Silicon, Small Caps, and Sentiment

Tech leadership, small-cap momentum, and shifting investor sentiment took center stage as markets kicked off the new year. Nasdaq’s Kevin Davitt joins Andrew Wilkinson to break down broadening market leadership, CES-driven tech trends, and what it all signals for investors moving forward.

Summary – IBKR Podcasts Ep. 339

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson 

Welcome to this Week’s Market Minute with me, Andrew Wilkinson. I’m my guest, Kevin Davitt, who’s the Head of Index Options Content at the Nasdaq. Kevin, happy New Year to you. How are you? 

Kevin Davitt 

I’m doing very well and couldn’t be happier to spend it with you, Andrew. Thanks for having me back. 

Andrew Wilkinson 

Excellent. Excellent. Okay, let’s get straight to it. So the stock market, Kevin, got off to a storming start on Monday, with headlines connecting the removal and New York indictment of Venezuela’s President, Madura, and his wife as the catalyst. True or false, the stock market would’ve rallied anyway? Or put another way, why was Maduro’s indictment so good for small caps? Pick the bones out of it, Kevin. 

Kevin Davitt 

Well, it’s a loaded question with politics and markets, and that becomes muddy. I’m gonna go with yes. Um, I like the ambivalence of the question, but from my perspective, we’re in a bull market, and January tends to lead the way. So I saw some research very recently that shows January is arguably the best month for Nasdaq 100 performance, going back to 1985 when the index was introduced. Um, it has been higher in the month of January 70% of the time, with an average gain of around two and a half percent—nothing to sneeze at. 

Now, January is often the largest month for 401k or IRA allocations around people that have bonuses. Um, the other standout months, for those that are interested, are May and November, with similar frequencies with respect to positive returns, but average is closer to 2% instead of two point a half. Your point about the small caps—I would read that, uh, and a dynamic that’s been going on now for quite some time, is that breadth is improving. The rally really does seem to be broadening, and small caps have been playing along recently.Big picture, I’m too old to position myself against the U.S. economy or the Nasdaq 100 in particular. We’re in a bull market. Investors aren’t concerned about Venezuela. They make up a super small proportion of the global energy markets. Narratives matter more, and the path of least resistance seems higher. 

Andrew Wilkinson 

Good. Good. All good points. Now, shares in banks and oil companies rose. Those of utility companies traded lower. Defense companies rallied, indicating a resurgence in geopolitical challenges, and cryptocurrencies rose, suggesting risk-on. It’s a confusing picture. How did technology shares start the week, Kevin? 

Kevin Davitt 

So that is a good question. And when aren’t the markets confusing would be my sort of quick comeback there. But as of yesterday’s close—and I focus appropriately on kind of mega-cap tech performance—I would characterize it as mixed to weak. You mentioned that small caps have been playing along, the rally’s broadening. 

So Apple has been under pressure. That’s sort of the leader on the downside, or the laggard—shares lower like 3% to start the year. Amazon, on the other hand, has been ripping, up like 6% just this week. The semiconductors, which have been kind of the epicenter of so much of the narrative for the past couple of years, are mixed. So Broadcom, which got a lot of attention recently, slightly lower, but Micron, a name that has also gotten a lot of attention, up big yesterday. Your point about crypto—it’s sort of been chopping at the low end of its kind of one-year range recently. Um, I don’t make too much—you can’t make too much—about a thousand or $2,000 here and there in an asset that’s trading around a hundred thousand. Um, and going back to my lead point, I think the market broadly, or markets when you look across asset classes, are kind of by design confusing, and that presents opportunity and unique data sets. But I think that focusing on where your risk exists, as opposed to what’s shiny now, tends to be rewarded. 

Andrew Wilkinson 

Kevin, there was a potential big catalyst this week, and it’s probably still going on in Las Vegas, in terms of the Consumer Electronics Show. And I think you told me you’ve got a team positioned there. What’s coming out of there that’s impacting the market, and how is it impacting the market? You mentioned Micron there. The traditional Nvidia and other AI chip makers are not necessarily the leaders in response to this news, and it seems to be more, as you mentioned, Micron, Seagate, SanDisk, where flash memory demand is set to surge. What are you hearing coming out of the conference, and what does that excite your team? 

Kevin Davitt 

So you framed that, I think, really well, and it speaks to our earlier points about the broadening narrative here, where it isn’t just Nvidia day after day. 

Andrew Wilkinson 

Hmm. 

Kevin Davitt 

Uh, before I joined Nasdaq a couple of years ago, I had no idea how big a deal this Consumer Electronics Show was, and that it’s a potentially market-moving event. Maybe that’s my fault. It’s kind of like a Super Bowl of sorts for the types of companies that do really drive the Nasdaq 100. 

AMD news stood out for me, for one. Uh, I just finished a book that was primarily focused on Nvidia’s growth, and I didn’t know that Jensen’s first cousin is AMD’s CEO. What a great narrative that is. Um, AMD is the 15th-largest constituent in the Nasdaq 100. Lisa Su is their CEO, and she was talking about demand for global compute power and the infrastructure to support it. That has been going on for months and months. That capacity—this was one of the points she made—has expanded by a hundred times over the past three years. She said that capacity needs to grow by ten thousand times to meet demand. 

I think some of the names that you mentioned reacting to this are reflective of that growth in demand. Um, and they highlighted their next GPU, which is supposed to go head-to-head with Nvidia. Nvidia has also been highlighted, the largest constituent in the Nasdaq 100, which I care about. They made reference to an AI data center processor named Rubin. Uh, it’s supposed to be way more powerful than the Blackwell chip. They also highlighted reductions in inference costs and the number of GPUs necessary to train these big models. And I think my understanding is that CES is now the premier venue for companies to showcase their innovation, and more specifically to Nasdaq. Alongside Invesco, our index business sponsors a research panel where we interview some of these Nasdaq 100 companies on a whole bunch of topics that go back to that kind of core identity of innovators. So, huge week for tech and Nasdaq in particular. 

Andrew Wilkinson 

I think from a bull’s perspective, it’s very encouraging that this does not seem to be a marathon. It seems that leadership keeps getting the baton, keeps getting passed on to a new area, a different sector every time. It’s very constructive for the market. 

Kevin Davitt 

I agree with you there, and I like the analogy too—the baton passing. And there hasn’t been a fumble on that pass-off to date. 

Andrew Wilkinson 

Yeah. Kevin Davitt, head of Index Options Content at the Nasdaq, thank you for joining me. 

Kevin Davitt 

Thanks for having me, Andrew. 

Andrew Wilkinson 

All right. And to the audience, if you enjoyed today’s episode, please don’t forget to subscribe and like wherever you download your podcasts from.