Pushing aside the letdown June jobs report and your general obsession (or is that just me) with everything coming out of the Federal Reserve, I want to remind you of three things to start the week.
First, there is more to investing than stalking Federal Reserve headlines. Two, this week earnings season begins and the stories companies tell investors will become more important than the Federal Reserve (at least until the July 26 FOMC meeting…). And three, as the earnings machine kicks into warp overdrive — remember that not every company in the stock market is a profit beast with a five-year runway to show explosive growth like chip king Nvidia.
And because of that brutal reality, the market could be set up for disappointment as crops of ho-hum earnings reports trickle in.
“The bar has been set high for 2Q23 reporting season as blockbuster 5/24 results from Nvidia have catalyzed upward earnings revisions for the growth heavy Nasdaq,” opined EvercoreISI’s always prescient strategist Julian Emanuel in a weekend client note.
To jog your memory, May 24 brought a shocker from Nvidia that opened a lot of eyes across Wall Street.
Nvidia said it expects second-quarter revenue to come in at about $11 billion, plus or minus 2%. Wall Street was anticipating $7.2 billion. I have been crunching numbers on stocks for 20 years — I have never seen this magnitude of sales upside from a company. Ever. Not even close.
The Street is now projecting $11.02 billion in sales for Nvidia’s second quarter, according to Yahoo Finance data. Analysts expect Nvidia to add another $1 billion in sales from the second quarter’s end to the third quarter’s conclusion (October).
Nvidia founder and CEO Jensen Huang told analysts at the time the very upbeat outlook reflected a fundamental shift to accelerated computing. In turn, that is placing Nvidia’s chips that power generative AI in incredibly high demand.
“We’re seeing incredible orders to retool the world’s data centers. And so I think you’re seeing the beginning of, call it, a 10-year transition to basically recycle or reclaim the world’s data centers and build it out as accelerated computing,” Huang said. “You’ll have a pretty dramatic shift in the spend of a data center from traditional computing and to accelerate computing with SmartNICs, smart switches, of course GPUs and the workload is going to be predominantly generative AI.”
The problem here is that UnitedHealth isn’t selling AI chips. It sells healthcare. Warren Buffett’s Berkshire Hathaway isn’t selling AI chips. It sells railroad services via Burlington Northern (among other things). Home Depot for darn sure isn’t selling AI chips. I just went to an HD store on Sunday to buy a BBQ brush — no AI chips down aisle 10 I assure you.
Yet, the S&P 500 has rallied an impressive 6.5% since that Nvidia sales guidance shocker. The advance has bought the US equity market to a 19.3 times forward P/E multiple, a 19% premium to the 15-year average, points out strategists at UBS.
It’s as if investors are positioned for more Nvidia type stories (a growth boom) instead of hearing ones where companies are being challenged by stubborn inflation, higher financing costs and slowing sales growth.
The mismatch in expectations — in part fueled by the juggernaut that is Nvidia — could trigger swift earnings related sell-offs as reality comes home to roost warns Emanuel.
“Double misses” (EPS and sales) are likely to be as punished or more vs. 1Q’s announcement reaction of -5.3%, while double beats could see anemic action,” Emanuel says.
He adds, “Nvidia changed the way investors will perceive this upcoming earnings season.”
Good if you own Nvidia, but probably bad if you don’t.
Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations or anything else? Email brian.sozzi@yahoofinance.com
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