AI Powerhouse Nvidia Set to Report Earnings: Investors Eager Amidst Stock Rally Fluctuations

 

Nvidia, the AI powerhouse, is set to release its earnings report on Wednesday, and eager investors are looking to this event to potentially reignite the recent stumbling U.S. stocks rally.

Remarkably, Nvidia's stock has surged threefold in 2023, underscoring its immense potential within the megacap stocks landscape. This surge, coupled with the excitement surrounding the business prospects of artificial intelligence, has been a driving force behind the S&P 500's impressive 14% gain this year.

Nvidia's year-to-date surge stands out even among the elite group of megacap stocks known as the "Magnificent Seven," which includes industry giants like Apple and Microsoft. This group's collective surge contributed significantly to around two-thirds of the S&P 500's growth through July.

However, as the broader equity rally encounters recent turbulence, with the benchmark index declining over 4% in August due to surging Treasury yields, attention is now keenly focused on Nvidia's fiscal second-quarter report, scheduled for release after the market closes on Wednesday.

Nvidia finds itself at the crux of two significant market concerns: the sustainability of Big Tech's leadership and the authenticity of the AI narrative. Anthony Saglimbene, Chief Market Strategist at Ameriprise Financial, highlighted that Nvidia's performance could potentially reshape sentiment in a market where it has been a pivotal driver.

In May, Nvidia astounded the market with a stellar forecast that catapulted its stock by an impressive 24% in a single day. Following this surge, the technology sector of the S&P 500 rallied by 8% over the subsequent five days.

Nvidia's exceptional performance is intrinsically linked to its role as a major beneficiary of the rise of transformative AI applications like ChatGPT, all powered by its cutting-edge graphics processors.

The far-reaching impact of AI is evident from a Societe Generale analysis, which found that 20 stocks heavily owned by AI-related exchange-traded funds are responsible for a substantial portion of the S&P 500's performance. Removing these stocks would lead to a significant reduction in the index's gains for the year.

Investors are already positioning themselves for potential success, as Nvidia's shares have surged nearly 12% since the start of the previous week, hitting an all-time high on Tuesday before retracting slightly. This build-up, however, could set higher expectations for the company's upcoming report.

Chuck Carlson, CEO of Horizon Investment Services, noted that while the numbers are likely to be favorable, the question remains whether they will exceed expectations. Failure to do so could prolong the ongoing sell-off that has been observed in recent weeks.

Options data suggest that Nvidia shares could experience an approximate 11% swing in either direction by the end of the week, reflecting the market's anticipation for substantial movement post-earnings. This level of volatility compares to the stock's average 8.6% movement on the day following earnings reports over the past eight quarters.

With Nvidia constituting a significant portion of the S&P 500 and Nasdaq 100, at 3.2% and 4.3% respectively, the fluctuations in its stock price hold considerable sway over these major indexes.

As investors await Nvidia's earnings report, another key market event looms in the form of a speech by Federal Reserve Chairman Jerome Powell at the central bank's annual conference in Jackson Hole, Wyoming. Any signals of prolonged interest rate maintenance could further impact stock prices.

Nonetheless, the undeniable influence of Nvidia and other megacap stocks on the broader market landscape remains apparent. Goldman Sachs identified Nvidia as one of the beneficiaries of the "AI revolution." A recent note from Goldman analysts indicated that an equal-weighted basket of these AI-focused stocks had returned an impressive 69% in 2023, significantly outperforming the overall equal-weighted S&P 500's 7% gain.

Goldman's analysts emphasized that some of these stocks have already seen heightened 2024 EPS estimates due to increasing AI adoption, with Nvidia serving as a prominent example of this trend.