Bullish investors hope Wednesday’s earnings report from chip heavyweight Nvidia (NVDA.O) can rejuvenate a recent U.S. stock rally that has stumbled as Treasury yields climbed. Concerns over inflation have weighed on the market. Nvidia is widely seen as a bellwether for the famous artificial intelligence trade. Its stock surged last week, briefly putting it into the elite club of companies with a market value exceeding $1 trillion.
The maker of GPUs (graphics processing units) that power generative AI, which creates content such as written articles or programming code by analyzing massive amounts of data, is expected to say second-quarter revenue will rise by about 65% from the year-ago period. That would bolster expectations of a continued recovery for the overall technology sector, hampered by rising Treasury yields and worries about a possible economic slowdown.
Nvidia’s upcoming earnings report is being scrutinized to test how well the market has embraced generative AI. Many analysts expect the company to forecast that sales of its GPUs will continue to grow at a healthy clip, fueled by a growing number of applications that use generative AI. Investors also want to hear more details about the company’s burgeoning business in data center sales, where Nvidia supplies hardware that helps store and analyze large volumes of information.
While some investors remain skeptical of AI hype, others say Nvidia is one of the few stocks that can deliver on the promise. The company is valued at a lofty 36 times its trailing 12-month sales and even more astronomical 25 times forward sales. The market’s appetite for Nvidia is likely to depend on the accuracy of the company’s forecast and how quickly demand for its products can be fulfilled, said Shaniel Ramjee, a multiasset fund manager at Pictet Asset Management.
Nvidia shares have tripled in 2023, underscoring how a rebound in mega-cap stocks and excitement over the business potential of artificial intelligence has helped propel the S&P 500 (.SPX) to a 14% gain this year, led by gains among the so-called Magnificent Seven group of the most extensive stocks in the S&P 500.
Investors have flocked to tech stocks this year, with the equal-weight S&P 500 semiconductor index up 69%, outpacing the S&P’s 7% gain.
Nvidia’s stock has been a significant beneficiary of the frenzied interest in AI, with the chipmaker’s share price surging to record highs on a surge in sales of its graphics processors used in AI software. But Nvidia’s latest results will be a crucial barometer of whether the AI frenzy has become a mania, with a disappointing outlook potentially setting off a market correction. In May, Nvidia’s previous quarterly report sent the stock soaring 24%, stoking a broader tech rally that lifted the S&P 500 technology sector 8% in the five days afterward. The chipmaker is expected to report after the markets close on Wednesday.
