Nvidia's Earnings Will Test the Recovery of $4 Trillion in the S&P 500

Nvidia Corp.’s meteoric rise, nearly $3 trillion in value over the past two years following the debut of ChatGPT, has profoundly reshaped the U.S. stock market. The artificial intelligence chipmaker has now gained a significant influence over several key equity indexes, a dynamic that was clearly evident during the recent turbulence in the stock market. The S&P 500 Index, for instance, regained $4 trillion in market capitalization between August 5 and August 23, with Nvidia's stock price surging over 28% during that three-week period. As Nvidia prepares to release its earnings report after the market closes on Wednesday, traders are closely monitoring the potential for dramatic market movements.

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In early trading on Wednesday, Nvidia's shares dipped by up to 0.8%. According to options market predictions, Nvidia's earnings announcement could trigger a nearly 10% swing in its share price in either direction, which could result in a $300 billion shift in market capitalization. But Nvidia’s influence doesn’t stop there; it accounts for 6.7% of the S&P 500, making it the second-largest company in this broad market index, trailing only Apple Inc. Additionally, Nvidia holds more than an 8% weighting in the Nasdaq 100 and constitutes 14% of the Philadelphia Semiconductor Index.

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John Belton, a portfolio manager at Gabelli Funds, pointed out that Nvidia is seen as the clearest representation of the health of the AI infrastructure space. Investors are keenly interested in Nvidia's earnings because they offer critical insights into the performance of numerous companies within the AI value chain.

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Revenue growth will be the primary focus when Nvidia releases its earnings, especially after other AI-driven companies like Alphabet Inc. and Amazon.com Inc. reported massive capital expenditures with only modest revenue increases. For the past five quarters, Nvidia has consistently exceeded expectations and has projected even greater financial gains ahead. As the primary beneficiary of billions in AI-related spending, any deviation from this growth trajectory could raise doubts about the long-term potential of AI technology.

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Nvidia's pivotal role in the market has essentially turned the once relatively obscure semiconductor maker into a barometer of U.S. economic health. "It shouldn’t be a bellwether for the economy," said Shana Sissel, founder and president of Banríon Capital Management, "but it has become one due to its size and the impact its stock has on the overall market."

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Analysts are forecasting that Nvidia will report quarterly revenue of around $29 billion, more than double what it reported during the same period last year. Furthermore, expectations are high for Nvidia to offer an optimistic sales forecast for the coming quarters. However, there is some uncertainty regarding the company’s next-generation Blackwell chip, with reports of delays and design flaws creating potential concerns. Nvidia has stated that production for the Blackwell chip remains on track to ramp up in the latter half of the year.

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Bloomberg Intelligence analysts, led by Kunjan Sobhani, noted that worries about a possible delay in the Blackwell chip could temper expectations for fiscal 2025. This makes Nvidia's guidance for 2025 particularly important, as reassuring comments from management could alleviate these concerns.

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Howard Chan, CEO of Kurv Investment Management, emphasized that any remarks about the Blackwell chip during the earnings call will be scrutinized closely, much like a Federal Reserve announcement. Investors and analysts will also be paying attention to the demand for Nvidia's H-200 chip, which could potentially compensate for any delays in revenue from the Blackwell chip. If Nvidia’s current lineup of chips performs well, it would likely bode well for the upcoming Blackwell chip.

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Belton from Gabelli Funds suggested that strong numbers driven by demand for the H-200 chip could be a positive sign, indicating incremental demand for the Blackwell chip in the coming year.

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Wall Street remains largely optimistic about Nvidia's stock, with 66 buy ratings, 8 holds, and no sell recommendations, according to Bloomberg data. Nvidia’s 12-month price target is around $145, suggesting a potential gain of approximately 14% from current levels. Despite concerns about continued heavy investment in AI and potential issues with the Blackwell chip, Nvidia’s valuation has become more reasonable, with its forward price-to-earnings ratio dropping to around 38 times, compared to 44 times in June and over 60 times last year. By comparison, the S&P 500 trades at about 21 times its forward earnings.

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The recent dip in Nvidia’s stock in early August, driven by concerns over AI spending and the Blackwell chip, was quickly reversed as investors took advantage of the lower prices. This rebound highlights the ongoing enthusiasm for AI among Big Tech investors, despite some lingering uncertainties. "The bar has been raised in recent quarters," Belton noted, emphasizing that the market now expects Nvidia to deliver a strong performance and positive guidance for the coming quarter. This recent surge in the stock’s price underscores the importance of Nvidia's earnings report for short-term trading and market sentiment.

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