Bullish investors are hopeful that Nvidia’s earnings release on Wednesday can revive the sputtering recent advance in U.S. markets.
The S&P 500 has increased by 14% this year, with the support of a comeback in mega-cap stocks and enthusiasm about the commercial possibilities of artificial intelligence, as evidenced by the tripling of Nvidia shares in 2023.
In the so-called Magnificent Seven group of mega-cap equities, which also includes Apple and Microsoft, the chipmaker has led increases year to date. The increase in the group as a whole contributed to about two-thirds of the S&P 500’s growth through July.
The benchmark index fell more than 4% in August, however, as rising Treasury yields threatened to lessen the appeal of stocks. As a result, the broader equity gain has recently failed. Focus on Nvidia’s fiscal second quarter report, which is coming on Wednesday after market close, is growing as a result of the market’s instability.
Nvidia is at the heart of “two major themes the market is concerned about right now: Can Big Tech continue to lead the market, and is this AI story for real?” Ameriprise Financial, has a modest overweight in the technology sector, according to Anthony Saglimbene, chief market strategist.
“A little bit of positive news in a stock that has been a key driver of the market could change the sentiment,” he said.
With its previous report in May, Nvidia shocked the market when a spectacular forecast drove its stock soaring 24% in a single day. The S&P 500 technology sector increased 8% during the following five days as a result of that report.
The growth of ChatGPT and other generative AI apps, practically all of which are driven by the business’s graphics processors, has made it possible for the company to make gains.
A Societe Generale analysis that focused on 20 stocks heavily held by exchange-traded funds with an interest in artificial intelligence (AI) found that excluding those stocks from the S&P 500 would reduce index performance by about 13 percentage points, leaving it with only a marginal gain for the year. This is one indication of how the market has benefited from AI overall.
Given that Nvidia shares have increased by almost 12% since the beginning of last week and reached an all-time high on Tuesday before falling back, some investors may already be betting on another strong performance. However, such a surge in the shares might make it harder for the business to beat investor expectations with its Wednesday report.
“I think the numbers will work out just fine, but will it be enough?” Chuck Carlson, president and CEO of Horizon Investment Services, stated. “If it isn’t, you might observe a continuation of the sell-off we have experienced here over the past few weeks.”
Data from Trade Alert shows that Nvidia options suggest a nearly 11% move for the stock by Friday, in either way. This contrasts with the stock’s 8.6% average move the day following the chipmaker’s quarterly reports over the previous eight quarters.
With weights of 3.2% and 4.3%, respectively, Nvidia shares are the fifth-largest component of the S&P 500 and Nasdaq 100, which means that changes in the stock price have a disproportionate impact on both indices.
The earnings announcement from Nvidia is not the only market event that will be widely observed in the coming days. Investor attention will also be on the remarks made by Federal Reserve Chairman Jerome Powell at the central bank’s annual conference later this week in Jackson Hole, Wyoming.
Stocks may suffer further if there are indications that the central bank intends to keep rates at their current levels for a longer period of time than investors had anticipated.
Few people, however, contest the influence Nvidia and mega cap stocks have had on larger markets this year.
Goldman Sachs identified Nvidia as one of 11 stocks that will profit immediately from the “AI revolution.” An equal-weighted basket of those 11 equities, according to Goldman analysts, has gained 69% so far in 2023, outperforming a gain of 7% for the entire equal-weight S&P 500.
The Goldman analysts stated that “some of these stocks have already seen 2024 EPS estimates rise on the back of AI adoption, with NVDA representing a notable example.”
