Global investors battle between long- and short-term wins amid Nvidia volatility

Global investors are bracing for a battle between long and short-term wins amid a dramatic sell-off in artificial intelligence-related stocks. 

AI darling Nvidia buoyed an otherwise deflated market when it reported strong earnings after the bell on Wednesday, sending its own stock soaring and carrying related names alongside it. However, the rally quickly reversed on Thursday with Nvidia ultimately ending the trading session 3% lower.  

While the U.S. chipmaker’s earnings initially appeared strong enough to quell concerns over an AI bubble, economic speculation put global investors back on the defensive as hopes dimmed of a December rate cut by the Federal Reserve. The U.K.’s hotly anticipated Autumn Budget is also expected next week.  

Asia-Pacific markets fell Friday, led by tech heavyweight SoftBank, which plunged more than 10%. European stocks followed suit with a negative open. Stateside, however, appetite may have already reversed – again – as futures rose.  

“I think the market is quite confused as to why this is happening,” Ozan Ozkural, founding managing partner at Tanto Capital Partners, told CNBC’s “Squawk Box Europe” on Friday.  

Market moves this year have been driven by sentiment, momentum, AI and innovation, “with sprinkles of geopolitical risk,” he said. “Although we haven’t got a specific reason why there has been a sell-off on the back of the strong Nvidia results, to me it’s not that surprising, because [it’s] only a matter of time until sentiment just shifts, because we just live in a much more uncertain world.” 

There also doesn’t need to be a catalyst, he added. However, the “most dangerous place we can be at” is a sustained sell-off, even if it’s a slow burn, Ozkural warning, noting that this could lead portfolio managers to lock in gains and cash out.  

Asset managers are driven by compensation cycles which is why they don’t like to hedge their bets, he said. “No one cares about the long term. Everyone is dead in the long term. No one even cares about the medium term. It’s all about short term cycles,” he said.  

“But the reality is, it’s year end, people need to get paid their bonuses, and it doesn’t pay to be bearish unless we see a sustained level of a sell-off.”  

Investors with cash in an AI ETF or index may be cashing out due to a mixture of year-end risk management and continued concerns over an AI bubble. Those who may have made a lot of money on the back of the AI trade will probably want to step back and sell, said Stephen Yiu, investment chief at Blue Whale Growth Fund, which has a position in Nvidia.  

However, for Julius Bendikas, European head of macro and dynamic asset allocation at Mercer, “it’s the battle between the solid fundamentals and questions being raised about multiples and maybe positioning getting a touch stretched.”

Despite solid fundamentals and earnings exceeding expectations, Bendikas told CNBC’s “Europe Early Edition” that investors are now starting to question whether the price is right and have started to sell as a result.

On technicals, “arguably, a lot of people have rushed into equities,” he said, noting that a recent Bank of America survey found cash levels are low. “So people have been quite long equities, maybe too long equities. And I think what we’ve seen yesterday is the valuations and technicals [narrative] overpowering the fundamental narrative, which came in quite strong post the Nvidia earnings overnight, a day ago.”

Nick Patience, AI lead at The Futurum Group, added: “Investors are also concerned about the circular nature of deals between Nvidia and other ecosystem players, questioning whether massive capital expenditures from hyperscaler customers represent sustainable demand.”