Nvidia Earnings Are Stock Market Risk Event After Fed Rally

Mandeep Singh, Global Head of Tech Research at Bloomberg Intelligence, breaks down expectations for Nvidia earnings and the government's 10% stake in Intel.

Traders are breathing easier heading into this week after Federal Reserve Chair Jerome Powell indicated that interest rate cuts are coming. The next test for the stock market will be a read on what’s been driving gains for the past few years: artificial intelligence euphoria.

Sentiment was weak heading into Friday, with the S&P 500 Index falling for five straight sessions, its longest losing streak since January, as Wall Street pros pulled back on bets that the Fed was about to reduce borrowing costs. Powell’s comments halted those concerns, sending the S&P 500 soaring to its best day since May and less than two points from a record.

Now comes Nvidia Corp., which is set to report quarterly earnings on Wednesday after the market close. Traders are hoping it can soothe fears about AI spending and effectively confirm that the stock market’s latest rally isn’t just a technology bubble.

“Nvidia is crucial for the stock market because any signs of further strength will be the fuel to light this market on fire,” according to Eric Beiley, executive managing director of wealth management at Steward Partners. “The looming risk is all this AI investment may be peaking if it doesn’t deliver and its outlook is cautious, which would rattle markets.” He owns shares but said he has begun to add hedges after its huge run.

Nvidia’s size, it’s the biggest weight in the S&P 500 at almost 8%, and its position at the center of AI development have made it a bellwether of the broader market. The tech giant’s chips are everywhere, 40% of its revenue comes from Meta Platforms Inc., Microsoft Corp., Alphabet Inc. and Amazon.com Inc. — all are among the Top 10 weightings in the S&P 500.

All of which makes Nvidia’s quarterly earnings report, as well as its forward outlook, a major market event.

Pressure Is On

“The pressure’s still really intense,” said Kim Forrest, chief investment officer at Bokeh Capital Partners LLC. “So much of the market the last couple of years has been built on Nvidia and its friends. So I’m a little nervous.”

This is not to say that investors have no idea what Nvidia’s results will show. Its megacap customers reported mostly solid results earlier in the earnings season, including pledges to increase the billions of dollars they’ve been pouring into capital expenditures. That’s encouraging for the chipmaker’s earnings and outlook.

Nvidia shares jumped 1.7% Friday, snapping a three-day streak of declines, its longest losing streak in a month, and putting the stock less than 3% from the record high it hit earlier in August. Wall Street analysts expect Nvidia to report $1.01 in adjusted earnings per share in its fiscal second quarter, a 48% jump from the previous year, on revenue of more than $46 billion, up 54% from the same quarter a year ago.

Of course, just as a strong report could boost Nvidia shares and lead the market higher, any miss — real or perceived — could stop the rally in its tracks and add significant weight to the downside. Options traders are pricing in a 6% move in either direction, according to data compiled by Bloomberg.

While lower interest rates should help growth stocks like Nvidia, they won’t address concerns about high market valuations. The S&P 500 trades at about 22 times forward earnings, above its 10-year average price-to-earnings ratio of 19. Nvidia is trading at roughly 34 times its blended forward P/E ratio, below its five-year average of 39.

Nosebleed Valuations

“Valuations are at nosebleed levels,” Steward’s Beiley said. “Yet investors continue to ignore it on expectations these AI darlings will continue to produce stellar results.”

One of the biggest questions that Nvidia faces is whether it will be able to sell its products in China. The Trump administration recently gave Nvidia and Advanced Micro Devices Inc. permission to resume sales in China as long as they give 15% of the revenues to the US government.

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