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 shore up 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 centre 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.
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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.”
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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.
“Oftentimes Nvidia reports at a time when technology comes into question, and it certainly has over the course of two weeks,” said Art Hogan, chief market strategist at B. Riley Wealth. “Nvidia has the potential to be a positive catalyst.”
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 than US$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
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“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 gave 15% of the revenues to the US government. But then Beijing encouraged local companies to avoid using Nvidia’s H20 AI chip, which was designed to sell in China, so the firm told suppliers to stop production, according to a report from The Information.
“The market expectation was that Nvidia would eventually be allowed to return to China,” said Michael O’Rourke, chief market strategist at Jonestrading. “The problem now is that the administration has argued it is allowing H20 sales because they are nearly obsolete, and China has taken offence. China is also concerned about the US using Nvidia chips to create backdoors into Chinese technology.”
Wall Street analysts, who have long been bullish on shares of Nvidia, see little reason to worry. In the last week alone, at least nine of the 79 analysts covering the company have boosted price targets based on expectations for a solid quarterly report, setting the average at more than US$194, according to data compiled by Bloomberg. That implies a roughly 9% upside from Nvidia’s US$178 closing price on Friday.
Of course, Nvidia’s report isn’t the only potential market catalyst coming next week. Traders will also be watching for more information about inflation in the core personal consumption expenditures index numbers due Friday. Still, concerns about the company’s results triggering a potential selloff are dominating Wall Street’s thinking.
“I’m concerned,” Beiley said. “The economy is facing tariffs and slowing job growth. So these pricey stocks are ripe for a huge drop if there is any bad news, with the broader market vulnerable to concentration risks.”
