How Will Nvidia's Earnings Impact the Market?
There's massive demand for AI infrastructure, but that isn't good news for the buyers of AI infrastructure. But there's one group that may benefit from Nvidia and Mag 7 weakness.
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It is no surprise that Nvidia NVDA reported a very strong quarter on Wednesday night, surpassing revenue and EPS estimates. However, the stock is trading lower early on Thursday morning primarily because its revenue estimate for the fourth quarter is lower than hoped.
Nvidia provided Q4 revenue guidance of around $37.5 billion, but Wall Street was hoping for $39 billion to $40 billion. That is not an insignificant shortfall, but it appears to be driven by a lack of supply rather than a lack of demand.
Nvidia's biggest problem is that demand for its Hopper and Blackwell products is so great that the company can not produce them fast enough. Management indicated that this was likely to be a problem for at least a couple of quarters in 2025, and that will keep estimates constrained.
Expectations for Nvidia were sky high so it isn't surprising that there is some sell-the-news action. Analysts love the report and are increasing price targets, but much of the good news is already discounted.
Nvidia stock may have some difficulty producing sustained upside right now, but there will be plenty of investors anxious to buy it on pullbacks. There should be good support even if the near-term upside is limited.
The next question is, what will the impact be on the rest of the market?
The other Magnificent Seven MAGS stocks are not seeing any positive sympathy and are down about 0.9% in the premarket. Good news from Nvidia isn't necessarily good news for Microsoft MSFT, Meta META, Google GOOGL, Apple AAPL, etc. They are all Nvidia customers and may be unable to buy all of what they need for their AI programs.
The good news for Nvidia is that there is massive demand for AI infrastructure, but that isn't good news for the buyers of AI infrastructure. We'll see how the Mag 7 names develop, but there isn't any compelling reason to chase them at this point, especially given current valuations.
One group that may benefit from Nvidia and Mag 7 weakness is small-caps and secondary stocks. Big-cap technology often sucks up huge amounts of capital, but that may flow back into smaller stocks if there is some QQQ underperformance. According to Bespoke Investment Group, "Since the end of May, there has been a tendency for the Russell 2000 to perform poorly when Nividia has surged as it sucks all the capital from the pool, and vice versa."
Another area of interest is the rampage in Bitcoin IBIT. It is hitting an all-time high, and the trading is going parabolic. Moves like this can persist far longer than seems reasonable, and it is being supported by tremendous optimism that the Trump administration will make Bitcoin into a major asset class that every diversified portfolio must hold.
Interest rates and the Fed are no longer as market-friendly as they were a month ago. There is now just a 50-50 chance of a quarter-point cut at the Fed meeting in December, and various Fed members such as Michelle Bowman indicate that they plan to move slowly toward further interest-rate cuts as inflation remains sticky.
There is still an unfilled hole in the charts that was formed after the election, but we are now heading into a period of positive seasonality. From 1950 to 2023, November seasonality has, on average, bottomed on the 20th day of the month and then trended higher the rest of the month. It would help if that gap on the charts was filled first, but that would require a 2% or more drop from this point. There is some mild selling in the early going, but nothing very significant.
At the time of publication, Rev Shark was long NVDA.
