Nvidia stock rises on Q3 earnings beat fueled by data centers, Palo Alto Networks falls

Key Concepts

• Market Performance: Dow, Nasdaq Composite, S&P 500, S&P 500 Equal Weighted Index, Sector Performance (Tech, Financials, Industrials, Materials, Consumer Discretionary, Energy, Utilities, Staples, Real Estate), Breadth.
• AI Trade & Nvidia: Nvidia earnings, AI spending, Data Center Revenue, Gross Margins, Market Cap, Demand vs. Supply, Future Growth Projections, Blackwell, Rubin.
• Economic Outlook (2026): Policy Shocks, Implementation Risk, Tariffs, Trade Changes, Federal Reserve Easing, Inflation, Neutral Growth Rate, Asia & China Growth, US Economic Growth Resilience.
• Currency Markets: US Dollar Decline, Dollar Smile Theory, Interest Rate Differentials, ECB, Bank of Canada, Reserve Bank of Australia, Hedging Markets, Dollarization.
• Commodities: Gold, Copper, Crude Oil, Silver, Supply, Demand, Restocking.
• Company Earnings: Palo Alto Networks (Q1, Q2 guidance, full-year guidance, acquisitions), Nvidia (Q3, Q4 guidance, Data Center Revenue, Gross Margins).
• Valuation: Price-to-Earnings (P/E) Ratio, Free Cash Flow.

Market Action and Sector Performance

The market saw a win for the bulls, with all three major indices closing in positive territory. The Dow Jones Industrial Average experienced modest gains, closing up 47 points, or 0.1%. The Nasdaq Composite performed slightly better, gaining 0.6%, while the S&P 500 rose by 0.4%. However, the S&P 500 Equal Weighted Index, which gives equal weight to all stocks rather than favoring larger ones, was down. This indicates a lack of broad market participation, suggesting that the price returns were primarily driven by a few large-cap stocks.

Sector Performance:

• Top Performers: Technology (XLK) led the gains, up 0.7%, recovering after two days of declines. Financials followed, also outperforming. Industrials and Materials also finished in the green, indicating a positive day for cyclical sectors.
• Underperformers: Energy was the worst-performing sector, down 1.28%. Defensive sectors like Utilities, Consumer Staples, and Real Estate also experienced declines. Consumer Discretionary, another cyclical sector, ended slightly in the red.

Notable individual stock performances included Alphabet and Broadcom, which were up 3% and 4% respectively. However, the primary focus remained on Nvidia, with its year-to-date chart showing a significant increase.

Economic Outlook and AI's Role

Rich Kelly, TD Securities Head of Global Strategy, discussed the economic outlook for 2026, anticipating fewer policy shocks and ongoing risks. He highlighted that while 2025 has been marked by policy uncertainty, the S&P 500 is on track to end the year higher, which bodes well for the following year.

Nvidia's Earnings and the AI Trade: Nvidia's upcoming earnings report is considered a critical focal point for the market, especially given the lack of significant data due to government shutdowns. Kelly acknowledged Nvidia as a critical innovation rewiring the global economy but questioned the immediate overhype regarding its impact on the economy, viewing it as a long-term story.

AI's Impact on GDP: While some economists believe AI is transformational for the economy, Kelly's analysis suggests that AI's contribution to GDP growth, while significant and a large share of capital investment, is crowding out other investments. A substantial portion of the content supporting AI investment is imported, meaning only about 0.1% to 0.2% of GDP growth is directly attributable to it. Despite this, AI is a growing and important engine of US economic growth.

Resilience and Growth in 2026: Kelly forecasts US economic growth to beat consensus expectations for 2026. This resilience is attributed to:

• Delivered Policy: Much of the policy uncertainty from the previous year has been addressed.
• Implementation Risk: Firms are adjusting to new policies, and tariffs are starting to roll back.
• AI Adoption: Only a portion of the changes from AI adoption has been realized.
• Federal Reserve Easing: Further easing from the Fed is expected.

However, Kelly anticipates a period of weaker data in the near term (next 3-6 months), with payrolls potentially beating consensus but subsequent prints being subpar. Inflation is expected to remain above target in the first half of the year but should improve as the year progresses. He believes consensus estimates for US economic growth in 2026 are too pessimistic, with potential outperformance from the US and Asia, particularly China.

Currency Markets and Commodities

US Dollar Decline: Kelly predicts a structural decline in the US dollar in 2026, with a potential decrease of 50-60 basis points in 10-year Treasuries. This is based on the "dollar smile" theory in FX markets, where a strong dollar typically occurs during extreme dollar exceptionalism or global collapse. In a scenario of decent growth and relative stability, a lower dollar is more likely.

Interest Rate Differentials: The Federal Reserve is expected to continue easing, while other central banks like the ECB, Bank of Canada, and Reserve Bank of Australia may consider hiking rates later in the year. This divergence in interest rate policy will lead to higher rates outside the US and lower rates in the US, creating interest rate differentials that weaken the dollar.

Dollar Debasement vs. Hedging: Kelly pushes back against the idea of dollar debasement or de-dollarization, suggesting it's overhyped. He observes a structural change in hedging markets, with less selling of US assets and a shift towards non-dollar assets when new investments are made. As the Fed cuts rates, hedging costs decrease, potentially leading to more hedging activity, which can further support a weaker dollar.

Commodities Outlook: Kelly has a constructive view on commodities:

• Gold: Driven by structural trends of official money inflow and diversification, with potential to reach new highs, possibly upwards of $4,400.
• Oil: Despite massive global supply, oil prices have not fallen significantly. A bottom is expected in the first half of the year, with prices potentially rising thereafter.
• Base Metals (Copper): Expected to track overall US economic growth and a potential rebound in Asia, with restocking providing support.

Company Earnings and Analyst Insights

Palo Alto Networks:

• Q1 Earnings: Reported adjusted EPS of $0.93 (vs. $0.90 estimate) and revenue of $2.5 billion (vs. $2.46 billion estimate).
• Q2 Guidance: Adjusted EPS projected between $0.93-$0.95 (vs. $0.93 estimate).
• Full-Year Guidance: Revenue expected between $10.50-$10.54 billion (revised from $10.48-$10.53 billion).
• Acquisitions: Announced the acquisition of Cyber Arc and Kronosphere for $3.35 billion, positioning the company as a data and security partner in the AI era.
• Market Reaction: The stock was down approximately 5% in after-hours trading despite meeting or exceeding estimates.

Nvidia:

• Q3 Earnings:
  • EPS: $1.30 (beat street estimates).
  • Revenue: $57.01 billion (beat street estimates of $55.19 billion).
  • Data Center Revenue: $51.2 billion (beat street estimates of $49.34 billion).
• Q4 Guidance:
  • Revenue: $65 billion +/- 2% (exceeding the estimate of $62 billion).
  • Gross Margins: 75% (exceeding the estimate of 74.6%).
• Analyst Commentary (Angelo Zeno, CFRA Research):
  • Strong Numbers: Zeno described the numbers as "great," with upside to revenue and uplift in margins.
  • Data Center Dominance: Approximately 90% of Nvidia's revenue comes from data centers, which remain supply-constrained and are expected to persist through 2026 and potentially 2027.
  • Margin Sustainability: Margins are expected to remain in the mid-70s for the foreseeable future.
  • Addressing AI Concerns: While the Q3 results and Q4 guidance were strong, Zeno noted that they might not fully address broader concerns about the AI trade, which extend into 2027 and beyond. He anticipates a deceleration in revenue growth over the next few quarters due to the "law of large numbers" but believes the $500 billion backlog mentioned by Jensen Huang at GTC is consistent with this trajectory.
  • Valuation: Zeno considers Nvidia's valuation attractive, trading at approximately 21-22 times calendar 2027 earnings. He believes the company's long-term free cash flow potential supports higher multiples.
  • Execution Focus: The narrative is shifting from bookings growth to actual execution, with potential execution issues in AI infrastructure builds in 2026. However, earnings power and free cash flow potential are expected to drive multiples higher.
• Market Reaction: The stock was popping nearly 5% in after-hours trading following the earnings release.

Key Statements:

• "I think it's very important because it is the leader of the pack and if the leader of the pack stumbles then uh in a sense the other members will trip over it." (Analyst on Nvidia's importance)
• "The street is looking for about 62 billion in revenue for Q4. Typically Nvidia guides up call it kind of two to three percent on the street. I think they probably do something like that maybe even a little bit better and I think that's probably a relief certainly given what's going on AI trade right now." (Analyst on Nvidia's Q4 guidance)
• "Jensen's comments in in Washington, you know, he's talking about booked business, booked Blackwell and Rubin business uh over 2025 and 2026 cumulative. Um, you know, that's 500 billion of book business that Nvidia has." (Analyst on Nvidia's backlog)
• "The Taiwanese supply chain is continuing to see upward momentum. uh had conversations with people selling into their products in the US. Same thing. We've heard it publicly from the CSPs, right? They they are spending more on AI." (Analyst on supply chain checks)
• "Demand the supply is 10 to1 for Nvidia chips. Get the popcorn out, get the watch parties out for next week's earnings because this is, in my opinion, is going to be a $6 trillion market cap in 2026." (Analyst's bullish outlook on Nvidia)
• "Q1 adjusted EPS 93 cents. The street was at 90 cents. Q1 revenue 2.5 billion uh versus an estimate of 2.46 billion." (Palo Alto Networks Q1 results)
• "Cloud GPUs are sold out just highlighting the demand he's seeing there." (Jensen Huang on Nvidia's demand)
• "I think the numbers were great. um you know you're looking at the numbers as far as revenue about 50 uh was it 57 billion or so I think we're looking about 56 billion um and earnings about $129 so you know I think street was a$125 so so they did beat the the street as far as the guide we were looking closer at 6162 billion and you know they definitely came you know well ahead of that." (Angelo Zeno on Nvidia's Q3 results)
• "about 90% of the revenue right now roughly is coming from from data centers so the the company is you know essentially completely being driven by data centers the fact that we remain supply constrained here." (Angelo Zeno on Nvidia's data center focus)
• "valuation actually, you know, is pretty reason. I mean, it's pretty attractive here relative to historical levels. I mean, you're looking at about 21 times, you know, before the print here. 21 22 times on a calendar 27 basis." (Angelo Zeno on Nvidia's valuation)

Synthesis and Conclusion

The market experienced a mixed but generally positive day, with gains in major indices driven by large-cap tech stocks, particularly Nvidia. While breadth was a concern, the focus remains on the AI trade and Nvidia's pivotal role. Economically, 2026 is projected to see resilience and growth, with potential for a weaker US dollar and strong performance in commodities like gold and oil. Nvidia's latest earnings report exceeded expectations, reinforcing its dominance in the AI sector and providing a positive outlook, though broader concerns about AI trade sustainability persist. Palo Alto Networks also reported solid earnings and guidance, but its stock saw a dip in after-hours trading. The market is keenly watching how these trends will unfold, with Nvidia's performance serving as a key indicator for the broader AI investment theme.