AI ‘Tipping Point’: Nvidia’s Explosive Earnings Put a Charge into Tech, Lifting Wall Street after Losing Streak

AI 'Tipping Point': Nvidia's Explosive Earnings Put a Charge into Tech, Lifting Wall Street after Losing Streak

Key Takeaways

    Nvidia’s explosive earnings, outlook shift rally into higher gear as tech soars

    Jobless claims fall back toward historic lows and Treasury yields climb

    Fed minutes show little inclination toward near-term rate cuts as inflation concerns persist

(Thursday market open) Nvidia (NVDA) believes AI demand has reached a “tipping point.” Its monster earnings report late Wednesday provided evidence and delivered the sagging market a shot of adrenaline.

Shares of the AI mega cap climbed more than 13% in premarket trading, carrying the rest of the market along for the ride. Nvidia’s results beat analysts’ expectations across the board, and its outlook that showed exploding demand for AI computing hardware also impressed. Lots more below.

Major indexes gained steam in premarket trading on the tailwind from Nvidia, with the tech-packed Nasdaq-100® (NDX) climbing 2% ahead of the open. AI-related names like Advanced Micro Devices (AMD), Intel (INTC), Super Micro Computer (SMCI), and Taiwan Semiconductor (TSM) enjoyed the fruits of Nvidia’s gains.

Nvidia’s results sucked most of the air out of the earnings room, but Thursday brings another host of reports including Archer-Daniels-Midland (ADM), Carvana (CVNA), Intuit (INTU), Keurig Dr. Pepper (KDP), Live Nation Entertainment (LYV), and Moderna (MRNA).

Economic data is light beyond weekly Initial Jobless Claims (see more below), but minutes from the Federal Open Market Committee’s (FOMC) last meeting, released Wednesday afternoon, showed policy makers were encouraged by the economy’s performance and progress on inflation. Still, they noted inflation remains above their 2% target, reinforcing ideas there’s little chance of an imminent cut in the central bank’s short-term funds rate. Treasury yields rose early Thursday to fresh two-month highs, perhaps a warning sign for rallying stocks.

Despite the sharp drop in chances for a spring rate cut, stocks generally seem resilient and bounced back quickly after last week’s unpleasant inflation data. “Equities’ reaction to the January CPI report was swift and brutal; but its recovery was equally swift,” said Kevin Gordon, senior investment strategist at Schwab.

Futures based on the S&P 500® index (SPX) climbed 1.31% shortly before the close of overnight trading. Futures based on the Dow Jones Industrial Average® ($DJI) rose 0.47%, and futures based on the NDX climbed 2%.

Morning rush

    The 10-year U.S. Treasury Yield (TNX) climbed two basis points to 4.34%, a new February peak.The U.S. Dollar Index ($DXY) slipped to 103.89.The Cboe Volatility Index® (VIX) sank to 14.23, down sharply from yesterday.WTI Crude Oil (/CL) fell slightly to $77.63 per barrel, near the 200-day moving average.

Just in

Weekly Initial Jobless Claims receded toward recent historic lows at 201,000 while continuing claims fell to 1.862 million. Neither appears to be reflecting a recent wave of U.S. corporate layoffs.

Stocks in spotlight

NVDA earnings: After sliding into quarterly results, Nvidia shares climbed sharply once the company opened its books.

By now, investors are likely familiar with the fiscal Q4 numbers, but just to review the biggest ones:

    Earnings per share of $5.16 were $0.57 better than the FactSet consensus of $4.59.Revenue of $22.1 billion topped the FactSet consensus of $20.4 billion.Data Center revenue, which includes AI chips, rose 26% from the prior quarter and 409% from a year ago to $18.4 billion, despite a significant decline in sales to China due to U.S. government licensing requirements. Analysts had expected $17.1 billion.Nvidia sees fiscal Q1 revenue of $24 billion, plus or minus 2%, above the $22.1 billion consensus.

Nvidia shares actually stumbled in the first few minutes after reporting, which might have reflected a higher “whisper number” circulating about potential Q1 revenue, one analyst told CNBC.

Nvidia takeaways: While some investors were apparently disappointed that growth won’t be even stronger in fiscal Q1, the Q4 earnings and Q1 guidance reinforced what investors heard earlier this earnings season from companies like Microsoft (MSFT), Meta Platforms (META), and Amazon (AMZN), all of which talked about expanding their data center purchasing. As Nvidia said in its press release, “Accelerated computing and generative AI have hit the tipping point. Demand is surging worldwide across companies, industries, and nations.” Nvidia tends to benefit from that as the leader in AI.

In its conference call, Nvidia said approximately 40% of its Data Center revenue was likely for AI inference (the term for using a trained model to make predictions on never-seen-before data). Executives also stuck with Q2 timing for first shipments of the company’s next-generation H200 chips for AI.

Keep in mind, too, that weak demand from China took a major bite out of Nvidia’s Data Center business. Typically, China sales represent about 20% of that, so if those trade battles eventually end, it could be more wind in the sails. It also reflects well on Nvidia’s Data Center business that it climbed so much even with slumping sales to China.

Analysts liked what they saw. Nvidia shares received a slew of price target increases following earnings. The general consensus was that the company climbed a high bar to beat quarterly expectations and its outlook impressed.

Caution sign: Still, there’s a cautionary note here for investors continuing to pile into shares. Nvidia now represents 4% of the S&P 500’s market capitalization and is responsible for around 35% of the S&P 500’s market cap rise year to date. “Thus, this was a huge catalyst to keep the bear in hibernation,” said Joe Mazzola, director, trading and education at Schwab.

Nvidia’s fortunes, good or bad, might help shape the overall market path. When a handful of mega caps set the tone, it can sometimes distort what’s happening below the surface with the other 490 or so stocks in the SPX. Market breadth remains a concern (see more below).

Shades of 1989: Turning to other matters, Japan’s Nikkei 225 Index hit a record high Thursday for the first time since 1989 amid strength from technology shares, and the Stoxx Europe 600 Index briefly surpassed its January 2022 closing peak on strong corporate earnings. Eurozone January inflation was 2.8%, in line with analysts’ expectations and down from 2.9% in December. The core inflation rate, stripping out food and energy, continues to ease. In other news, the Eurozone Area Manufacturing PMI fell in February, missing analysts’ expectations.

EVs unplugged: The electric vehicle business took a shock late yesterday when earnings from Lucid (LCID) and Rivian (RIVN) both disappointed investors. “Economic and geopolitical uncertainties and pressures, most notably the impact of historically high interest rates, have informed our expectations for 2024,” Rivian said in a letter to shareholders.

Wednesday in review:

Major indexes finished mixed, with info tech again slumping as investors took profit in some big names including Nvidia. The sector appeared overbought by some measures and is trudging through what’s historically a weak period seasonally. However, bullish investors might be encouraged that some overlooked sectors like utilities, real estate, materials, and industrials showed more muscle the last few days as tech sagged.

Stocks on the move early Thursday include:

    Rivian crumbled 17% in premarket trading after the electric vehicle company announced Q4 earnings per share that missed Wall Street’s expectations and that it’s cutting its workforce by 10%. The company plans to build around 57,000 units in 2024, but analysts had expected 66,000.Lucid fell nearly 8% after the manufacturer of luxury electric vehicles reported late yesterday and came up short of analysts’ revenue estimates. Delivery and production fell in Q4, and the company expects to build 9,000 units this year, well below analysts’ estimates of above 22,000.

What to watch

Next week brings key data in the form of Personal Consumption Expenditure (PCE) prices and an updated government estimate on Q4 gross domestic product (GDP).

However, the corporate news flow slows as we approach March, with few consequential earnings reports scheduled beyond big box Lowe’s (LOW) next Tuesday. Investors wait until the following week for Target (TGT), as retail earnings season looks a bit more spread out than normal.

January Existing Home Sales and two Fed speakers could be worth checking as Thursday continues. The Briefing.com consensus for Existing Home Sales is a seasonally adjusted annual rate of 3.99 million, up from 3.78 million in December.

Eye on the Fed

Early today, futures trading pegged chances at 4.5% for the FOMC cutting rates by 25 basis points following the March 19–20 meeting, according to the CME FedWatch Tool. The market prices in around a 30% chance the funds rate will be lower than now after the Fed’s May meeting. Chances rise to nearly 70% by June, but that’s down from more than 80% a week ago.

The funds target, which the Fed has held at 5.25% to 5.5% since July, “was likely at its peak for this tightening cycle,” according to the FOMC minutes released yesterday. Still, FOMC members “remained concerned that elevated inflation continued to harm households, especially those with limited means to absorb higher prices.”

Inflation check: The latest relatively hot U.S. inflation reports reinforce why the Fed’s rate-cutting cycle may be more gradual. Learn more about what might shape Fed thinking in the latest post from Schwab’s Liz Ann Sonders and Kevin Gordon.

AI 'Tipping Point': Nvidia's Explosive Earnings Put a Charge into Tech, Lifting Wall Street after Losing Streak

CHART OF THE DAY: DJIA REJECTS. This week’s news of Walgreens Boots Alliance (WBA) being pulled from the $DJI in favor of Amazon (AMZN) merits a look at two of three companies still trading that were last removed, back in August 2020 (vertical red line). Shares of both Exxon Mobil (XOM-candlesticks) and Pfizer (PFE) initially did well after their removal, but Pfizer has since fallen on hard times. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

A Capitol affair: March is only a little over a week away, meaning investors again should keep one eye on the U.S. capital city for possible drama. Congress is still wrangling over expenditures for various departments, and the next deadline to keep the government open is next Friday, when four funding bills are due. The other eight funding bills are due March 8, and the House of Representatives is away until February 28. That means the House has just three working days (including the leap day) to get those first bills done or face a possible partial shutdown. Repeated shutdown warnings in the recent past could mean these fears are more bark than bite, but investors should be prepared for associated volatility if talks come down to the wire. “The real concern is the House, where Republicans have a razor-thin majority and have been plagued by internal dysfunction that has made it nearly impossible to pass even basic legislation,” said Michael Townsend, managing director, Legislative and Regulatory Affairs at Schwab. “An early March shutdown is not out of the question, but we won’t be surprised if Congress pushes through another short-term extension of funding for a few weeks.”

Psych test: Though we don’t touch on it often, sentiment plays a major role in day-to-day market behavior and remains solidly optimistic. This can often be a counter-intuitive bearish signal. “Sentiment remains the largest near-term risk for U.S. stocks,” said Schwab’s Gordon. “An aggregate measure of attitudinal and behavioral sentiment metrics we track remains in ‘extreme optimism’ territory. In and of itself, that isn’t a reason for the market to roll over, but it does make stocks increasingly vulnerable in the face of a negative catalyst.”

Hold your breadth: One popular measure of market “breadth” is the percentage of SPX stocks trading above their 50-day moving average. That topped 63% Wednesday after falling below 50% briefly last week. It’s still below the 90% from late last year, but closer to the long-term average. Just two sectors—utilities and real estate—have less than 50% of their members trading under their respective 50-day moving averages. Generally, the market is considered healthier when more sectors participate in a rally. Speaking of which, 10 of 11 S&P sectors did finish higher yesterday with the exception of info tech. Still, the SPX only rose 0.15%. It was the first time since November 8, 2007, that the SPX gained 0.15% or less when 10 of 11 sectors rose, Barron’s noted.

Calendar

February 23: Expected earnings from Warner Brothers Discovery (WBD).

February 26: January New Home Sales and expected earnings from Domino’s Pizza (DPZ) and Zoom Video (ZM).

February 27: Expected earnings from Dell (DELL) and eBay (EBAY).

February 28: Q4 GDP Second Estimate, January Retail Inventories, January Wholesale Inventories, and expected earnings from Baidu (BIDU).

February 29: January Personal Consumption Expenditure (PCE) prices, January Personal Spending, and January Personal Income.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Charles Schwab & Co., Inc. (“Schwab”) and TD Ameritrade, Inc., members SIPC are separate but affiliated subsidiaries of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.

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