Nvidia’s earnings out later today could make or break the AI trade

Wall Street’s AI rally faces a critical test this week as chipmaker Nvidia gears up to release its earnings later today, the Financial Times reports. Nvidia has become the poster child for the artificial intelligence boom that has reshaped markets since late 2022. Investors see the company’s performance — and its guidance — as a proxy for AI’s broader economic promise.

Nvidia doesn’t just set the direction for AI and AI-related stocks, but the whole of the S&P 500. The company — now the most valuable publicly listed firm in the world with a market capitalization of USD 4.4 bn — has been the single biggest contributor to the S&P 500’s almost 10% YTD gain.

The company’s earnings could shape the direction of the market for weeks and even months to come, with traders bracing today for a high-volatility moment that could either reignite market momentum or trigger a pullback. “It’s not just a single stock,” said Pictet Asset Management Portfolio Manager Arun Sai. “It’s very unusual — people read through it to the economy as a whole.”

There’s concern that Nvidia shares are already overvalued, with shares of the chipmaker trading at 40x its expected earnings, according to FactSet. The tech-heavy Nasdaq 100 as a whole is trading at 28x forward earnings — well above its 25-year average of 22x.

Investor jitters intensified last week after a downbeat MIT reportand a warning from OpenAI CEO Sam Altman, who said “investors are over excited” about AI and that “some are likely to lose a lot of money.” The comments have cast a shadow over a sector many fear may be approaching a bubble territory — putting even more weight on Nvidia’s earnings. “They are the locomotive of this AI train,” said Citigroup’s Jon Zauderer. Futurum Group’s Daniel Newman added that “an unexpected surprise would be the ultimate and fastest way to send the market into a tailspin.”

But despite doubts, expectations are still sky-high, with the consensus being that Nvidia reports USD 46 bn in revenue for its July quarter — a 53% y-o-y increase. While that’s slower than the 69% growth it posted last quarter, and well off the 250%+ pace of early 2024, some analysts say the market will focus more on relative performance. “People will be more focused on growth relative to peers, and right now they are doing very well in that regard,” said Morgan Stanley’s Joseph Moore.

MARKETS THIS MORNING-

Asian markets are mostly in the green in early trading this morning, with the Hang Seng leading gains, up 0.3%. Japan’s Nikkei and the Shanghai Composite are also up, while the Kospi is flat.

THE CLOSING BELL-

The ADX fell 0.4% yesterday on turnover of AED 2.5 bn. The index is up 7.9% YTD.

In the green: Aram Group (+14.7%), National Bank of Umm Al Qaiwain (+2.3%) and Hayah Ins. (+2.2%).

In the red: Al Wathba National Ins. Co. (-9.3%), Hily Holding (-4.5%) and E7 (-3.8%).

Over on the DFM, the index fell 0.5% on turnover of AED 1.3 bn. Meanwhile, Nasdaq Dubai was down 0.9%.

CORPORATE ACTIONS-

Union Properties sets date for capital reduction: Union Properties will activate its approved capital reduction on Friday, 29 August after trading hours, bringing its capital down to AED 2.9 bn from AED 4.3 bn, with the nominal value of each share reduced to AED 0.7, according to a DFM disclosure (pdf).

REFRESHER- Shareholders approved the 33.4% capital reduction in April to offset accumulated losses.

DFM-listed Unikai Foods has raised the cap on GCC ownership in its capital to 100%, up from 49%, according to a disclosure (pdf). The changes take effect today.