Why Nvidia Matters More To Markets Than The Fed

Forbes

5 hours ago

Markets move on gaps between reality and expectations. I expect the gap that could emerge after Nvidia reports second-quarter earnings next Wednesday will move markets more than whatever Federal Reserve Chair Jerome Powell says on Friday in Jackson Hole, Wyoming.
How so? Investors are growing worried about how much companies are investing in artificial intelligence and how few of them are getting a payoff. Unless Nvidia beats investor expectations and raises guidance, its stock could plunge. This drop would be exacerbated by investors who view the bad report as a sign the AI bubble is bursting
By contrast, what Powell will say Friday is subject to less surprise. Since he has proven himself to be more loyal to Fed independence than to President Donald Trump's efforts to force him to lower rates, I am expecting Powell to say something along these lines: inflation could rise due to tariffs and unemployment is low so there is no reason to cut rates.
Read on for a closer look at why Nvidia is so market moving and how investors will know whether the AI chip designer will beat and raise.
Why Nvidia Is So Important To The Market
Nvidia's quarterly earnings reports have been market moving events since May 2023 when the chip designer issued the revenue growth forecast heard around the world – prompting me to write my latest book, Brain Rush.
Since then Nvidia's market capitalization has grown so much that changes in the company's stock price drive the S&P 500. Indeed, the AI chip designer's $4 trillion stock market capitalization, accounts for 8% of the value of the index, according to the New York Times.
Moreover, the options market is expecting Nvidia's earnings report to move markets more than Powell's remarks. That's because S&P 500 options are pricing a 0.8 percentage point move up or down after the Fed Chair speaks – whereas prices for August 28 – the first chance for investors to trade on Nvidia's report – imply a move of 0.9 percentage points up or down, reported the Times.
What Investors Expect From Nvidia's Second Quarter Report
In the last few weeks, investors have grown more skeptical of investing in AI companies. For example, Palantir – whose shares peaked a few weeks ago at $190 – have recently lost 20% of their value despite an excellent second quarter financial report, as I wrote in an August 20 Forbes post.
One reason for the drop – which was primarily due to a short seller's estimate the stock is 74% overvalued – is the abysmal payoff from companies' investments in AI.
Last September, generative AI was looking to me like a big dud. While people were using ChatGPT to help them draft emails and reports, there was no killer app – akin to what the iTunes store did for the iPod or the electronic spreadsheet did for personal computers, I wrote in the Boston Globe.
This week, MIT reinforced this point with hard numbers. "Despite $30B-$40B in enterprise investment into generative AI, this report uncovers a surprising result in that 95% of organizations are getting zero return," according to a study – based on 150 interviews with professionals, a survey of 350 employees, and an analysis of 300 public AI deployments – from MIT's NANDA Institute featured by SeekingAlpha.
Will investors be worried this minimal payoff from AI will cause Nvidia to offer a less bullish growth forecast? If they do, Nvidia's stock could fall and drive a significant tech selloff.
This brings us to the question of what Nvidia is likely to say next Wednesday when it provides investors with its second quarter report. In May, the company forecast $45 billion in revenue for the second quarter – $920 million below investor expectations – but 50% higher than last year, according to Investor's Business Daily.
A week before the report, investors are expecting more from Nvidia. Specifically, analysts expect Nvidia to post revenue of $45.65 billion – a 52.4% increase from last year and a 47% boost in earnings per share to $1.00, according to MarketBeat. Investors are expecting Nvidia to forecast Q3 2026 revenue of $52.5 billion, according to The Motley Fool.
If Nvidia exceeds these expectations and raises revenue guidance, its shares will likely rise. Otherwise, the drop in Nvidia could cascade to other AI stocks. Meanwhile, I anticipate a much more muted reaction to whatever Powell says Friday.