Special Topic: NVIDIA’s quarterly report will hit hard, will the market value fluctuate to US$260 billion?
Golden Ten Data
For maintaining the rebound of U.S. stocks, Nvidia's (NVDA.O) second-quarter earnings report, which will be released after U.S. stocks close on Wednesday, may even be more important than last week's signal from Federal Reserve Chairman Powell to cut interest rates.
U.S. stocks rose sharply on Friday, with the Dow Jones Industrial Average (DJIA) closing at its first new high since December last year, a boost after Powell hinted at a possible interest rate cut in September at the Jackson Hole annual meeting. Small-cap stocks had their best day since May, with the S&P 500 (SPX) recording three consecutive weeks of gains.
However, the market gave back a significant portion of those gains on Monday, as investors appeared to be beginning to think more deeply about the reasons behind Powell's dovish comments.
Generally speaking, lower interest rates have a direct support for the stock market because the risk-free yield on government bonds decreases, which increases the discounted present value of future cash flows. However, if the rate cut is driven by an economic slowdown, corporate profits may also deteriorate; if the rate cut triggers inflationary pressure, the real value of future cash flows will also be eroded.
In his speech, Powell warned that the job market was cooling and said the inflation risk from tariffs was clearly visible, suggesting both scenarios were happening.
The bond market echoed this concern. On Monday, the spread between the 2-year and 10-year U.S. bond yields rose to the highest level since 2021, with short-term yields falling faster than long-term yields. This means that the bond market is expecting the Federal Reserve to cut interest rates, but at the same time is still worried about rising inflation and stagnant economic growth.
Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, noted that weak growth could test the tech giants that have driven U.S. stocks higher this year. Wall Street would need to see "a significant upgrade in consensus GDP forecasts" before analysts would raise their profit forecasts for these tech giants.
"This will pose a challenge to further gains in U.S. stocks as a whole, especially in the trading of large-cap growth stocks and technology stocks," she said.
Against this background, NVIDIA's second-quarter financial results, scheduled to be announced after the U.S. stock market closes on Wednesday, are particularly interesting. The leading artificial intelligence chip company is at the core of the technology giant market, with about 40% of its revenue coming from Alphabet, the parent company of Microsoft (MSFT.O), Amazon (AMZN.O), Meta Platforms (META.O) and Google (GOOGL.O).
NVIDIA's market share in the AI chip market is as high as 80%. The company's market value is approximately US$4.3 trillion, accounting for approximately 8% of the total market value of the S&P 500 Index. According to calculations by Synovus analyst Dan Morgan, approximately 60% of the capital expenditures of these technology giants will go to AI, and Nvidia’s sales prospects will directly verify or challenge the market’s most important narratives.
The six largest technology companies in the US stock market currently account for about 34% of the total market value of the S&P 500, which means that Nvidia's performance may be more influential than expectations for interest rate cuts. Although the Federal Reserve will receive employment and inflation data before its mid-September meeting, Nvidia's outlook may be more decisive.
Although AI trading is undoubtedly a positive factor for U.S. stocks, RBC's Calvasina pointed out that investors sold off technology stocks last week precisely because "the AI theme that drove the rise of giant stocks has once again been strongly questioned."
NVIDIA's stock price has increased its market value by more than US$1 trillion in the past 12 months, and has increased by nearly 30% so far this year. Its valuation is already very expensive. Jacob Falkenscone, global head of investment strategy at Saxo Bank, warned that Nvidia shares have "little room for error" ahead of Wednesday's earnings report.
He said: "Despite its dominance, Nvidia's 'Achilles heel' is that competitors or regulators can quickly change the rules of the game. If growth slows or margins are less than expected, the downside risks could be dramatic."
