Bullish investors are eagerly anticipating the earnings report from chip giant Nvidia (NVDA.O) on Wednesday, with hopes that it can reignite a recent stumble in the U.S. stocks rally. Nvidia's shares have experienced a remarkable surge in 2023, tripling in value, highlighting the rebound of megacap stocks and the excitement surrounding the business potential of artificial intelligence, which has contributed to the S&P 500 (.SPX) gaining 14% this year.
Nvidia's impressive performance this year has outpaced gains by other megacap stocks like Apple (AAPL.O) and Microsoft (MSFT.O), collectively known as the Magnificent Seven. This group's ascent has driven around two-thirds of the S&P 500's increase through July.
However, the broader equity rally has recently faltered, with the benchmark index declining over 4% in August as surging Treasury yields threaten to diminish the appeal of stocks. As a result, all eyes are now on Nvidia's fiscal second-quarter report, scheduled to be released after the market closes on Wednesday.
Anthony Saglimbene, chief market strategist at Ameriprise Financial, emphasized that Nvidia is at the center of two key market concerns: the sustainability of Big Tech's leadership and the legitimacy of the AI narrative. He noted that a positive development for a stock that has been an important market driver could potentially shift sentiment.
Nvidia surprised the market with its previous report in May, where an outstanding forecast propelled its stock by 24% in a single day. Subsequently, the S&P 500 technology sector (.SPLRCT) surged 8% over the following five days.
The company's gains have been driven by its position as a major beneficiary of the rise of ChatGPT and other generative AI applications, as virtually all of them rely on Nvidia's graphics processors.
Highlighting the overall boost that AI has provided to the market, an analysis by Societe Generale revealed that removing the 20 stocks widely owned by AI-related exchange-traded funds from the S&P 500 would reduce index performance by approximately 13 percentage points, leaving only marginal gains for the year.
Some investors may have already positioned themselves for another strong performance, as Nvidia shares have surged nearly 12% since the beginning of last week, reaching an all-time high on Tuesday before retreating. However, such heightened expectations could make it challenging for the company to surpass investor projections with its Wednesday report.
Chuck Carlson, CEO at Horizon Investment Services, expressed his thoughts, stating, "My guess is the numbers are going to be just fine, but is it going to be enough? If it's not, you could see a continuation of the sell-off that we have had here in the last month or so."
Options trading in Nvidia indicates a potential swing of nearly 11% in the shares, in either direction, by Friday, according to Trade Alert data. This compares to the average 8.6% move experienced by the stock on the day after the chipmaker's previous eight quarterly earnings reports.
Given the significant weight of Nvidia shares in the S&P 500 and Nasdaq 100, accounting for 3.2% and 4.3% respectively, any fluctuations in its stock price have a substantial influence on these major indexes.
