

By now, we all know these statements should be treated cautiously.

But for the moment, the market appears willing to believe it.

Which, in turn, is helping cool the rates market as traders begin pricing in reduced inflationary pressure tied to lower energy prices.

Should these comments actually lead to a finalized deal, then you have to assume a meaningful reaction rally would follow across risk assets.

The question, however, is how much of that potential peace agreement is already being priced into the market.

We would venture to say: quite a bit.

Time to check the charts.