Nvidia Corp's results in the coming week could guide the U.S. stock market on its next path, as investors turn to the technology sector and artificial intelligence trading after an election rally stalled.
Nvidia's stock rise of nearly 800% over the past two years, driven by its flagship artificial intelligence business, has propelled the semiconductor company to No. 1 in the world in terms of market value.
This weight gives Nvidia great influence on market benchmarks, such as the S&P 500 and the Nasdaq 100. Its results on November 20 will also be an indicator of the market's appetite for technology stocks, trading in artificial intelligence and sentiment for stocks in general, investors said.
The benchmark S&P 500 index fell off its record highs after the Nov. 5 U.S. election that gave Donald Trump a second term as president and his fellow Republicans control of Congress.
Markets are “looking for direction right now,” said Garrett Melson, portfolio strategist at Natixis Investment Managers. “If these results are pretty good, that tells you that there is still momentum behind this investment and trading and I think that helps broaden the appetite for risk.”
Nvidia's dominance in AI has catapulted its stock price and enabled it to achieve astonishing financial performance. For its fiscal third quarter, the company is expected to post net income of $18.4 billion, as its revenue jumped more than 80% to $33 billion, according to LSEG data.
However, after beating analyst estimates last year, Nvidia's surprises have become more modest, with earnings 6% lower in the most recent quarter, according to LSEG data.
“It's increasingly difficult to exceed those expectations,” said Mark Luschini, head of investment strategy at Janney Montgomery Scott.
Nvidia's results cap a mixed third-quarter earnings season for U.S. companies. S&P 500 earnings are expected to have increased 8.8% from a year earlier, with 76% of companies beating estimates, compared with an average of 79% over the past four quarters, according to LSEG IBES data.
As in recent quarters, results from Nvidia and a small group of other large-cap technology and related companies carry the load. These so-called “Magnificent 7” companies, which also include Apple and Microsoft, are expected to have increased their profits by 30% in the third quarter, compared with 4.3% for the other 493 companies in the index, said research analyst Tajinder Dhillon. principal at LSEG.
“It's really the Mag 7 group, led by Nvidia, that has done the heavy lifting to achieve the kind of earnings growth that has supported the rise in stock prices,” Mr. Luschini said.
Nvidia's results could also be crucial to supporting the broader market's lofty valuation, with the S&P 500's forward price-to-earnings ratio more than 22 times and near its highest level in more than three years, according to LSEG Datastream.
The benchmark index is up 23% this year. Mr. Trump's victory initially led to a general rise in stocks on optimism over his tax cut and deregulation agenda.
But stocks retreated this week as markets continued to digest the implications of the election.
Investors will keep an eye on Mr. Trump's transition plans, including his picks for key cabinet positions, after some of his early appointments weakened market sectors such as pharmaceutical and defense stocks.
Stocks also fell after Federal Reserve Chairman Jerome Powell said Thursday that the central bank does not need to rush to lower interest rates, which will keep monetary policy at the forefront for markets in the coming weeks.
“Given that the stock market has become so expensive, the fact that the Fed is signaling that it will not be as dovish as it had indicated before the election… will create at least some headwinds in the days and weeks ahead,” Matthew Maley, chief market strategist at Miller Tabak, said in a note Friday.
