Nvidia showed that AI spending is still accelerating

Nvidia produced another set of figures that would have seemed extraordinary only a few years ago.

Second-quarter revenue more than doubled to $96.2 billion, while data-centre revenue reached $89 billion. More strikingly, Nvidia expects revenue to grow around 70% in the financial year ending January 2028, against analyst expectations of roughly 44%. It also expects to deploy another two million GPUs with Amazon Web Services during 2027 and 2028.

Why did investors care? Nvidia sits close to the centre of AI infrastructure spending, so its order book tells us something about expenditure across cloud computing, data centres and semiconductor equipment.

There is a catch. Nvidia also warned about memory shortages and pressure on profit margins.

For investors, the message is becoming clearer: AI demand remains strong, but the economics of supplying that demand matter increasingly.

US inflation refused to fall

July’s preferred Federal Reserve inflation measure didn’t provide the reassurance investors wanted.

The PCE price index rose 3.7% over the year, unchanged from June and slightly above forecasts. Core PCE, which removes food and energy, remained at 3.3%. Consumer spending continued to grow, while second-quarter consumer spending was revised higher.

This is the awkward part for the Fed. Inflation isn’t accelerating sharply, but neither is it returning quickly to 2%.

Meanwhile, the economy remains reasonably firm. Private domestic spending grew strongly and corporate profits increased by more than $400 billion during the second quarter.

That makes another rate increase possible without the Fed necessarily fearing an immediate recession.

Jackson Hole changed the interest-rate conversation

Warsh used his first Jackson Hole speech as Fed Chair to make one point clear: the 2% inflation target isn’t negotiable.

He said the Fed would have more work to do unless officials gained confidence that inflation was moving back towards target. Investors reacted quickly. The US two-year Treasury yield rose nearly 13 basis points on Friday, while the 10-year yield climbed to around 4.73%. The dollar strengthened and gold fell sharply.

This matters because markets had spent much of the summer debating whether the next significant move in US rates might eventually be down.

That assumption now looks far less secure.

For highly valued growth shares, higher bond yields raise the hurdle. Strong earnings can offset that pressure, as Nvidia demonstrated, but valuations have less room for disappointment.

Friday’s US employment report

Friday brings the most important economic release of the week.

Economists expect August payrolls to increase by roughly 58,000, following July’s surprise loss of 23,000 jobs. Unemployment is expected to remain around 4.1%. The figures arrive at 1.30pm UK time.

A strong report, particularly if accompanied by faster wage growth, would strengthen the case for a September Fed rate increase.

Another weak figure creates a more complicated picture. It could reduce rate-rise expectations, helping bonds, but investors would then have to consider whether the US economy is losing too much momentum.

Broadcom: another AI reality check

Broadcom reports on Wednesday.

After Nvidia’s figures, investors will want to see whether demand for specialised AI chips and networking equipment tells the same story. Broadcom has become one of the largest beneficiaries of spending by hyperscale cloud companies building their own AI systems.

Strong orders would reinforce the view that AI investment is broadening beyond Nvidia.

A weaker outlook would raise a different question: are some technology companies spending faster than their customers can generate returns?

US manufacturing and services

The latest ISM business surveys will provide another check on the strength of the American economy.

July’s manufacturing index jumped to 55.6, its highest level in more than four years. A reading above 50 indicates expansion.

Investors will pay particular attention to prices and employment.

Strong activity combined with rising costs would support the Fed’s argument for tighter policy. Slower activity and softer prices would give the central bank more reason to wait.

Eurozone inflation

Tuesday brings the first estimate of August eurozone inflation. July inflation stood at 2.9%, and markets are watching for another increase before the European Central Bank’s September meeting.

A move above 3% would increase pressure on the ECB to raise rates.

That could push European government bond yields higher and support the euro, although higher financing costs would be less welcome for indebted governments and rate-sensitive companies.

Final thought

Last week captured the tension running through markets rather neatly.

Companies are still producing impressive profits and the AI investment cycle remains powerful. Yet inflation hasn’t disappeared, government bond yields remain high and central banks aren’t ready to declare the job finished.

The real question at the moment, is not trying to predict the next set of results but looking at your portfolio and thinking if these lofty expectations are impacted by rate rises or stubbon inflation, how would that affect you ?