A Velveteen Response to NVIDIA Earnings Report

Articles From: Briefing.com
Website: Briefing.com

By:

Chief Market Analyst

A stock market on a losing streak got just what it needed to feel less like a loser. A mega-cap stock… a growth stock… a heavily-traded stock… and an “AI” stock posted better than expected fourth quarter results and issued first quarter guidance that was also better than expected.

That would be NVIDIA (NVDA), which is up 12.4% in pre-market action and is driving the gains in the S&P 500 and Nasdaq 100 futures. 

Currently, the S&P 500 futures are up 20 points and are trading 0.6% above fair value, the Nasdaq 100 futures are up 126 points and are trading 1.1% above fair value, and the Dow Jones Industrial Average futures are up 67 points and are trading 0.2% above fair value.

This particular trade, though, feels a little gratuitous and we’ll explain why.

NVIDIA’s non-GAAP net income was down 35% year-over-year, its revenues were down 21% year-over-year, and the midpoint of its Q1 revenue guidance of $6.37-6.63 billion is down 21.6% year-over-year. That “good news” is somehow translating into an approximately $65 billion increase in NVIDIA’s market capitalization and setting the equity futures market aglow.

That seems like an AI chatbot response gone wrong in our estimation, but it is happening in the real world and it is translating into real gains for NVIDIA shareholders and the broader market.

The question is, will this real-world reaction prove to be illusory or end up being the real thing today?

Again, we point to interest rates as a potential spoiler in the mix. The 1-yr T-bill yield is up one basis point to 5.12%, the 2-yr note yield is up one basis point to 4.71%, and the 10-yr note yield is up four basis points to 3.96%.

Those moves qualify as subdued in the current market environment, but if the 10-yr note yield stretches closer to 4.00%, or exceeds 4.0%, then this morning’s velveteen market may just go back to being unloved.

Right now, it is getting the benefit of investors loving NVIDIA’s report and loving the support that seems to be coming in with the S&P 500 sitting on top of its 50-day moving average (3,980). That love has overshadowed the distaste for disappointing earnings news and/or guidance from Moderna (MRNA), Unity Software (U), NetApp (NTAP), and Dollar General (DG) to name a few others that have shown all is not well.

All seems to be okay in the labor market, however. Initial jobless claims for the week ending February 18 declined by 3,000 to 192,000 (Briefing.com consensus 200,000). Continuing jobless claims for the week ending February 11 decreased by 37,000 to 1.654 million.

The key takeaway from the report is that it covers the period in which the survey for the February employment report was taken. The remarkably low level of initial claims will contribute to expectations for another strong gain in nonfarm payrolls and the Fed sticking to its tightening ways.

The second estimate for fourth quarter GDP showed a downward revision to 2.7% growth (Briefing.com consensus 2.9%) from the advance estimate of 2.9%. That was driven by a downward revision in personal spending growth to 1.4% from 2.1%. The GDP Price Deflator was revised up to 3.9% (Briefing.com consensus 3.5%) from 3.5%. The personal consumption expenditures index, meanwhile, was revised up to 3.7% from 3.2%.

The key takeaway from the report is that it is an off-putting mix for the Fed. Growth is still running above potential and inflation is still running above target.

Market participants took stock of the data but didn’t fall out of love with the equity futures. They are still pointing to real gains for the indices when trading begins.

Originally Posted February 23, 2023 – A velveteen response to NVIDIA earnings report

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