It was a week where blockbuster earnings sparked selling, an inflation print landed like a bag of wet sand, and the Treasury market quietly sent a message worth paying attention to. There was plenty to digest this week. Let’s get into it.
Nvidia: A $68 Billion Quarter, and Still Not Enough
Nvidia reported Q4 fiscal 2026 earnings on Wednesday, and the numbers were, by any reasonable standard, extraordinary. Revenue came in at $68.1 billion, up 73% year-over-year and beating consensus by nearly $2.5 billion. Earnings per share hit $1.62, topping estimates by 8%. Data center revenue alone was $62 billion, with networking revenue tripling to $11 billion. Free cash flow for the quarter was $35 billion. For the full fiscal year, the company generated $215.9 billion in revenue and $97 billion in free cash flow.
And the stock fell 8% in two days.
In the chart below, you can see that Nvidia’s stock price has largely been in a range since last summer aside from a pop to a new high in October. If you look at the momentum indicators at the bottom of the chart you can see that this stock has lost momentum and is likely to experience some profit taking by current holders in the coming months. Does this mean the A.I. trade is ending?
CEO, Jensen Huang, had a confident tone on Wednesday’s earnings call but investors had questions about the sustainability of capital spending by the hyperscalers. The four largest cloud providers — Microsoft, Alphabet, Amazon, and Meta — are on track to spend roughly $650 billion on capital expenditure this year, nearly doubling 2025 levels. At an aggregate level, AI capex now represents about 2% of U.S. GDP, and these companies are expected to spend roughly 90% of their operating cash flow on capex this year, up from 65% in 2025.
Free cash flow at some of these companies is set to collapse — Amazon is projected to go negative and Alphabet’s free cash flow could fall 90% from last year’s $73 billion. The hyperscalers insist they are supply-constrained, not demand-constrained, but the history of technology investment cycles should give investors pause.
Adoption curves follow an S-shape. Early adoption is slow and expensive, growth accelerates as costs fall and eventually the market saturates. Markets have a well-documented tendency to extrapolate the steep part of the curve indefinitely — the dashed red line in the chart — rather than recognizing that the pace of deployment inevitably plateaus.
Given how quickly AI is advancing, it is difficult to pinpoint where we are on this curve but it seems like we are just getting started from my own experience.
PPI: Hotter Than Expected
This morning’s Producer Price Index release for January added another data point to the “sticky inflation” narrative. The headline number came in at 0.5% month-over-month, well above the 0.3% consensus estimate. Services prices drove the overshoot, rising 0.8% — the hottest reading since July — led by a 14.4% surge in equipment wholesaling. On the goods side, prices actually fell 0.3%, so this was really driven by the services side of the equation.
Source: Bureau of Labor Statistics, Producer Price Index, January 2026
The PPI feeds into the PCE deflator, which is the Fed’s preferred inflation gauge, so this print matters for rate expectations.
The Yield Curve Twist
The Treasury market is exhibiting a fascinating dynamic that’s worth understanding. We’re seeing what some have dubbed the “yield curve twist” — short-term rates are holding firm or rising slightly, while the long end is rallying (blue line represents Friday’s levels).
The 10-year Treasury yield has fallen to around 4.0%, its lowest in three months, while the 2-year sits at roughly 3.48%. This has caused mortgage rates to dip below 6% which is a welcome relief for new homebuyers. We don’t want to see the curve flatten as that would warn of growth faltering but nothing yet – stay tuned!
Putting It Together
The S&P 500 is essentially flat year-to-date but there has been enormous dispersion underneath due to sector rotation as the Mag 7 stocks are less attractive as they burn cash chasing their AI hopes and dreams. However, one notable is that seasonality over the past ten years shows a pattern of better performance March through July. Will the markets broaden out away from the Mag7 and follow this seasonal patten?
It has been a rough environment as the chart below illustrates the choppy nature of the S&P 500 especially when you include the overnight data with this futures contract below. A big messy chart with many 2-way reversals. Which side of the range will break first?
The VIX volatility index pushed back above 20 on Friday, a reminder that complacency can evaporate quickly. We’ve entered a period where the three forces that powered the post-2022 rally — moderating inflation, Fed easing expectations, and AI enthusiasm — are all being simultaneously questioned. That doesn’t mean the bull market is over, but it does mean we’re in a more discerning environment where fundamentals and valuation matter more than momentum.
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Paul J McCarthy III CFA
President, Kisco Capital
This commentary is provided by Kisco Capital LLC for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any security. Opinions are subject to change without notice. Past performance is not indicative of future results. All investments involve risk, including possible loss of principal. Kisco Capital and its clients may hold positions in securities discussed herein.
