Wall Street analyst Ed Yardeni is drawing parallels between Nvidia Corp.'s (NASDAQ: NVDA) current stock market rally and Cisco Systems Inc.'s (NASDAQ: CSCO) meteoric ascent during the 1990s tech bubble.
Nvidia could potentially soar even higher before facing any risk of a downturn-if such a risk materializes at all, Yardeni said.
What Happened: Nvidia's stock value continues to surge as the market grapples with a critical question: Are we on the verge of another bubble, or is this the ascent of a sustainable technological boom?
Since the introduction of ChatGPT by OpenAI on Nov. 30, 2022, Nvidia - the leading manufacturer of AI chips - has seen its stock soar by an astounding 265%.
This surge has outpaced the S&P 500 Semiconductor Index's 108% gain over the same period.
The growth trajectory, as Yardeni showed, shows a sharp upward trend. It's reminiscent of Cisco's eightfold increase before its eventual crash in the early 2000s.
"Is Nvidia today's Cisco? It's possible. If so, then it has a lot more upside before it crashes-if it crashes," Yardeni wrote.
According to Yardeni, Federal Reserve Chair Jerome Powell, having closely examined the tenure of his predecessors, including Paul Volcker, aims to quell inflation potentially without inducing a recession.
This delicate balance has led to a market expectation of interest rate cuts, as the fight against inflation shows signs of victory.
Why It Matters: The memory of former Fed Chair Alan Greenspan's 1996 warning of "irrational exuberance" is still fresh. And the possibility of asset bubbles forming is a concern that cannot be ignored.
The staggering $6 trillion parked in money market mutual funds represents a vast pool of liquidity that could flood into stocks and bonds. This could potentially ignite a melt-up in the markets if interest rates are slashed, Yardeni says.
If Powell and his team prematurely bask in the triumph of curbing price inflation without a recession, all while cutting interest rates, they may inadvertently stoke asset inflation. Such a scenario could inflate a bubble that, upon bursting, would likely precipitate a recession.
Nvidia's fate in the coming months or years may well signal whether we are on the cusp of a groundbreaking epoch driven by growing productivity thanks to the AI revolution, or merely the reflection of a historical bubble.
"The Fed's next big mistake could be inflating a speculative stock market bubble. Powell must know that. If so, then he should reiterate that he is in no rush to lower interest rates," Yardeni stated.