Investors and stocks markets face a “moment of truth” when Nvidia, the giant chipmaker and recent market darling, releases its latest earnings after the US closing bell on Wednesday. Markets have rebounded strongly since “Manic Monday” and the dramatic sell-off at the start of the month. The perfect storm appeared to hit markets that day, with momentum crowding, the unwind of the yen carry trade, Middle East tensions, disappointing monthly US non-farm payrolls data and worsening funding conditions all cited as reasons for the crash.
But we should also add that AI profit taking was due with a record high concentration in a handful of tech stocks being highlighted by many Wall Street watchers for several months. Put simply, everyone being in the same trade for too long can cause sharp volatility when they all rush for the exit. The strong rebound in the major US indices has stalled recently as we approach Nvidia’s latest results, with the benchmark S&P 500 index just a few percentage points away from its record highs.
Nvidia’s sheers size
The mania in AI has seen the chipmaker gain over 3,300% since the start of 2019. Since ChatGPT launched in November 2022, its market cap has risen by more than $3 trillion. That has turned the company into the main driver of the S&P500 as it accounts for more than 6% of the index. As a noted Bloomberg commentator put it, “there is no precedent for a company rising to such a weight so quickly”.
Others equity analysts have talked about the earnings results being a “reality check” for AI, stocks and the risk rally. Certainly, they will have a big bearing on the direction of the wider market, with one investment bank calculating that the release has a 78% correlation with the broader market direction over the next two weeks.
Detail in the results, importance in the guidance
The GPU-maker used in training and inference of AI models is expected to report another quarter of explosive growth with revenue at $28.8bn, up 113% y/y and EPS of $0.65, an increase of 157% y/y. The tech giant is also expected to guide Q3 EPS at $0.69 and Q3 revenue at $31.18bn. For the full year, Nvidia is forecast to guide EPS around $2.70, and revenue of $120.14bn.
Investors are likely to focus on two things. Firstly, the near-term outlook for revenue, and secondly, if the new Grace Blackwell 200 chip, its next-generation AI chip, is on track to launch in the first quarter of 2025 after a recent delay due to a design flaw. That means guidance on this delivery and order backlog will most likely be more important than current sales and revenues.
Market reaction
It seems that anything less than another beat and raise may prove to be a disappointment which could hurt the wider bullish momentum in risk assets. With the stock up over 150% this year alone, the pressure is on the AI megacap to deliver. The chipmaker has beaten estimates six quarters in a row and has only missed twice in the last five years.
To gauge the potential market moves, options market are seeing an implied move on the day of reporting at +/-10%. Levels to watch include the all-time high at $140.76 and the August low at $90.69. Of course, the estimated level of volatility for a company with a $3tn market cap could have significant implications, not only for Nvidia’s share price but also other AI and mega-cap tech names, plus the indices as a whole. A major move in US equity futures could also impact the USD and risk FX, such as the AUD and CAD.
