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== Macroeconomic Analysis == === Macro sensitivity === US Semiconductor companies are sensitive to economic conditions and market activities, with high beta. S&P 500 and SOX are heavily correlated. Nvidia has a high beta of 1.75<ref>https://finance.yahoo.com/quote/NVDA?p=NVDA</ref> which measures the sensitivity to the market activity. This strong correlation indicate the performance of the semiconductor companies being heavily influenced by the general market activies, being affected by macroeconomic factors including the monetary policies, inflation rates, federal funds rate and many more. [[File:Sox.png|thumb|947x947px|SOX<ref>https://www.nasdaq.com/market-activity/index/sox/historical</ref>vs S&P500<ref>https://www.wsj.com/market-data/quotes/index/SPX/historical-prices</ref>|none]] === Philadelphia Semiconductor Index (SOX) === Philadelphia Semiconductor Index (SOX) measures the performance of 30 largest United States semiconductor companies involved in the distribution, manufacturing and design of the product. Nvidia has the largest market capitalisation with $1.11T and second highest trailing price to earnings ratio of over 235. Nvidia benefited from recent surging Artificial Intellignece demand and FOMO (fear of missing out) trades which substantially increased its valuation. Typically during recessionary period with economic hardship, growth stocks with high beta and PER suffer more than value stocks on the downside. {| class="wikitable" |+SOX constituents<ref>https://www.tradingview.com/symbols/NASDAQ-SOX/components/</ref> !Company !Ticker !Stock Price ($) (as of 04/08/2023) !Market Capitalisation ($, in billions) !Trailing Price to Earnings Ratio |- |Analog Devices, Inc. |ADI |185.4 |93.958 |26.63 |- |Allegro MicroSystems, Inc |ALGM |42.61 |8.326 |44.58 |- |Applied Materials, Inc. |AMAT |146.22 |123.626 |19.42 |- |Advanced Micro Devices |AMD |114.69 |186.955 |645.69 |- |ASML Holding N.V. |ASML |679.81 |273.87 |33.04 |- |Broadcom Inc. |AVGO |874.92 |362.985 |27.59 |- |Coherent Corp. |COHR |47.47 |6.708 |(negative) |- |Entegris, Inc. |ENTG |101.02 |15.209 |(negative) |- |GlobalFoundries Inc. |GFS |58.64 |32.818 |21.37 |- |Intel Corporation |INTC |34.73 |146.035 |(negative) |- |IPG Photonics Corporation |IPGP |110.93 |5.226 |51.85 |- |KLA Corporation |KLAC |494.32 |68.505 |20.37 |- |Lam Research Corporation |LRCX |689.13 |93.092 |19.28 |- |Lattice Semiconductor Corporation |LSCC |90.71 |12.673 |68.91 |- |Microchip Technolog Incorporated |MCHP |82.94 |45.114 |20.68 |- |Monolithic Power Systems, Inc. |MPWR |522.18 |24.99 |54.83 |- |Marvell Technology, Inc. |MRVL |62.01 |53.974 |(negative) |- |Micron Technology, Inc. |MU |69.27 |76.167 |(negative) |- |Novanta Inc. |NOVT |173.06 |6.265 |87.04 |- |NVIDIA Corporation |NVDA |445.83 |1110 |235.39 |- |NXP Semiconductors N.V. |NXPI |209.91 |55.015 |20.31 |- |ON Semiconductor Corporation |ON |101.04 |44.323 |25.24 |- |QUALCOMM Incorporated |QCOM |119.4 |113.725 |12.8 |- |Qorvo, Inc. |QRVO |106.12 |10.506 |108.15 |- |Skyworks Solutions, Inc. |SWKS |108.58 |17.399 |15.78 |- |Synaptics Incorporated |SYNA |87.75 |3.498 |19.33 |- |Teradyne, Inc. |TER |106.53 |16.702 |28.35 |- |Taiwan Semiconductor Manufacturing Company (TSMC) |TSM |95.47 |500.277 |15.71 |- |Texas Instruments Incorporated |TXN |167.52 |152.998 |18.91 |- |Wolfspeed, Inc. |WOLF |58.71 |7.404 |(negative) |} === Recession === US Semiconductor stocks suffer brutally during economic recessions with more than 30% downside on the SOX index during the COVID outburst. NVIDIA however, remained resilient on artificial intelligence forecast and increasing demand. However, from the start of the US Federal Reserve's attempt to bring long term inflation rate to 2% with quantitative tightening and interest rate hikes, the stock fell for more than 65% from November 2021 to September 2022 before increasing more than 300% with increased artificial intelligence demand and FOMO trades. Numerous potential recession signals are evident which need to be cautiously considered. These include the worst inverted US treasury yield curve since 1981 stagflation and oil crisis<ref>https://fred.stlouisfed.org/series/T10Y2Y</ref>, two consecutive negative quarterly growth on US Gross Domestic Income (GDI)<ref>https://mishtalk.com/economics/gross-domestic-income-gdi-suggests-the-us-is-in-recession-right-now/</ref>, the debt crisis (explained below), commercial real estate crisis, and many more. Although the labour market remains tighter than expected with resilient economic strength, deteriorating economy will likely to negatively impact the perfomance of NVIDIA based on historical performance of semiconductor companies. === Monetary Policy === Monetary policy refers to instruments used by the US Federal Reserve in order to achieve maximum employment with price stability. Quantitative tightening (QT) ejects liquidity out of the financial market, which is achieved by the Federal Reserve reducing its balance sheet by either selling their current assets, mostly US Treausry bonds and Mortgage Backed Securities (MBS), or letting the bonds mature without reissuance. Reduced amount of liquidity cools the economy which bring inflation down, which historically put downward pressure on tech and growth stocks including NVIDIA.<ref>https://www.investopedia.com/quantitative-tightening-6361478</ref> Quantitative Easing (QE) is the reverse of QT. Commonly referred as "money printing", they acquire bonds and securities and effectively lending money or injecting liquidity to the financial market. Increasing the money supply heats the economy and brings currency devaluation. This typically leads to inflation by issuing more debt and the FED lowers the federal funds rate to near zero in order to pay less interest on their debt. Semiconductor companies and growth stocks outperformed during QE phase of the economic cycle. === Credit Ratings === Credit ratings of the United States is a major catalyst for market activities. On 1st of August, Fitch downgraded the credit rating of the United States from the highest rating of AAA, to AA+. Fiscal deterioration and growing government deficit burden were the reasons behind this downgrade.<ref>https://www.bbc.com/news/business-66379366</ref> Previously, the credit rating downgrade of the US only occurred once in 2011, following the aftermath of 2008 Financial Crisis and the Federal Reserve's attempt to revive the economy with vast amount of quantitative easing and an increased balance sheet. This downgrade is significant as investors began to question the economic strength of the US. With high macroeconomic sensitivity, the SOX index plummeted by 6% after the announcement. Credit Ratings of 10 US banks were downgraded by Moody's on 8th August 2023. {| class="wikitable" |+US Banks Downgraded by Moody's !Bank Name !Ticker |- |M&T Bank |MTB |- |Webster Bank |WBS |- |Pinnacle Financial Partners |PNFP |- |BOK Financial Corp |BOKF |- |Associated Banc-Corp |ASB |- |Old National Bancorp |ONB |- |Amarillo National Bank |(private) |- |Commerce Bancshares |CBSH |- |Prosperity Bank |PB |- |Fulton Financial Crop. |FULT |} Additional six banks are under review for a potential downgrade. {| class="wikitable" |+US Banks under review for potential credit rating downgrade !Bank Name !Ticker !Market Capitalisation |- |Bank of New York Mellon |MK |$35.49B |- |U.S. Bancorp |USB |$61.462B |- |State Street Corp. |STT |$23.279B |- |Truist Financial Corp. |TFC |$42.57B |- |Northern Trust Corp. |NTRS |$16.52B |- |Cullen/Frost Bankers Inc. |CFR |$6.846B |} These downgrades indicate a deteriorating credit market following regional bank turmoil of collapse of Silicon Valley Bank, Signature Bank, First Republic Bank and so on. These banks are responsible for commercial real estate loans which is significantly underperforming with higher interest rates. With US office vacancy rates at an all time high<ref>https://www.axios.com/2023/04/13/office-vacancy-rate-remote-work-hybrid-work</ref>, this causes devaluation of those vacant buildings which reduces the availability of CRE loans for owners. With higher interest rates and increased difficulty of CRE loans, this sector in the market is in deep trouble with $1.5 Trillion of CRE loans to mature by 2025. <ref>https://themessenger.com/business/the-1-5-trillion-mortgage-crisis-looming-for-commercial-real-estate</ref> The severity of the debt crisis often brings downward pressure for growth stocks with high PER, including NVIDIA, thus Nvidia is likely to have downward pressure with deteriorating economic conditions. === Debt Crisis === Credit ratings downgrade of the US was mainly due to potential defaults on current governmental and individual debt levels amid economic uncertainty and tightened credit conditions. In terms of consumer loans, often refered as the credit card debt, has reached an all time high near $1 trillion, and delinquency rates on those debt has been increasing for the last two years. Upward trends on both data are a reliable leading indicator of an economic recession, as evident on 2000 dot-com crash, 2008 financial crisis and 2020 Covid. These set of data indicate a deteriorating credit conditions which typically contribute to underperformance of SOX and NVIDIA. [[File:Delinquency1.jpg|credit card debt, delinquency rates]]
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