Market Talk: Nvidia will crush earnings, but will it matter? | REUTERS

Key Concepts

• AI Bubble Fears: Concerns that the rapid growth and high valuations of AI-related companies are unsustainable.
• AI Infrastructure Spend: Investment in the hardware, software, and services necessary to support the development and deployment of AI.
• Valuations: The assessment of a company's worth, often based on metrics like price-to-earnings ratios.
• Consumer Spending: The total amount of money spent on goods and services by households, a major driver of economic growth.
• 50-Day Moving Average: A technical indicator used to gauge short-term market trends. A break below this level can signal a downward shift in momentum.
• 200-Day Moving Average (Death Cross): A more significant technical indicator. Crossing below the 200-day moving average is often seen as a precursor to a larger market correction.
• Bull Market: A period of sustained price increases in a stock market.
• Santa Claus Rally: A tendency for the stock market to rise in the last week of December and the first two trading days of January.
• Tailwinds: Factors that support or encourage growth and positive momentum.

Nvidia Earnings and AI Bubble Concerns

Kevin Man of Henyan and Walsh Asset Management discusses the current market sentiment, characterized by a drop in US stocks for the fourth consecutive session, largely driven by anticipation of Nvidia's earnings report. The S&P 500 is on track for its longest losing streak since August, fueled by fears of a potential "AI bubble" and general concerns about excessive valuations across the stock market.

Key Points:

• Investors are questioning the sustainability of current AI infrastructure spending levels and the high valuations of AI-associated tech companies.
• Man emphasizes that the AI revolution is a "long road filled with many potholes" and that there will likely be more "losers than winners."
• He suggests that the ultimate winners will be those companies that have already invested heavily and possess the capacity to continue spending to maintain a competitive edge in the AI revolution. Patience will be crucial for investors.

Nvidia's Role:

• Nvidia is described as being at the "hub of the AI ecosystem" and its performance is critical to investor psychology regarding both the stock market and the overall health of the AI revolution.
• However, Man notes that Nvidia is not the only company poised to benefit from AI proliferation. He advises investors to consider both current AI infrastructure spenders and future AI benefactors and implementers.

Expectations for Nvidia's Earnings:

• Man anticipates Nvidia will "knock the cover off the ball" with its quarterly earnings, likely exceeding analyst estimates for earnings per share (EPS) and revenues.
• He also expects Nvidia to provide a higher forecast for the next quarter and potentially for fiscal year 2026.
• He will be looking for a "healthy blend between chip revenue and data center revenues." In the previous quarter, data center revenue accounted for 88% of Nvidia's total revenue, while chip revenue represented only 12%.
• Despite potentially strong results and guidance, Man believes many investors will still question the existence and imminent bursting of an AI bubble.

Consumer Spending and Home Depot's Earnings

The discussion shifts to the resilience of the consumer, prompted by Home Depot's earnings report and forecast of a larger drop in full-year profit, which led to a decline in its shares.

Key Points:

• Man believes strains in consumer spending were already evident earlier in the year.
• He highlights that 70% of US economic growth is driven by consumer spending.
• Interestingly, he notes that during the first half of the year, the contribution of consumer spending to GDP was matched by AI infrastructure investment. This raises the question of whether AI spending was exceptionally strong or if the consumer was weakening.
• While the consumer showed some pickup in the third quarter, evidenced by the S&P 500's 13.1% year-over-year earnings growth, Home Depot's results warrant caution.
• Factors influencing Home Depot include not only consumer sentiment but also the real estate market, mortgage costs, and consumer engagement in home improvement projects.
• Man intends to monitor other consumer staple companies like Walmart, Target, and Lowe's before making a definitive judgment on the consumer's overall health.

Market Outlook and Bull Market Longevity

The conversation turns to the broader market outlook, with the S&P 500 trading below its 50-day moving average.

Key Points:

• A stock market index falling below its 50-day moving average is generally a cause for concern, indicating a potential downward shift in momentum.
• A more significant indicator of concern would be a "death cross," where the index falls below its 200-day moving average, historically suggesting a larger correction.
• Man provides a historical perspective on bull markets, noting that October marked the three-year anniversary of the current bull market.
• In the last 50 years, there have been five other instances of bull markets reaching their three-year anniversary. In all these cases, the market continued to move higher, with an average additional duration of eight years.
• The shortest duration in these historical examples was five years, suggesting a potential two more years of upward movement. In two instances, bull markets lasted for double-digit years.
• While acknowledging that "past performance isn't indicative of future results," Man believes "multiple tailwinds" support the continuation of the current bull market.
• He anticipates "more short-term bouts of volatility" in the fourth quarter.
• However, he expects this volatility to be met by capital coming "off the sidelines," potentially leading to a "nice little Santa Claus rally" to end the year on a positive note.

Synthesis and Conclusion

The market is currently experiencing a downturn driven by investor apprehension surrounding Nvidia's upcoming earnings and broader fears of an AI bubble and overvaluation. While Nvidia is expected to deliver strong results, the market's reaction will be crucial in gauging sentiment towards the AI revolution. Simultaneously, signs of strain in consumer spending, exemplified by Home Depot's performance, warrant close observation of other consumer staple companies. Despite short-term volatility and technical indicators suggesting caution, historical data on bull markets suggests a potential for continued upward movement, with a possible "Santa Claus rally" to conclude the year. Investors are advised to focus on companies with sustained AI investment capacity and to exercise patience in navigating the evolving AI landscape.