(Bloomberg) — Nvidia Corp.’s earnings report was impressive by almost any metric, except for the company’s recent performance.
Most read articles on Bloomberg
That was enough to roil markets overnight, but cooler hands prevailed early Thursday as investors speculated that the artificial intelligence revolution was still on track and found solace in money market bets that Federal Reserve interest rate cuts could reach 100 basis points this year.
Nvidia shares fell 4%, while the S&P 500, about 1.3% off its all-time high, rose, with futures up 0.2%.In Europe, the Stoxx 600 index was hovering near its all-time high, while Germany's DAX index rose to an all-time high.
The chipmaker delivered profit margins of more than 50% on more than $30 billion in sales and promised similar margins in future quarters, as investors looked for more from a company that has beaten analyst estimates by a wide margin for six consecutive quarters.
But those figures were enough for investors to speculate that industry-wide demand for Nvidia's AI engine remained strong enough to justify further investment in the technology.
“If anyone had fears that demand for AI might disappoint, that has evaporated,” said Alberto Tocchio, a portfolio manager at Kairos Partners. “Obviously, we're talking about stocks that have rallied a lot, but we can be confident that the demand in this space is still there.”
Optimism over subdued inflation, a relatively strong economy and interest rate cuts by the Federal Reserve have lifted sentiment in recent weeks. Markets will get their next signal on Friday from personal consumption expenditures, the Fed's preferred inflation gauge.
Technical factors are also supporting the broader stock market. Scott Rabner, managing director of global markets and tactical expert at Goldman Sachs Group Inc., said Monday he expects the S&P 500 to hit a record high this week, citing big inflows from systematic funds and companies buying back their own shares.
Indeed, equity options trading showed investors were positioning themselves to take profits following the selling pressure in early August triggered by fears of a U.S. economic recession.
The S&P 500's call skew — a measure of how much traders are willing to pay for bullish exposure — has been rising sharply, suggesting there's a rush to pick up bullish options after Federal Reserve Chairman Jay Powell's dovish Jackson Hole speech, according to Nomura cross-asset strategist Charlie McElligott.
The story continues
Meanwhile, volatility traders are supplying options dealers with add-ons, underwriting and outright volatility shorts, which acts as a market stabilizer as dealers are left with long gamma positions and need to buy futures when stocks fall.
Thursday's bounce in Nasdaq 100 futures followed a pattern seen all week, with futures dropping during regular trading hours before rebounding overnight. But in a sign of weakness, the overall market trajectory remains downward. The Nasdaq 100 remains more than 6% below its all-time high recorded in July.
As for the reaction to Nvidia, William Marsters, senior sales trader at Saxo UK, said Wednesday's drop in the stock price was likely an “overreaction.”
“Investors have become too used to exceptional results,” Marsters said. “The real test will be today's regular trading session, when we'll get a clearer picture of how clients react.”
Expectations of Fed rate cuts are also helping to make the market less dependent on the performance of large tech stocks. Small caps and unprofitable tech stocks, for example, are seeing inflows as lower borrowing costs boost earnings. This spread is evident in the S&P 500 index, which has its market-cap bias removed; the equal-weighted index hit an all-time high last week.
“Futures are rising as the market expands,” said Craig Johnson, chief market technologist at Piper Sandler & Co. “It's not just about the Magnetic 7 stocks anymore, and there's a sense of relief that Nvidia didn't flop despite the long delays in Blackwell's launch.”
–With assistance from Allegra Catelli, Michael Msika, and Natalia Kniazhevich.
Most read articles on Bloomberg Businessweek
©2024 Bloomberg LP
