David Randall
NEW YORK (Reuters) – The U.S. stock rally will face a key test next week when chipmaker Nvidia Corp (NASDAQ:), which has led the stock market through 2024, reports earnings.
Stock prices, which had plummeted since the beginning of the month due to selling pressure caused by concerns about the U.S. economy, are once again trading near their all-time highs.
Nvidia, which makes chips widely considered the gold standard for artificial intelligence, has led the rally, surging more than 30% from recent lows. Its shares are up about 150% this year, accounting for about a quarter of the S&P 500's 17% gain so far this year.
The company's Aug. 28 earnings report, coupled with guidance on whether it expects corporate investment in AI to continue, could be a key turning point for market sentiment as we enter a historically volatile period.The S&P 500 is down an average of 0.78% in September, its worst monthly performance since World War II, according to CFRA data.
“Nvidia is the stock of the moment,” said Mike Smith, a portfolio manager at Allspring Global Investments, which holds Nvidia shares in its portfolio. “Their quarterly earnings are like the Super Bowl.”
Some investors are bracing for fireworks: Traders expect Nvidia shares to move about 10.3% the day after the company reports earnings, according to data from options-analysis firm ORATS. That's more than Nvidia's pre-earnings expectations over the past three years and well above the stock's average volatility of 8.1% after earnings in that period, ORATS data show.
The results came at the end of earnings season, during which investors have been less forgiving of big tech companies whose profits have failed to justify lofty valuations and huge investments in AI. Examples include Microsoft (NASDAQ:), Tesla (NASDAQ:) and Alphabet (NASDAQ:), whose shares have all fallen since reporting earnings in July.
Nvidia's valuation has also risen, with shares up about 750% since the start of 2023, making it the world's third-most valuable company as of Thursday, and it has also been compared to the dot-com bubble more than two decades ago. The company's shares trade at about 37 times forward 12-month earnings, compared with an average of 29 times over the past 20 years, according to LSEG Datastream.
Market sentiment could be driven not only by Nvidia's results but also its guidance. Evidence that the company is seeing strong demand would be a bullish sign that companies are continuing to invest rather than pulling back in anticipation of an economic slowdown, said Matt Stuckey, chief portfolio manager of equities at Northwestern (NASDAQ:) Mutual Wealth Management.
Nvidia “has ties to some of the biggest names in the U.S. stock market, so this is something to watch,” he said. “What investors really want to know is, is this sustainable, and what's the demand going to be in 2025 and 2026?”
Monetary policy and the future of the U.S. economy are also big questions for investors. Speaking in Jackson Hole, Wyoming, on Friday morning, Federal Reserve Chairman Jerome Powell said a further slowdown in the job market would be unwelcome and explicitly supported cutting interest rates.
Investors will be closely watching U.S. labor market data on Sept. 6 for evidence of whether last month's unexpected job losses extended into August. Signs of continued weakness in hiring could rekindle recession fears that rocked markets earlier this month.
The fierce presidential race between Democratic Vice President Kamala Harris and former Republican President Donald Trump could lead to increased market uncertainty in the coming weeks.
John Belton, a portfolio manager at Gabelli Funds, which holds the company's shares, said the stock's sharp rise in August may make it difficult for the market to make any bigger gains in the near term, even if Nvidia's earnings impress Wall Street.
The S&P 500 is trading at 21 times forward earnings, well above its long-term average of 15.7 times.
“The equity market as a whole is still trading at expensive valuations and the hurdles remain high,” Belton said.
