Nvidia’s chips are key drivers behind everything from AI applications at Google and Meta to IT infrastructure in the architecture, engineering, and construction sectors.

Nvidia’s shares, which gained 240% in 2023 and 170% in 2024, were key drivers behind the S&P 500’s strongest back-to-back annual runs since the late 1990s. When the company reports earnings after the bell today, analysts expect everything from “in line” with expectations and a side of “growing pains” (Mizuho) to “good news” (Wedbush). Whether pain or gain, recent Goldman Sachs research shows there’s a richer, longer-term conversation playing out among investors, including hedge funds, about investing after two years of megacap tech prosperity.

Risk Hedging

Nvidia is one of the so-called Magnificent Seven, along with Alphabet, Amazon, Apple, Meta, Microsoft, and Tesla. Together, they accounted for 50% of the S&P 500’s gains last year and hold a roughly 30% weighting in the benchmark index, in part because of the excitement around artificial intelligence breakthroughs.

But a Goldman Sachs analysis of 695 hedge funds with $3.1 trillion in equity positions released last week found that the funds trimmed their positions in all but Tesla in the fourth quarter of 2024. This isn’t a surprise. It’s no secret that a lot of smart people think US equities are overvalued: That’s what an overwhelming 89% of fund managers told Bank of America in its latest monthly Global Fund Manager Survey. That’s the highest since 2001. Indeed, the Magnificent Seven are down 2.9% this year, while the S&P 500 is up a modest 1.5%. That doesn’t mean hedge funds don’t see value to be had:

• Goldman found that hedge funds raised their exposure to health care and communications services companies in the fourth quarter — the former sector has offered a 5% return this year and the latter 9%. Health insurance provider Primerica and electronic trading firm Tradeweb were among the most popular companies for increased hedge fund positions in the fourth quarter. 
• While comms services performed well last year — the Morningstar US Communication Services Index rose 39% in 2024 — healthcare stocks are seen as particularly undervalued. The S&P 500 healthcare sector gained only 2% last year, while the Centers for Medicare and Medicaid Service predicts that US health expenditures will hover around 18% to 19% of GDP through 2032.

Riding The Wave: Hedge funds are still all in on the AI boom that drove the Magnificent Seven’s gains, they just think it’s creating value in different places now. According to Goldman, fund managers raised their exposure to “Phase 3” companies, or businesses with AI-enabled revenues, in the fourth quarter. Their top two Phase 3 stocks were Salesforce and ServiceNow, companies that provide IT services and platforms to a wide range of sectors. “AI models are going to be commoditized at a really fast rate, which is a trend that is quite good for platform and application vendors like ServiceNow: The differentiation that AI is going to drive is going to be at the platform and application level, and not at the large language model level,” ServiceNow president and CFO Gina Mastantuono recently told The Daily Upside. “Agentic AI has quickly become part of every conversation. Companies and customers that we’re talking with certainly are realizing that this is a magic moment to shed the weight of their legacy technology and drive exponential efficiency.”

As the cold front between the US and Russia melts, defense contractors are feeling a chill.

The biggest US defence contractors have seen their share prices fall while their European counterparts have rallied, the Financial Times reported on Tuesday. That’s because the Trump administration is positioning itself to reduce military aid to Ukraine, which has been combating a Russian invasion for three years, while Defense Secretary Pete Hegseth plans to cut 8% from the US military budget every year for the next five years.

The Art of Budgeting

By contrast, European military contractors are licking their chops. On Monday, the US signalled that its relationship with Russia may be thawing even further, by voting alongside Russia to reject a UN resolution condemning Russia’s invasion of Ukraine. The US and Ukraine did reach an agreement on a deal exchanging Ukraine’s mineral resources for military support, but per the Financial Times the text of the deal didn’t specify exact security guarantees. So European leaders, unsurprisingly, are gearing up for the possibility of a sudden America-shaped hole in that particular war’s budget:

• Friedrich Merz, leader of Germany’s Christian Democratic Union (CDU) party that won the largest vote share in Sunday’s election, said he wants to stop relying on the US. “My absolute priority will be to strengthen Europe as quickly as possible so that, step by step, we can really achieve independence from the USA,” he said.
• The UK on Tuesday announced that it will increase defense spending from 2.3% of GDP to 2.5% by 2027. Prime Minister Sir Keir Starmer said the boost, intended specifically to combat Russia, would be the “biggest sustained increase in defense spending since the end of the cold war.”

Out in the Cold: With VC investment already at a record high for European defense companies, the rallying of European governments is providing an extra boost that their US peers probably envy. Palantir, a defense contractor which initially benefited from the Trump trade, has seen its share price slide 30% from a peak on February 18, two days before Hegseth announced the Pentagon budget cuts.

The golden age of crypto is off to a rocky start.

The price of bitcoin plummeted to a three-month low yesterday, falling from more than $95,000 to nearly $86,000. Other cryptocurrencies slipped in bitcoin’s wake, including ether and solana. Memecoins tumbled the furthest, dropping more than 15% yesterday per Coingecko, as cautious investors piled into Treasurys and pulled out of slightly less assured assets like fartcoin.

The main culprit: Risk-on investments are being hit hard by macroeconomic concerns after President Donald Trump on Monday doubled down on his plans to impose tariffs on imports from Canada and Mexico starting next month.

At the same time, last week’s Bybit hack could be reinforcing crypto’s risky rep. ICYMI: Hackers swiped $1.5 billion worth of ether off the exchange in the largest-ever hack to hit crypto, ringing in at more than double the industry’s second-largest incident.

Great Expectations Get Real

It was supposed to be the best of times: Trump’s campaign was full of crypto-friendly promises, like making the US “the crypto capital of the planet.” But wins under his administration so far may have been too small to outweigh macroeconomic concerns.

The biggest Trump-era moves perceived as pro-crypto have happened at the SEC:

• SEC chair Gary Gensler, who led a crypto crackdown, left office. Trump’s pick, Paul Atkins, as well as the interim appointee currently keeping Atkins’ seat warm, Mark Uyeda, are both crypto backers.
• In the past week, the SEC dropped investigations into crypto exchange Coinbase, NFT marketplace OpenSea, and Robinhood’s crypto arm, ushering in an era of relaxed regulations.

Meanwhile, the industry’s waiting for Trump to establish the national bitcoin stockpile he promised. The president issued an executive order in January calling for a group to be formed to look into the possibility of creating the stockpile — but not to actually create it.

The Vibe Shifts Quick: Bitcoin was able to stay above $90,000 for months, after breaking that barrier in November. Before Trump won the presidential election, it was trading at just below $70,000. That goes to show that crypto is especially sensitive to vibe shifts as a risk-on asset, and its fellow cryptocurrencies tend to trend in its direction.