This morning, we are seeing the latest in a series of relief rallies. The sigh of relief comes from the market’s reaction to yesterday’s Nvidia (NVDA) earnings. You might be thinking, “wait, NVDA is lower today. How is that relief?” It’s because although the company didn’t meet the most optimistic “whisper numbers”, they also didn’t say anything that would invalidate investors’ love for megacap tech and all things regarding artificial intelligence. We have been referring to NVDA as “the market’s Atlas”; traders are relieved that Atlas barely shrugged.
As I type this, the S&P 500 (SPX) is once again flirting with all-time highs, though the Nasdaq 100 (NDX) remains about 5% below the high it made about six weeks ago. We can thank the broadening rally for the outperformance of SPX over the past few weeks. While investors continue to show affection for the megacap tech darlings, they are no longer the only game in town. While both NDX and SPX are both top-heavy with tech, the relative weighting of non-tech is far higher in SPX, allowing it to outperform recently.
(That said, this thought literally just occurred to me while I was typing: SPX put in a major top on the first trading day of 2022, right after the long New Years’ weekend. NDX had peaked six weeks earlier and was trading about 5% off its highs at the time. A generally ugly year followed. With the long weekend ahead, and a seasonally tricky month beginning thereafter, that’s just a coincidence, right?)
Whether or not NVDA’s results failed to meet the loftiest of expectations, they continued to tell a positive story for the company and the AI-investing theme. Their key customers continue to buy NVDA chips, and the company expects to ramp up production of its delayed Blackwell chip in the fourth quarter. They wouldn’t be ramping up if they didn’t foresee demand. Thus, after a modestly risk-averse day yesterday, tech investors got an “all clear” to resume their fondness for the sector.
Even though the worst appears to be behind us, it was indeed sensible for markets to concern themselves with the risks that could have materialized. If NVDA offered any signs that demand was slowing, that its key customers were slowing their purchases of AI-related chips to focus more on making AI a contributor to their own profits and less on building new capacity, the ramifications could have been enormous. Just because a reasonable risk was averted does not invalidate the concern. Look for it to crop up again – and with good reason – three months from now.
We’ve been generally positive about the results, and of course with good reason. But there are a couple of nitpicky items. First, although we noted that NVDA beat expectations, the magnitude of the earnings beats has been shrinking. Last year at this time, NVDA’s EPS beat consensus by 31.07%. The level of “beat” has declined since then to 19.64%, 11.69% and 8.51% ahead of yesterday’s 5.43%. None of that is bad, but it shows how expectations have been catching up to the company.
Also of note, Super Micro Computer was mentioned only once in passing on the earnings call. Normally, that wouldn’t be a big deal – a CEO doesn’t give shoutouts to all his best customers. But when a company’s third-biggest customer delays its 10-K, that may merit some concern. None was shown.
For now, the situation remains generally great for NVDA and the investing thesis for the companies in its orbit. But it doesn’t mean that vigilance is unwarranted.
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