Nvidia’s strong earnings update is being seen as a significant bullish bellwether for equities by market commentators.
The US chipmaker has been one of the group of seven tech giants driving major gains for equities as an asset class this year, along with Alphabet, Amazon, Apple, Meta, Microsoft and Tesla.
Last night, the company reported revenue of $13.5bn (£10.6bn) versus forecasts of $11.5bn (£8.7bn) and announced a $25bn (£19bn) share buyback, sending its stock price up 6.5% in after hours trading.
Concern had been growing among investors that the tech-driven market rally had been overdone and earnings would inevitably disappoint, leading to a sharp correction. In the case of Nvidia, this has not been the case.
Commentators see far wider implications from the forecast beat than the climb in Nvidia shares, and the results may provide the momentum for US equities in particular to head up on a sustained basis as we approach the final quarter of the year.
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“Better than expected quarterly earnings from Nvidia have significant implications for global markets,” said AJ Bell investment director Russ Mould.
“The chip specialist has been one of ‘The Magnificent Seven’ stocks driving US markets this year, with its shares up 243% since the start of 2023. It’s been one of the market superstars and given investors hope that it is still possible to make good money from equities in an environment where interest rates continue to go up and inflation remains sticky in places.
“Any disappointment in its latest results would have gone down like a lead balloon,” he continued. “It could have hurt investor sentiment and caused contagion elsewhere in the markets. Fortunately, it’s pulled another rabbit out of the hat and given investors everything they wanted and more.
“This appears to have sprinkled some magic dust on the markets and provided new impetus to share prices. The rest of the Magnificent Seven – Alphabet, Amazon, Apple, Meta, Microsoft and Tesla – all saw their shares rise in after-hours trading following Nvidia’s results, and on European markets we’ve seen tech-related stocks such as ASML and Scottish Mortgage move higher.
An important aspect of Nvidia’s role in market sentiment is its close association with the rise of AI as an industry, and investment theme. The company’s computer chips power the GPUs that run large language models (LLMs) such as Chat GPT, as well as many other AI technologies.
“Nvidia is seen as the poster child for artificial intelligence, with its chips playing a key role in the roll-out of AI systems,” Mould noted. “AI has been the hot investment theme in 2023 and Nvidia’s results imply there is a lot more to go for.”
“As chief executive Jensen Huang says, ‘a new computing era has begun’. That’s crucial to why investors are rushing to own the stock. They see this as the start of something big, with further gains to come. In this situation it is important to not get carried away and have unrealistic expectations for what a company can achieve.”
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Victoria Scholar, head of investment at interactive investor, added: “There is a sea of green across European equities this morning. Very strong Q2 results, bullish guidance, and a major share buyback from Nvidia have provided a boost to global market sentiment. Technology is the leading sector across Europe this morning following Nvidia’s 6.5% after-hours gain and its near 9% jump in Frankfurt this morning. Semiconductor stocks like ASML and STMicro are rallying too on the back of Nvidia’s blowout quarter.”
Geir Lode, head of global equities at Federated Hermes, said: “Nvidia’s exceptionally strong outlook and earnings report proves that AI is not a spike but transformational shift for the tech industry.
“Companies that provide the building blocks for AI will have exceptional growth. As we have seen previously with new technologies, a handful of companies will emerge as leaders and will dominate the industry.
“In the early phase of the transitional shift extremely high valuations can be hard to justify in a market with higher interest rates. These companies are priced for perfection.
“As for other hyper-growth stocks, investors should be less concerned about current valuations and focus more on competitive edge and business momentum, keeping in mind that not all of today’s winners will be tomorrow’s leaders. When these companies mature, traditional valuation metrics become much more relevant.
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