Nvidia closes in on $6 trillion as bond markets flash caution: Deutsche Bank

The extended period of equities near record highs with yields remaining elevated raises the vulnerability of large growth stocks to a repricing, as higher real yields hit hardest on valuations tied to far-off earnings. Concentration heightens the danger, given that a few megacaps are propping up the main indices. Should the divergence narrow via a risk-off episode, Deutsche Bank expects the US dollar to gain while the euro and high-beta currencies weaken. Oil adds uncertainty: a new supply shock with such low inventories would lift inflation expectations and yields precisely when equities are most vulnerable.

Bond markets are preparing for turbulence as Nvidia's value hovers near $6 trillion, and Deutsche Bank states that both cannot be correct.

Key points follow:

• Nvidia's rally towards $6 trillion stands in stark opposition to turmoil in global bond markets.
• Last week, US 10-year yields reached about 5.3%, the highest since 2007, and 30-year yields hit about 5.6%.
• The spread between French and German 10-year yields recorded its largest weekly expansion in over 30 years, yet the STOXX 600 remains within about 4% of its all-time high.
• According to Deutsche Bank, bonds have signalled the alarm but risk assets have yet to factor in the implications.
• AI-driven earnings, buyback programmes and the dominance of megacaps account for equities' resilience.
• Aramco's caution about low oil inventories raises the prospect of an additional inflation jolt.

Nvidia's march toward a $6 trillion valuation epitomises a split that Deutsche Bank believes is unsustainable: bond markets are discounting a tougher environment while equities imply a favourable one.

The difference is sharp. US 10-year yields moved to roughly 5.3% last week, a peak not touched since 2007, and 30-year yields stood at about 5.6%, a level from 2002. Across the Atlantic, the gap between French and German 10-year yields posted its largest weekly jump in over thirty years. Nevertheless, Nvidia reached new all-time highs on Monday, and the STOXX 600 for Europe is around 4% below its record.

Deutsche Bank contends that bonds are already indicating a new macro environment characterised by multi-decade yield peaks, more rapid rate increases and oil surpassing $100 per barrel, while equities, credit markets and the VIX show scant evidence of strain. The bank believes that bonds have already incorporated the caution, but risk assets have not accounted for the fallout. Either the tension dissipates swiftly, or equities and credit will ultimately have to adjust to lower growth and elevated default risk.

Nvidia offers a reason for equities' resilience. The market is valuing a strong earnings narrative fuelled by AI demand, an unprecedented buyback scheme and revenue that nearly doubled in Nvidia's most recent quarter. For the index's biggest constituents, these factors have for now offset the burden of increased borrowing costs, and their sheer scale allows them to keep major benchmarks steady even as the macroeconomic picture worsens.

The bond market's signal remains perceptible underneath. According to Deutsche Bank's daily note, US equities first climbed on softer inflation figures last week, then reversed in the closing minutes of trade as long-term and real yields continued to climb. Elevated real yields increase the discount rate on future earnings, a shift that hits hardest the firms whose values are built on growth anticipated years into the future.

Oil adds further strain. On Monday, Saudi Aramco's CEO cautioned that replenishing low global inventories might require two years, a hazard that futures markets may not entirely capture.

The central question is which market yields first. Weaker US employment data has already lowered the probability of a Federal Reserve rate increase in October, providing some respite. A lasting decline in yields would support the equity advance, whereas additional increases would examine how much longer earnings power can compensate for a greater cost of capital.