Nvidia’s earnings will test the S&P 500’s $4 trillion recovery

(Bloomberg) — The nearly $3 trillion rally in Nvidia Corp. shares in the roughly two years since ChatGPT was revealed has all but transformed the U.S. stock market, giving the artificial intelligence chip giant outsized influence over a wide range of stock indexes.

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Wall Street saw that swing during the stock market rout earlier this month and subsequent rally, which saw the S&P 500 Index recover $4 trillion in market cap between Aug. 5 and Aug. 23, while Nvidia’s stock price soared more than 28% in just three weeks. With the company’s earnings expected after the market close on Wednesday, traders will be glued to their monitors in preparation for wild swings.

Shares of Nvidia fell as much as 4.4% intraday on Wednesday.

Looking at the options market, Nvidia’s results are expected to send shares swinging nearly 10% in either direction in the session following the report — a move that would shift roughly $300 billion in market cap. And that’s just its own share. The chipmaker accounts for about 6.6% of the S&P 500, making it the second-largest company in the broad equity benchmark after Apple Inc. It also has a weighting of more than 8% in the Nasdaq 100 and makes up 14% of the Philadelphia Semiconductor Index.

“Nvidia is clearly the cleanest kind of pure play way for investors to assess the health of the AI infrastructure space,” said John Belton, portfolio manager at Gabelli Funds. “So Nvidia’s earnings are being watched because they have direct read-throughs to so many companies in the AI value chain.”

Looking for sales growth

Revenue growth will be the focus of Nvidia’s results, after previous reports from AI darlings Alphabet Inc. and Amazon.com Inc. showed huge capital spending that delivered relatively small increases in revenue. The chipmaker has now beaten expectations for five quarters and promised even bigger returns. It’s done this by becoming the primary beneficiary of billions in AI spending, so any deviation from that trend would raise questions about the technology’s promise.

That crucial role has seen the once-unknown semiconductor maker emerge as a key indicator of U.S. economic strength.

“It shouldn’t be a bellwether for the economy,” said Shana Sissel, founder and president of Banríon Capital Management. “But it has become one because of the size and the impact of the stock on the overall market.”

Analysts expect Nvidia’s quarterly revenue to come in at around $29 billion, more than double what it reported a year ago. And they expect a new boost to its future sales forecast. But there’s one new problem: The company has yet to provide an update on its next-generation Blackwell chip amid reports of delays and design flaws. The company said in early August that production is on track to start in the second half of the year.

“Concerns about the Blackwell chip delay could affect expectations for fiscal 2025, making management’s comments — particularly a reassuring outlook for 2025 — crucial,” Bloomberg Intelligence analysts led by Kunjan Sobhani wrote in an Aug. 21 note.

Parsing comments

According to Howard Chan, CEO of Kurv Investment Management, any comment about Blackwell during the call is analyzed as if it were an announcement from the Federal Reserve.

“Everyone will think about every word,” he said.

Analysts and investors will also be watching for signs that another Nvidia chip, the H-200, is gaining demand that could offset Blackwell’s earnings. If Nvidia delivers solid results with its current line of chips, that likely bodes well for the next-generation product.

“It’s probably a good sign if they’re really good here and it’s driven by strong demand for H-200,” Gabelli’s Belton said. “That probably paints an encouraging picture for Blackwell demand growth next year.”

Read the preview: Nvidia investors bet on another successful quarter

Wall Street, of course, remains overwhelmingly bullish on Nvidia’s stock. The stock has 66 buy ratings, eight holds and no sells, according to data compiled by Bloomberg. The 12-month price target of around $145 implies a gain of about 16% from where it currently trades. Nvidia’s valuation has also shrunk, with the stock trading at a blended forward price-to-earnings multiple of about 38 times, down from 44 times in June and more than 60 times last year. The S&P 500 trades at about 21 times its forward earnings.

Concerns about how long the heavy AI spending will last and worries about the Blackwell chip weighed on stocks during the early August trough. But the rally since then shows investors are still willing to buy dips in the stocks as Big Tech’s AI mania shows little sign of stopping.

“The bar has been raised over the last few quarters,” Belton said. “When you think about what’s happened to all the mega-cap stocks during this earnings cycle, I think the market absolutely wants to see a healthy beat and a quarterly guidance above published estimates. I think this recent run-up really matters to the near-term trading.”