Who will lead the US stock market, NVIDIA or the Federal Reserve? The answer will be revealed this week.

NVIDIA-led tech stocks vs. Fed's focus on inflation indicators, who is the leader of the U.S. stock market trend?

Last week, NVIDIA's explosive performance ignited the market, supporting the continued upward trend of U.S. stocks. Investors speculate that with the optimistic expectations for the development of AI technology, productivity is expected to further improve, thereby increasing corporate profits and suppressing the risk of rising inflation.

This has led the market to start doubting whether the leader of the U.S. stock market trend has shifted from the Fed to NVIDIA.

However, this Thursday, the upward momentum of U.S. stocks will face another major test: the PCE price index.

Previously, due to unexpected increases in CPI and PPI data, the market reignited concerns about rising inflation, giving the Fed more reasons to stay put. As the PCE data preferred by the Fed, the January PCE price index will be the last key reference data for the Fed's March FOMC meeting.

Amid NVIDIA's surge, bubble risks still linger

While NVIDIA-led tech stocks have lifted the market to new heights, Wall Street is not without warnings, suggesting that the current rally is eerily similar to the dot-com bubble of the early 21st century, with potential risks of a pullback.

A Bank of America report points out that the top 5 stocks in market value have contributed to 75% of the S&P 500's gains so far. The top three tech stocks in market value account for 90% of the tech sector's gains to date - the concentration of the U.S. stock market has reached its highest point since 2009.

JPMorgan Chase also stated that the valuations of tech giants in the U.S. stock market are too high, with the market's gains relying on a few super-weighted stocks. In the face of uncertain macroeconomic factors, once these few stocks experience a significant decline, the market will also shake.

Since the beginning of the year, the S&P index has risen by 6.7%, a gain that was achieved in just 5 trading days. Nick Colas, co-founder of DataTrek Research, identified several catalytic factors:

Last week, NVIDIA's profit report boosted the S&P by 2.1% on the day of the announcement, with previous positive news about NVIDIA driving the S&P up by 1% in four days;

On January 19, after TSMC released its earnings report, chip stocks approached historical highs, leading the market;

Despite Powell's hawkish remarks in early February triggering a sell-off, the stock market rebounded thereafter;

On February 2, Meta's financial report led to a temporary increase of over 20%, driving the market up.

Colas stated in the report that this indicates the market is shifting its focus from "how long interest rates will remain high" to the profit leverage of tech giants. Colas believes:

"This is a typical 'mid-cycle' market behavior. Once (and only when) there is positive momentum in a certain industry, investors can tolerate higher interest rates."

It can be said that what drives the stock market to rise is not the AI-driven profit model, but investors' belief in the profit expectations brought by AI.

Colas stated that this new growth pattern may lead the Federal Reserve to maintain a "moderate neutral interest rate" level - neither stimulating nor suppressing economic growth - or open the door to rate hikes.

He pointed out that in the past 125 years, market experts have proposed countless "growth paradigms," but only two periods (the 1960s and the 1990s) actually achieved productivity improvements.

Jose Torres, a senior economist at Interactive Brokers, stated in a report that the current focus of investors is whether artificial intelligence will continue to bring strong performance to leading technology providers and whether it will make the companies that ultimately use these products more efficient and profitable.

He mentioned that many technology-related companies have given cautious guidance, and the actual value of artificial intelligence seems insufficient to support total profits.

Once PCE Surges, Stock Market May Experience Significant Pullback

After NVIDIA's earnings report attracted widespread attention, inflation data may once again draw Wall Street's focus.

Previously released January CPI and January PPI both exceeded expectations, with core CPI showing the largest monthly increase in eight months, indicating persistent inflation pressure.

The rising inflation is forcing investors to retract their rate cut expectations. Currently, according to CME Group data, market pricing suggests only a 2.5% probability of a rate cut by the Fed in March, with the most likely scenario being the first rate cut starting in June, with a maximum of 100 basis points cut during the year, and up to 4 rate cuts by the end of the year.

Some media opinions point out that if the January PCE price index shows that inflation remains sticky or even rises, investors may have to accept the prospect of no rate cuts by the Fed this year or even a possibility of further rate hikes, which could lead to a significant stock market pullback and an increase in U.S. bond yields.

Michael Arone, Chief Investment Strategist at State Street Global Advisors, told the media:

"I believe investors will once again focus on inflation indicators." "The most important thing is the trend of inflation returning to the target of 2%. If this target starts to become precarious, the market will eventually experience volatility."