NVDA reported 1Q25 (ended April 30th) last night.

The company had already announced that there would be a significant negative impact on earnings from the late April decision of the Trump administration to bar sales it has previously okayed of watered-down NVDA AI chips to China.

The earnings call gave more detail:

–a $4.5 billion charge in the first quarter and

–a further $8 billion or so in the second.

to expense these now effectively worthless chips ordered from TSMC.

Slightly geeky, but I thought it was interesting that the company didn’t give as its primary view of its results profits ex the charge, and then follow with the actuals, containing the charge, as a secondary view. It did the opposite. More conservative, which is always good. But this also did underline the damage done to the company by having relied on the word of the administration.

The stock immediately went up by about 5% on the news–roughly where it is as I’m writing just after 9am, New York time. That is to say, the move had nothing, as I see it, to do with the court ruling against the entire Trump tariff apparatus.

My two takeaways:

–there was no (discernible to me, anyway) negative reaction by trading bots to the company financials

–the company suggested that there was considerable new interest from the EU and the Middle East in becoming AI super powers.

what I think is most interesting about NVDA

It has concluded, I think, that it’s impossible to have any real presence in the Chinese market, a huge technological and economic center, from outside the country. It may also figure that being subject to the whims of a dogma-driven autocrat and to the possibility of arbitrary arrest by the secret police aren’t the deal-breakers they once were. Arguably, key employees may be safer there than here. Most important, though, I think it understands, or has been forced to realize, that there are big plusses to being a key participant in the important Chinese scientific community that are impossible to get without a physical presence there.

NVDA has grown from being the video game graphics chip company, to the cripto mining company, to the go-to AI chip company. This kind of reinvention is a key part of any long-term growth company–the most valuable kind of equity investment, in my view. Maybe the next iteration is to become the synthesis of US and Chinese AI technology.

NVDA, the premiere AI chip maker, reports 1Q25 earnings after the close today. The consensus estimate is that eps will come in at $.93 per share. The progression of recent quarters’ results, earliest to most recent, is:

$.68

$.81

$.89.

So earnings growth has clearly been decelerating for some time. Arguably, then, a continuation of this trend itself should not be earthshaking news. Prior to the ban on sales of AI chips to China late last year, this deceleration was due mainly, as I read the financials, to the disappearance of operating leverage as SG&A expense (basically, payments to company researchers and salespeople) progressively shrank as a percentage of sales.

NVDA has made a statement about the impact on the government’s sales ban, saying that this will result in a loss of $15 billion in future revenue and a one-time charge of $5.5 billion to write off chips it has ordered from TSMC that can no longer be sold.

If we look at the recent price action of the stock, it reached an all-time high of $153 in early January, fell to around $86 three months later, before rallying to the current $135 or so as I’m writing this before the NY open today.

The big question: what will happen to the stock when it reports after today’s close, assuming that earnings come in as analysts expect and there are no big negative surprises announced by management?

Put a different way:

–if we’re in a world where professional analysts reevaluate and buy and sell a stock as news comes out, then, arguably, the 40%+ drop in the stock price earlier in the year factors in most/all of the bad news about sales to China. So the stock should go up or down based on how the actuals deviate from projections and what new information management may disclose during the earnings announcement

–if we’re in a world dominated by trading bots designed to react quickly to actuals being announced rather than estimates analysts have projected based on their own fact-finding, as well as news releases, then we could see an ugly reaction to the company’s announcements after the close.

It will be interesting to see what happens.

As for myself, my younger son persuaded me to buy NVDA years ago. I’ve held most of what I bought back then until late last year. As regular readers will probably know, I began to worry then that the market didn’t fully understand that earnings growth would begin to decelerate in 2025 as SGA expense became more trivial, leaving sales growth as the only real factor driving earnings. So I sold most of what I owned in the fourth quarter, replacing some of it with AVGO.

I started buying back a smallish amount of NVDA in the high $90s. That says I think the first alternative above is what will happen.

But I’m not sure. It will be interesting to see.

The Russell 2000 index gives us the purest view of global investor thoughts about the US economy. It’s down by about -6% year to date in $US.

This contrasts with the EAFE index of stocks in the developed world ex the US, again investors’ best assessment, this time of the world outside the US. It’s up in $US so far this year by +18%.

The spread is 24%–which is enormous! My sense (I haven’t gone back to look) is that this is the largest outperformance of ROW stocks vs. US in at least a quarter-century.

Note: NASDAQ and the S&P 500 both have something like a 50/50 mix of US and foreign, so they don’t give an area-specific view.

More:–

If we take the UK, the sick man of Europe, its FT index is up by 7% in local currency terms so far this year Sterling has gained about another +7% against the USD, making the return in $US just under 15%.

Japan, whose working population peaked over 30 years ago and whose economic direction is, even now, deeply influenced by the old samurai codes–in other words, a train wreck still in progress–in the plus column in $US, although only by about +5%.

For what it’s worth, the S&P and NASDAQ are flattish.

Why is this happening?

I think the four main things are:

–tariffs. The domestic auto industry has had tariff or quota protection for over half a century. GM had half the domestic market back then, but was unable to keep pace with Japanese competition, even being given a leg up by Washington. This is in line with economic theory and real-world experience that protection engenders worse performance, not better.

GM is still a mess now, even after going through bankruptcy–and is neck and neck with Toyota–which has been on the receiving end of US government protective measures–for the domestic market share lead with ~15%.

Besides not working, tariffs add to inflation and reduce real incomes.

–ICE grabbing and deporting immigrants to foreign prisons before they can exercise their legal rights is a very bad look. It also conjures up images of Manzanar, or the gulags, or the fascism of post-WWI Europe–the opposite of what the land of the free and the home of the brave are supposed to be. This activity seems to have the enthusiastic approval of the President

–Trump himself. News articles are beginning to appear that suggest he is suffering from the same kind of cognitive decline that Biden’s handlers hid from the public during his second term.

–why isn’t either side of the aisle in Congress speaking up about any of this?

I’ve always thought of the UK as a sad country economically, lost in dreams of past glory–and not the kind of place you’d like to invest your money. I suspect that the US is starting to give off the same vibe. I hope not, but for the first time since the Nixon years I think we can’t simply rule this out.

“Afloat” may not be the best word, since the US stock market is right about breakeven, year to date. On the other hand,

–EAFE (Europe, Australasia and the Far East), the index of non-US developed world markets) = +16%

–Japan = +8.3%

–Hong Kong = +18%, so far this year.

You may have to go back into the last century to see such relative underperformance of the US as we’ve experienced during this year so far.

I think the reason is pretty clear. It’s that investors who see the budget now being discussed in Congress understand that it won’t reduce the country’s outstanding $36 trillion in debt. Rather, the estimate of the Congressional Budget Office is that over the next half-decade the Federal government will not only spend all the money it collects in taxes and add another $3.6 trillion to what we now owe. Looking from a different perspective, Washington would need eight years of devoting every penny it receives to pay back creditors to–no other outlays–to be able to extinguish that debt.

The bond market is signaling that it thinks the risk the government will sooner or later default on a portion of that debt are rising. President Trump would reply that tariffs will cover the shortfall. Conventional economic wisdom would suggest that the tariffs will slow economic growth, adding to the debt problem, not shrinking it.

So it’s beginning to demand higher interest payments to offset this risk.

So far, most of this has been expressed through about a 10% decline in the value of the dollar vs the currencies of our trading partners. My experience, which is admittedly a bit dated, is that as prior funding crises have developed, US-based bond investors have taken the lead in pushing up rates. If someone forced me to guess, I’d say that a lot depends on the spending bill that comes out of the Senate.

There has already been a distinct stock market reaction to the Trump proposals, in two ways. The more significant is that the relative performance of sectors has been rearranged in favor of those less vulnerable to tariff harm. If we look at European markets ex currency gains, however, they are still about 8% ahead of their US counterparts. This is unusual.

Ytd through yesterday, the industry breakout of S&P returns are as follows:

Industrials +7.1%

Staples +5.3%

Utilities +5.3%

Financials +3.7%

Materials +2.1%

Communication services +2.1%

Real estate +0.6%

S&P 500 -0.7%

IT -2.8%

Energy -5.3%

Healthcare -5.3%

Consumer discretionary -6.9%

The big losers so far are Consumer discretionary, basically retail sales, and Healthcare, on the idea that many drugs and/or their constituents come from abroad, and consumers will pay at least part of the tariffs.

Energy is in the minus column both because of the domestic economic slowdown being set in motion by Washington and intra-OPEC squabbles about production levels.

Industrials are arguably a beneficiary of tariffs. Staples through Real Estate are arguably not hurt directly.

Commenting on the approval of the Trump spending bill, House Republicans said it reinforced Ronald Reagan’s vision of the US as “that shining city upon a hill.”

Hard to know what to make of that statement, given that in the same paragraph in his farewell address, Reagan continued:

“a tall, proud city built on rocks stronger than oceans, wind-swept, God-blessed, and teeming with people of all kinds living in harmony and peace; a city with free ports that hummed with commerce and creativity. And if there had to be city walls, the walls had doors and the doors were open to anyone with the will and the heart to get here.”

This Congress has allowed the free ports to be closed. The doors of the city are no longer open to large parts of the world, with secret police actively arresting and deporting non-white immigrant residents. Medical assistance for the less well-off is being disappeared, as well.

Thinking as an investor, not simply as a human being, these are not actions that trigger PE multiple expansion and currency strength. There’s also the economically perverse (and damaging) decision to shift income tax burden away from the people least likely to spend their extra money, placing it instead on the shoulders of the people who would be most likely to consume.

It should be no surprise, then, that interest rates are rising, as investors factor in the greater risk of holding Treasuries, that the dollar is weakening as capital leaves the US, or that non-US stock markets are booming while the US is in neutral.

As a stock market investor, the obvious (to me, anyway) actions to take are:

–look for large US-listed multinationals with a preponderance of foreign sales

–find companies that are not highly correlated with domestic GDP

–think down-and-out “value” stocks, on the idea you can’t fall off the floor

–look outside the US. An EAFE index fund is good enough, I think. As I see it, Trump has inadvertently made Xi a hero and helped him out from under the incredible mess he has made of the Chinese economy. So Hong Kong is worth looking at for the first time in years.

I should mention that the majority of my wife and my money is in index funds. I’ve shifted some from the US to EAFE. I also already own a number of China-based companies, either through Hong Kong or as ADRs. I think medium-sized Japanese companies are also interesting, although I haven’t gotten farther than buying an English-language Shikiho.

A final issue: we have to consider the possibility that all of the economic damage Trump is likely to do has already been done–and its negative effects already factored into today’s prices. My guess is no.