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In the dynamic landscape of the financial markets, all eyes are turning towards Nvidia (NVDA.O), the prominent chip heavyweight, as it prepares to release its highly anticipated earnings report on Wednesday. This pivotal event is expected to inject fresh momentum into a U.S. stocks rally that has encountered stumbling blocks in recent weeks.
The astonishing surge in Nvidia shares throughout 2023, a tripling in value, highlights the resurgence of mega-cap stocks and the enthusiastic embrace of artificial intelligence’s (AI) business potential. This wave of positive sentiment has played a significant role in propelling the S&P 500 (.SPX) to a commendable 14% gain over the course of the year.
Remarkably, Nvidia’s exceptional year-to-date growth has positioned it at the forefront of the “Magnificent Seven,” a select group of mega-cap stocks that includes technology giants like Apple (AAPL.O) and Microsoft (MSFT.O). This powerful collective has been responsible for driving around two-thirds of the S&P 500’s overall ascent up until July. Nevertheless, despite these accomplishments, the broader equity rally has recently encountered turbulence, with the benchmark index experiencing a decline of over 4% in August. This setback has been largely attributed to the surge in Treasury yields, which has raised concerns about the attractiveness of stocks as an investment.
In this context, the market’s attention has become acutely focused on Nvidia’s fiscal second quarter report, which is slated to be revealed after the market closes on Wednesday. Nvidia’s position is paramount within two critical narratives currently dominating the market landscape: firstly, the potential of Big Tech to sustain its leadership role, and secondly, the genuine extent of the AI narrative’s impact. According to Anthony Saglimbene, Chief Market Strategist at Ameriprise Financial, who holds a slightly overweight position in the tech sector, a favorable turn in a stock that has played a pivotal role in driving the market could be instrumental in reshaping market sentiment.
Nvidia’s prior earnings report in May surprised the market significantly, with an impressive forecast leading to a staggering 24% surge in its stock price in a single day. Subsequently, the S&P 500’s technology sector (.SPLRCT) experienced an 8% rally over the ensuing five days. The company’s gains have been anchored in its role as a major beneficiary of the growing prominence of AI-powered applications like ChatGPT and similar generative AI tools, most of which rely on Nvidia’s graphics processors.
The broader impact of AI on the market becomes apparent in an analysis by Societe Generale, which identified 20 stocks widely owned by AI-related exchange-traded funds. Removing these stocks from the S&P 500 would lead to a reduction of approximately 13 percentage points in index performance, leaving only a marginal gain for the year.
Investors have been responding with anticipation to Nvidia’s potential for another strong performance, as evidenced by a nearly 12% surge in the company’s shares since the beginning of the previous week, culminating in an all-time high on Tuesday before experiencing a minor retreat. However, such a buildup in stock value might present a challenge for the company in terms of surpassing investor expectations with its upcoming report.
Chuck Carlson, CEO at Horizon Investment Services, observes that while the numbers might be solid, the question remains whether they would be sufficient to meet market expectations. If not, the potential for a continuation of the recent sell-off trend could persist.
Market options for Nvidia suggest an expected swing of nearly 11% in either direction for the shares by Friday, according to Trade Alert data. This stands in contrast to the average movement of 8.6% following the company’s past eight quarters of reporting results.
Given Nvidia’s prominent position as the fifth-largest weight in both the S&P 500 and the Nasdaq 100, with weightings of 3.2% and 4.3% respectively, any fluctuations in its stock price wield a significant influence over these major indexes.
While Nvidia’s earnings report holds a prominent spot on investors’ radar, another closely watched event in the coming days is a speech by Federal Reserve Chairman Jerome Powell at the central bank’s annual conference in Jackson Hole, Wyoming. Speculation regarding the central bank’s inclination to maintain current interest rate levels for a longer duration than initially anticipated could potentially cast a shadow on the stock market.
Nonetheless, the undeniable impact that Nvidia and other mega-cap stocks have exerted on the broader market throughout this year remains evident. In fact, Goldman Sachs has identified Nvidia as one of the 11 stocks poised to benefit from the ongoing “AI revolution.” In a recent note, Goldman analysts revealed that an equal-weighted portfolio of these 11 stocks has yielded a substantial 69% return in 2023, surpassing the meager 7% gain exhibited by the overall equal-weighted S&P 500.
Goldman’s analysts further elaborate on the impact of AI adoption on these stocks, highlighting that some of them have already witnessed upward revisions in their 2024 earnings per share estimates due to their connection with AI adoption. Nvidia, in particular, stands out as a notable example in this regard.
Nvidia’s impending earnings report carries a weighty significance for the market’s trajectory, particularly as it navigates challenges and uncertainties. Its potential to shape sentiments, influence indexes, and drive discussions about the AI narrative’s real-world impact underscores the pivotal role it occupies within the evolving financial landscape.
