RPT-Wall St. Week Ahead – ‘Super Bowl’ Nvidia Gains Could Test Burning AI Trade-Off

The rally in U.S. stocks faces a major test next week when chipmaker Nvidia posts gains whose blistering run has powered markets throughout 2024. The S&P 500 has recovered from a sharp decline it suffered after U.S. economic concerns fueled a sell-off earlier this month and is back near a new all-time high.

Nvidia, whose chips are widely considered the gold standard for artificial intelligence, has led the rally, jumping more than 30% from recent lows. The stock is up about 150% year to date, about a quarter of the S&P 500’s 17% gain year to date. The company’s Aug. 28 earnings report, combined with guidance on whether it expects corporate investment in AI to continue, could be a key turning point for market sentiment heading into a historically volatile time of year. The S&P 500 fell an average of 0.78% in September since World War II, its worst performance of any month, according to CFRA data.

“Nvidia is the stock of the moment,” said Mike Smith, a portfolio manager at Allspring Global Investments, who holds the stock in his portfolio. “You can think of their earnings four times a year as the Super Bowl.” Some investors are bracing for fireworks. Traders are pricing in a swing of about 10.3% in Nvidia shares the day after the company reports earnings, according to data from research firm ORATS. That’s a larger move than expected before any Nvidia report in the past three years and well above the stock’s average post-earnings move of 8.1% during the same period, ORATS data showed.

The results come at the end of an earnings season in which investors have become less lenient toward big tech companies whose earnings haven’t justified their high valuations or their huge spending on artificial intelligence. Examples include Microsoft, Tesla and Alphabet, whose shares have fallen since their July reports. Nvidia’s valuations have also risen, with shares up about 750% since the start of 2023, making it the world’s third-most valuable company as of Thursday and reminiscent of the dot-com bubble of more than two decades ago. The company’s shares are trading at about 37 times estimated earnings for the next 12 months, compared with a 20-year average of 29 times, according to LSEG Datastream.

Market sentiment could hinge as much on Nvidia’s guidance as it does its earnings. Evidence that it sees strong demand would be a bullish sign that companies are continuing to invest, rather than retreating in anticipation of an economic slowdown, said Matt Stucky, chief equity portfolio manager at Northwestern Mutual Wealth Management. “Nvidia’s alignment with the largest companies in the U.S. stock market makes it a can’t-miss event,” he said. “The most important thing investors want to know is whether there’s sustainability and what demand looks like in 2025 and 2026,” he said.

The trajectory of U.S. monetary policy and the economy also looms large for investors. In a Friday morning speech in Jackson Hole, Wyoming, Federal Reserve Chairman Jerome Powell made clear his support for interest-rate cuts, saying a further cooling in the labor market would be undesirable. Investors will be watching U.S. labor data on Sept. 6 for evidence of whether last month’s unexpected decline in employment has carried over into August. Signs that employment is still weakening could revive recession fears that rocked markets earlier this month.

The tight presidential race between Vice President Kamala Harris, a Democrat, and Republican former President Donald Trump could also create market uncertainty in the coming weeks. The August rally in stocks could make it difficult for markets to make much progress in the near future, even if Nvidia’s earnings impress Wall Street, said John Belton, a portfolio manager at Gabelli Funds who holds shares of the chipmaker.

The S&P 500 trades at 21 times expected earnings, well above its long-term average of 15.7 times. “The stock market as a whole continues to trade at stretched valuations, so the bar remains high,” Belton said.

(This story has not been edited by Devdiscourse staff and is auto-generated from a feed.)