Tale of two stocks and what it tells us about this market

Target announced earnings this week, reporting same store sales were down 3.7% over the prior year quarter. This was the fourth consecutive quarter of same-store sales declines, with the prior ones ranging from down 4-5%. Target is obviously not executing well in an ever-changing retail environment, given some of their competitors, namely Costco and Walmart, reported strong same-store sales growth. On the other hand, NVIDIA reported record revenue of $26.04 billion for the fiscal first quarter of 2025 (Q1 2025), up significantly from $7.19 billion in the same quarter last year. This revenue beat analysts' expectations and marked the fifth consecutive quarter of record results for NVIDIA's data center business. The data center segment alone generated a staggering $22.6 billion in revenue, quintupling year-over-year.

• This is yet another example of an economy moving from atoms to bits
• This is also an indication that we are in a stock picker's market, where the sectors you are allocated to and the underlying companies matter more than in recent past
• It also brings us to the concentration of performance of the stock market recently
• As Bianco Research reported recently, NVDA alone represents roughly 40% of this year's gains for the S&P 500
• Taken together with META, MSFT, and AMZN, 54% of this year's S&P 500 gains are represented by just 4 companies
• This is very high relative to history and not a sign of a healthy market
• Unless we see a broadening out of performance, the market may struggle to produce further gains

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Crypto news

In a surprising about-face, the SEC approved the trading of Ethereum ETFs by the exchanges this week. While the SEC approved spot Bitcoin ETFs earlier this year, Ethereum ETFs were not expected to be approved anytime soon. Relatedly, the House of Representatives passed the FIT21 bill this week, which received bipartisan support. The bill attempts to delegate regulation of the crypto ecosystem from the SEC to the CFTC.

• While it was widely reported the SEC approved eight Ethereum ETFs, this is not what actually occurred
• The SEC approved the trading of Ethereum ETFs by the exchanges
• They will still need to approve the individual S-1s filed by the asset managers for trading
• The House passing the FIT21 bill was a very positive development for the crypto ecosystem
• The SEC has continued to resist providing a regulatory framework for crypto assets, trying instead to fit them into the securities regulatory framework
• We have discussed in the past that Congress may need to act here and this bill was a good first step in this direction

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China-Taiwan tensions escalate

China conducted large-scale military exercises around Taiwan from May 23-24, including mock missile strikes, dispatching fighter jets with live missiles, and mobilizing naval vessels. These drills were described by China as a "powerful punishment" for Taiwan's new pro-independence President Lai Ching-te, who was sworn in on May 20. The exercises aimed to test China's ability to blockade and potentially "seize power" over Taiwan, which Beijing claims as its own territory. Taiwan responded by scrambling jets, putting forces on alert, and accusing China of an "irrational provocation" that undermines regional peace and stability. President Lai called on China to stop its military intimidation in his inauguration speech. He seeks dialogue with Beijing while upholding Taiwan's democracy and avoiding conflict with the U.S. and other allies.

• While this may be just another “show of force” it got the attention of some in the foreign policy contingent
• China may be escalating ahead of the US presidential elections given the uncertainty that another Trump term may bring
• A Chinese invasion of Taiwan would almost certainly draw the US into the conflict
• While this is not being widely reported by the MSM, it would create additional uncertainty for markets in an already precarious time

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