For three years, the U.S. Federal Reserve maintained a firm grip on interest rates, leaving the federal funds rate at a 23-year high of 5.33% since its last increase in August 2023. Today, as inflation eases and unemployment creeps up, whispers of impending rate cuts dance through Wall Street. Yet, while a rate cut can be a tonic for stocks, it’s the happenings beyond the Fed that truly stir the market waters. Enter Aug. 28, a date marked not by any governmental communique, but by Nvidia’s fiscal 2025 second-quarter earnings report.
The rise of Nvidia’s stock over the past year, a staggering 187%, rides on the coattails of the company’s exceptional financial performance. This impending report is poised to cast a larger shadow over investor sentiment than the predictable ebbs and flows of the Fed.
Navigating Nvidia as the AI Compass
Nvidia, a stalwart in the AI industry, crafts the premier data center chips crucial for honing artificial intelligence (AI) models. The fervent demand for these chips surges from a diverse clientele, spanning established tech behemoths like Microsoft and nimble start-ups like OpenAI, progenitors of ChatGPT. Nvidia’s H100 graphics processor (GPU) raised the AI industry’s bar last year, with tech conglomerates assembling GPU clusters exceeding 100,000 units, each fetching up to $40,000. This burgeoning market, now multibillion-dollar, has captivated Nvidia’s CEO Jensen Huang, who envisions data center operators channeling $1 trillion into infrastructure expansion over the next five years.
Microsoft, Amazon, Alphabet, and more, housing data centers replete with Nvidia GPUs, lease computational prowess to businesses and developers, nurturing AI innovation. Huang lauds this symbiosis, touting that for every dollar spent on Nvidia’s chips, data center operators reap a $5 return over four years, denoting a lucrative alliance. While industry entrants are mustering their own GPUs to challenge Nvidia, the unveiling of the H200 propels Nvidia ahead, doubling AI inference speed from its predecessor. Punctuating this progress, Nvidia gears up to dispatch volumes of its next-gen GPUs built on the Blackwell architecture.
Foretelling Nvidia’s Ascendancy
Guided by Nvidia’s forecasts, the fiscal 2025 second quarter heralds a $28 billion revenue spectacle. This figure eclipses Wall Street’s erstwhile $26.6 billion projections, with analysts revising their consensus to $28.5 billion, suggesting Nvidia’s own projections may be too conservative. Nvidia is renowned for besting estimates, exemplified by its first-quarter fiscal 2025 performance, which flaunted $26 billion in total revenue, surpassing both its $24 billion guidance and Wall Street’s forecast of $24.6 billion.
Noteworthy in the first quarter was the staggering $22.6 billion data center revenue, catapulting 427% higher than its prior-year equivalent. This data center metric takes center stage in the impending second-quarter report. Any figure transcending Wall Street’s $25 billion estimation bodes well for tech juggernauts like Microsoft, Amazon, and Alphabet, spotlighting their AI infrastructure investments as a vote of confidence in the future of technology.
Comprising 20.4% of the S&P 500 index, Nvidia, Microsoft, Amazon, and Alphabet exude significant influence on the stock market’s trajectory. Meta Platforms and Tesla, also avid procurers of Nvidia GPUs, collectively command a 3.8% stake in the index. Thus, this cadre of tech titans could potentially steer the broader market narrative, underscoring the pivotal importance of Nvidia’s impending Aug. 28 report.
Image source: Nvidia.
Treasure Trove than the Fed’s Pivot
The Tightrope Walk of Impending Rate Cuts: The Market Dance Ahead
The Impact of Rate Cuts on the Market
Interest rate cuts can nudge investors toward growth assets like stocks and real estate, as they reduce the allure of risk-free assets like cash and Treasuries. Lower rates also empower companies to tap into more capital for expansion. Additionally, existing debt-laden firms stand to benefit with reduced repayment burdens, thus boosting their earnings.
Despite the potential benefits, history tells a sobering tale. Instances where the Fed slashed rates in response to dire economic conditions, such as the dotcom crash in 2000, the global financial crisis in 2008, and the pandemic woes of 2020, saw the S&P 500 stumble. Presently, a slight uptick in U.S. unemployment hints at potential economic softness, signaling caution, particularly in consumer spending.
Nevertheless, the CME Group’s FedWatch tool ominously assigns a 100% probability to an upcoming September rate cut. While the economy retains considerable strength presently, investor reaction remains unpredictable.
Nvidia’s Earnings Report Impact
With the looming rate cut overshadowing the economy, the forthcoming earnings report by Nvidia on Aug. 28 assumes critical importance. Nvidia could hold the reins to directing market trends, offering a beacon of hope amidst the uncertainty surrounding the impending interest rate adjustments.
Thoughts on Investing in Nvidia
Before delving into Nvidia stock, it’s crucial to ponder the persuasive track record of the Motley Fool Stock Advisor team. While Nvidia may not feature on their current top 10 stock picks, historical data flaunt the colossal returns that the right investments could yield. Consider Nvidia’s meteoric rise since April 15, 2005, when an investment of $1,000 burgeoned to an eye-watering $779,735!*
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*Stock Advisor returns as of August 12, 2024
