While Nvidia’s valuation soars towards $6 trillion, bond markets signal economic headwinds, sparking concerns over market stability and increasing concentration risks among megacaps.
Nvidia’s march towards a $6 trillion market value has become the most visible symbol of a widening split between equity and bond markets that Deutsche Bank says cannot persist for long. While the chipmaker has continued to set records, bond investors have been pricing in a much harsher economic backdrop, leaving markets with sharply different views on what comes next.
That divergence has been particularly pronounced in government debt. US 10-year Treasury yields rose to about 5.3% last week, their highest level since 2007, while 30-year yields reached roughly 5.6%, a peak not seen since 2002. In Europe, the spread between French and German 10-year borrowing costs posted its biggest weekly jump in more than 30 years. Even so, Europe’s STOXX 600 remains close to record territory, underlining how little strain has been reflected in equities so far.
According to Deutsche Bank, the bond market is already discounting a new regime of sustained high yields, more aggressive policy tightening and oil prices above $100 a barrel, but risk assets have yet to absorb the implications. The bank’s view is that either the pressure in bonds subsides quickly or stocks and credit will eventually have to reprice for slower growth and a higher chance of defaults.
Nvidia helps explain why the equity market has held together. Investors continue to reward the company’s artificial intelligence growth story, its sizeable buyback plans and revenue that nearly doubled in its latest quarter. Deutsche Bank’s concern is not confined to one company, however. Some analysts at the bank have warned that Nvidia’s valuation has grown so large that it now exceeds the total listed equity value of all but a handful of countries, a level of concentration that raises questions about how much of the broader market depends on a small group of megacaps.
The pressure points do not stop there. Deutsche Bank said recent US trading showed how quickly equities can lose momentum when long-dated yields and real yields keep climbing, because higher real yields reduce the present value of profits expected far in the future. Oil remains a wildcard. Saudi Aramco’s chief executive warned on Monday that rebuilding thin global inventories could take up to two years, heightening the risk of another inflation shock just as markets are already sensitive to higher borrowing costs.
For now, softer US jobs data has eased expectations for an October Federal Reserve rate increase, which has offered some support to stocks. But the broader question remains unresolved: if bond markets are right about a tougher macro environment, eventually something has to give. A sustained fall in yields would lend credibility to the equity rally. Another move higher would test how long earnings strength, share buybacks and investor enthusiasm for artificial intelligence can continue to offset a more demanding cost of capital.
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