CNBC Daily Open: The A.I. rally is too narrow

This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.

There are clear winners in the AI race. Everyone else, however, is a bystander reaping no benefits — and that could have implications for broader markets.

• Fresh off the Memorial Day break, U.S. markets traded mixed Tuesday, though major indexes registered only marginal movement. Europe’s Stoxx 600 index fell almost 1%, led by a 2.7% drop in food and beverage stocks.

• So near, yet so far: Nvidia briefly hit a $1 trillion market capitalization Tuesday. But the chipmaker’s shares lost momentum and fell during the trading day, giving it a market cap of $990 billion at close. Still, that’s nothing to sniff at: Its shares are at a 52-week high.

• Elon Musk met with China’s Foreign Minister Qin Gang on Tuesday. According to a statement from the country’s foreign ministry, Musk praised China’s achievements while Tesla, Musk’s electric vehicle company, opposed “decoupling” from China. Tesla did not immediately respond to a CNBC request to verify those statements — but investors responded by pushing up Tesla’s shares 4.14%.

• China’s economy isn’t rebounding from the country’s strict lockdown as strongly as many had hoped. Services and consumption are up, but manufacturing and employment aren’t faring well. Thus, some economists think the Chinese government and central bank might stimulate the economy and loosen monetary policy.

• The deal to suspend the U.S. debt ceiling is poised to clear the House Rules Committee as seven of nine Republicans on the committee look set to approve the deal. Next, it would be sent to the House floor for a vote within 24 hours.

• PRO Nvidia’s astounding surge has dominated the headlines lately, but there’s another chipmaker that’s also benefiting from the frenzy over artificial intelligence. Its stock has jumped 71% this year, rallying more than 32% on Friday alone.

But not everyone’s hopping on the bandwagon. Some, in fact, got off before it even started rolling. Cathie Wood — the famed investor of next-generation technologies — sold off all Nvidia holdings in her Ark Innovation ETF in January. “At 25x expected revenue for this year, however, $NVDA is priced ahead of the curve,” Wood said in a Twitter post Monday.

More crucially, the rally in markets has been narrow so far. Over the past three months, the S&P 500 has advanced nearly 6%, but the Invesco S&P 500 Equal Weight ETF has fallen more than 3%.

“We’re not seeing any signs of broad participation. We’re not seeing signs of early cyclicals on top of A.I.,” said Andrew Smith, chief investment strategist at Delos Capital Advisors in Dallas. That disconnect could lead to a retreat in markets soon, warned Javed Mirza, technical analyst at Canaccord Genuity, a large investment firm in Canada.

Meanwhile, the broader economy isn’t faring so hot. Oil prices sank more than 4% Tuesday, in a sign traders aren’t optimistic about global economic growth. On an individual level, U.S. consumers were also less upbeat about the economy in May than April, according to the Conference Board’s consumer confidence index.

“Their assessment of current employment conditions saw the most significant deterioration,” said Ataman Ozyildirim, senior director of economics at The Conference Board. The jobs report for May, coming out Friday, will paint a clearer picture of the labor market. After all, in markets, expectations might not match reality — a lesson we’ve learned again and again since last year.

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