Will Nvidia Trump the Fed? Yardeni answers

The FOMC minutes data released Wednesday revealed that Federal Reserve policymakers are in no rush to lower the federal funds rate and are even contemplating raising it if inflation remains above the Fed's 2.0% target.

The 2-year Treasury yield has risen to 4.94%, suggesting a single 25bps rate cut over the next year, analysts at Yardeni Research said in a note. In turn, stocks experienced a sell-off as concerns over "even-higher-for-even-longer" interest rates weighed on investor sentiment.

“We still don't expect any fed funds rate (FFR) increases or decreases in our "normal-for-longer" outlook for interest rates over the rest of this year through at least the first half of next year,” Yardeni’s team wrote.

The market research firm also noted that the initial unemployment insurance claims report, published earlier in the week which showed 215,000 claims for the week of May 17, further confirms the labor market's continued strength.

Historically, the Fed has typically lowered the federal funds rate when the weekly insured unemployment rate increased. However, it has remained flat at 1.2% since the week of March 14.

In their "Roaring 2020s" scenario, Yardeni analysts believe that the technology boom will continue to drive productivity, economic growth, and the stock market higher, despite the Fed's actions.

“The Fed's monetary policy is just one of many drivers of the economy, and the Fed won't need to cut rates to shore up economic growth if productivity is boosting it, as it did last year,” analysts said.

The latest, yet another blockbuster earnings report from Nvidia (NASDAQ:NVDA), further confirmed Yardeni Research analysts' thesis. In this context, the firm highlighted three key themes.

Firstly, they believe the stock market began to discount their "Roaring 2020s" scenario on November 30, 2022, when OpenAI released ChatGPT. Since then, the S&P 500's semiconductor indexes have surged along with NVDA.

Secondly, Yardeni pointed out that Wall Street analysts are turning increasingly bullish on the prospects for semiconductors, raising earnings growth forecasts for this year and the next two.

Lastly, Yardeni researchers said their close associate, Jim Oelschlager of Oak Funds, “has often observed that semiconductors are the oil of the high-tech revolution.”

“The forward earnings of the S&P 500 Semiconductor industry has soared since the start of 2023. The forward P/E is currently 29.9,” they concluded.