Stocks at record levels are about to get their next major test — Nvidia's earnings results

Published Wed, May 22 20249:33 AM EDTUpdated Wed, May 22 20242:55 PM EDT

Key Points

Nvidia is set to release its earnings report after the bell Wednesday.
While the AI chipmaker is universally anticipated to produce good results after the close on Wednesday, traders will discover just how much is priced into a stock that has surged 200% in the span of one year, or, put another way, added $1.5 trillion to its market capitalization.
Many investors expect a strong showing from Nvidia will keep markets on their recent upward ascent.

Stocks are riding high heading into Nvidia's earnings results after the market close Wednesday. But the artificial intelligence darling's latest report could either be the event that helps markets continue their recent momentum, or drags them lower. U.S. stock market benchmarks have been hovering near all-time highs. The S & P 500 and Nasdaq Composite touched records on Tuesday while the Dow Jones Industrial Average last week topped 40,000 for the first time, as investors embraced a sanguine outlook on the markets and economy and the likely size of corporate profits. But Nvidia will test the sustainability of recent market highs given its huge size in broad market indexes, as well as its influence over investor psychology. While the AI chipmaker is universally anticipated to produce good results after the close on Wednesday, traders will discover just how much is priced into a stock that has surged 200% in the span of one year, or, put another way, added $1.5 trillion to its market capitalization. How much influence does Nvidia wield over markets? Consider that the Jensen Huang-led company is in more than 6,000 long-only institutional funds, and in just 21 short-only funds, according to data from S & P Capital IQ. "The trajectory of the market in the near term, I think, will be highly correlated to the extent by which Nvidia meets or beats expectations," said Sam Stovall, chief investment strategist at CFRA Research. "I think a miss would be devastating for the market." "It could be a coin toss if Nvidia simply meets expectations," said Stovall. "Because I believe that there is a whisper number." Beat and raise Many investors expect a strong showing from Nvidia will keep markets on their recent upward ascent. CFRA's Stovall, who has a 12-month target of 5,610 for the S & P 500, noted that he does not expect investors will punish the stock if it does not beat by as much as it had in the past, saying the results are not likely to "interrupt the market's gradual move higher." As it is, Wall Street seems to be taking it for granted that Nvidia will beat and raise expectations after having done so quarter after quarter. Piper Sandler analyst Harsh Kumar noted that Nvidia has surpassed revenue expectations by an average $1.9 billion over the past three quarters. Kumar, who has a buy rating on Nvidia, expects the company could beat revenue expectations this time around by $1.5 billion to $2 billion as well, an outcome that markets may take without so much as a blink. "We think all that is sort of like on investors' minds," Kumar said. "And if they come up with those sort of numbers, the stock will be flat to slightly up, but it won't be up dramatically because people are already expecting that — they will want to be wowed." Still, the analyst expects investors will want to keep their allocations to Nvidia because of the potential of Blackwell, the latest iteration of its graphics processing units, or GPUs, coming in the back half of the year. Blackwell already has a backlog of orders from hyperscalers such as Microsoft and Amazon. Any insight from CEO Huang on those GPUs has the potential to dazzle investors. "Barring a sort of a major negative surprise, people will hold their position, or in case there's any kind of weakness in the near term, people will want to add to their position as they get ready for Blackwell," Kumar said. Elsewhere, Horizon Investments' Zachary Hill said he continues to be a buyer of the broad market and AI names in particular, even at current prices. "Despite the fact that we're making all-time highs, you know, we're not using that opportunity to take risk off the table," Hill said. "We've been positioned broadly within the large-cap growth tech, in AI-related themes. We do think that theme has plenty of room to run from here." On the other hand, a surprising miss from Nvidia could be crushing for investors. Chris Zaccarelli, investment chief at Independent Advisor Alliance, said he could see a drop of more than 1%, or even more than 2%, in the S & P 500 if Nvidia manages to disappoint investors.