Nvidia Earnings in Focus as Markets Await Federal Reserve Chair's Speech

Markets Cheered Fed Chair Powell's Big Speech -- How Will They React to Nvidia Earnings?

Nvidia and tech stocks have experienced elevated volatility in the past month as concerns about AI spending have coincided with a rotation into more rate-sensitive stocks. The market in recent weeks has been gripped by uncertainty about the state of the economy and the outlook for interest rates. Fed Chair Jerome Powell on Friday put much of that uncertainty to bed when he signaled the central bank would begin cutting interest rates at its next meeting in September. Now, Wall Street turns its attention to Nvidia (NVDA). The artificial intelligence chipmaker will report second-quarter earnings after markets close on Wednesday, and its report comes at a critical time for the AI craze that has propelled markets to record high after record high this year. Nvidia, the undisputed star of the AI rally, is the last of the Magnificent Seven to report, and its results could be a big event for markets. With a market capitalization of more than $3 trillion, the chipmaker has outsized influence in capitalization-weighted indexes like the S&P 500. As such, the performance of the S&P 500 and Nvidia stock tend to be strongly correlated around its earnings reports, as seen in the graph below from a recent Bank of America Securities note. Markets may be on edge heading into Nvidia's earnings, especially after a string of disappointing reports from its Magnificent Seven peers. Even as most of the group reported strong earnings growth, their stocks stumbled as Wall Street focused on pockets of weakness and expressed concern about surging AI spending. Nvidia has reported triple-digit-percentage earnings and sales growth in each of the last four quarters and is expected to do so again on Wednesday. And in each of the last six quarters, it has reported better-than-expected earnings per share and revenue, as well as raised its earnings outlook. What's more, massive spending on AI infrastructure, including Nvidia chips, has been one of the defining narratives of this past round of corporate earnings. Cloud hyperscalers like Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOGL) spent more than $50 billion on infrastructure in the second quarter, a more than 50% increase from the same period a year ago. With Nvidia accounting for an estimated 70% to 95% of the AI chip market, that spending has surely been a boon to the company's top line. And yet the stock, along with its Magnificent Seven peers, has run into some resistance in recent months. Shares fell more than 25% through July and early August as investors rotated out of big tech into small-cap stocks that stand to benefit most from imminent interest rate cuts. Though the stock has since recovered to trade just 6% off its June all-time high, it continues to exhibit notable volatility. Shares climbed more than 1% at the open on Monday before taking a turn and falling as much as 3.8% about an hour into the session. Beyond earnings, the stock and its tech peers also remain vulnerable to sell-offs amid substantial economic and geopolitical uncertainty. The upcoming presidential election and conflicts in the Middle East could compound the seasonal weakness stocks usually experience in September.

Nvidia earnings is an 'an underpriced risk' for markets: BofA By Investing.com

Nvidia (NASDAQ:NVDA)'s upcoming earnings report represents an "underpriced risk" for the broader market, according to analysts at Bank of America (NYSE:BAC). While recent market attention has been focused on Federal Reserve Chair Jerome Powell's dovish tone at Jackson Hole and the potential for rate cuts, BofA warns that investors may be overlooking the impact that Nvidia's results could have on equity indices. "Nvidia results have been a key driver of equity indices," BofA notes, emphasizing that any disappointment in the company's performance could have a significant ripple effect on the market. Despite the market's current optimism, BofA believes that investors are not adequately pricing in the potential downside risks associated with Nvidia's earnings. To hedge against this risk, BofA suggests that "S&P put spreads offer better protection than NVDA-based hedges," particularly because the S&P 500's vulnerability to shocks tends to cluster. The firm points out that the entry point for these put spreads benefits from the "fastest ever VIX retracement and steeper skew," making S&P options relatively cheaper compared to Nvidia options in past earnings seasons. BofA also highlights that the broader market is in the "early innings of an AI arms race," with hyperscalers spending $52 billion in the second quarter alone, a 54% year-over-year increase. This massive investment in AI underlines the importance of Nvidia's earnings, as the company is a major player in this space. While the Magnificent 7 tech giants have driven much of the S&P 500's growth, BofA observes that "earnings are broadening out" across other sectors, which could help cushion the market from any potential Nvidia-related shocks. However, the firm maintains that the risks surrounding Nvidia's earnings are still underappreciated by the market.