Investors Brace for Nvidia Earnings Amid AI Concerns and Inflation Data

Traders entered the week with a sigh of relief after the Federal Reserve Chairman hinted at impending interest rate cuts. However, the U.S. stock market still faces critical tests, particularly after the recent sell-off in tech stocks. Before last Friday, market sentiment was subdued, with the S&P 500 experiencing five consecutive days of decline, its longest losing streak since January. Wall Street had been scaling back bets on imminent Fed rate cuts. However, Powell's speech eased these concerns, driving the S&P 500 to its largest single-day gain since May, closing less than two points away from its all-time high. Now, the spotlight shifts to Nvidia (NVDA.O), which will release its quarterly earnings after the market closes on Wednesday. Traders are hoping it will alleviate concerns about a slowdown in AI spending and validate that the current stock market rally isn't just a tech bubble. "Nvidia is critical to the stock market because any further strength would be fuel on the fire," said Eric Beiley, executive managing director of wealth management at Steward Partners. "The biggest risk is that if AI investment doesn't continue to deliver as expected and the outlook turns cautious, the market could be in for a rude awakening." He himself holds Nvidia shares but has also started increasing hedging after its significant rise. Nvidia is not only a major component of the S&P 500 index, approaching 8% weighting, but it's also at the heart of AI development, making it a bellwether for the entire market. Amid the AI frenzy, Nvidia's chips are ubiquitous, with 40% of its revenue coming from tech giants like Meta, Microsoft, Alphabet (Google's parent company), and Amazon, all of which are also top-ten constituents of the S&P 500. Therefore, Nvidia's quarterly earnings and forward guidance are considered major market events. Investors aren't entirely in the dark about Nvidia's earnings outlook. Its mega-cap customers have largely delivered solid results this earnings season and pledged to continue increasing capital expenditure by billions of dollars, which is positive for Nvidia's earnings and prospects. However, "The pressure is still extremely high. The market has relied heavily on Nvidia and its peers for the past few years, so I'm a little nervous," said Kim Forrest, chief investment officer at Bokeh Capital Partners. Nvidia's stock rose 1.7% on Friday, ending a three-day losing streak and sitting less than 3% below its all-time high reached in early August. Wall Street analysts widely expect its second-quarter adjusted earnings per share to be $1.01, up 48% year-over-year. Revenue is expected to exceed $46 billion, a 54% increase year-over-year. "Nvidia often reports earnings when the tech sector is being questioned, and that's certainly the case these past two weeks," said Art Hogan, chief market strategist at B. Riley Wealth. "Nvidia has the potential to be a positive catalyst." Of course, just as a strong earnings report can boost the stock and drive the broader market higher, any deviation from market expectations could immediately halt the rally, or even bring clear downward pressure. According to data compiled by Bloomberg, options traders have bet that Nvidia's stock will move in either direction by about 6% after the report. While interest rate cuts are beneficial for growth stocks like Nvidia, they don't solve concerns about high valuations. The S&P 500's forward price-to-earnings ratio is currently around 22x, higher than the 10-year average of 19x. Nvidia's is around 34x, lower than its past five-year average of 39x, but still elevated. "Valuations are already dizzying," said Beiley. "But investors are still choosing to ignore it, hoping that these AI darlings continue to deliver stellar results." One of the biggest problems Nvidia faces is its ability to continue selling in the Chinese market. Despite this, Wall Street analysts remain largely bullish on Nvidia. In the past week, at least 9 of the 79 analysts covering the company have raised their price targets, with an average price target exceeding $194, about 9% above Friday's closing price of $178. Of course, Nvidia's earnings report won't be the only potential catalyst next week. Traders will also be watching the core Personal Consumption Expenditures (PCE) price index, due out on Friday, for more clues on inflation. However, the main concerns on Wall Street remain focused on whether Nvidia's results will trigger a new sell-off. "I'm very concerned," said Beiley. "The economy is facing tariff pressures and a slowdown in job growth. If there's any negative news, these highly valued stocks could see big drops at any moment, and the entire market is exposed to the risk of excessive concentration."