(Bloomberg) — Nvidia Corp.’s earnings report was impressive by virtually every measure — except its recent history.
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That was enough to send markets into turmoil overnight, but calm returned early Thursday as investors speculated that the artificial intelligence revolution was still intact and took comfort from money market bets suggesting the Federal Reserve’s rate cuts could reach 100 basis points this year.
While Nvidia shares fell 4 percent, the S&P 500 – which is about 1.3 percent below its all-time high – was expected to rise, with futures up 0.2 percent. In Europe, the Stoxx 600 index is oscillating near a record, while Germany’s DAX index rose to an all-time high.
The chipmaker posted profit margins of over 50 percent on revenue of over $30 billion and promised to deliver even more in the coming quarters. Investors wanted more from a company that had beaten analysts’ estimates for six quarters.
However, these figures were enough for investors to speculate that cross-industry demand for Nvidia’s AI engines remained strong enough to justify further bets on this technology group.
“If anyone was afraid of a possible disappointment in demand for AI, that is now over,” said Alberto Tocchio, portfolio manager at Kairos Partners. “Of course, we are talking about a stock that has had a great run, but we can be sure that the sector is still in demand.”
Optimism about easing inflation, a relatively solid economy and interest rate cuts by the Federal Reserve have lifted sentiment in recent weeks. The next clue markets will get on Friday from the personal consumption expenditures index – the Fed’s preferred inflation indicator.
Technical factors are also helping equity markets generally. On Monday, Scott Rubner, managing director of global markets and tactics at Goldman Sachs Group Inc., predicted that the S&P 500 would hit a record high this week, citing massive inflows from systematic funds and corporate buybacks.
In fact, trading in stock options showed that investors were preparing for profit opportunities following the sell-off in early August triggered by concerns about a U.S. recession.
The S&P 500 Index’s call skew, a measure of how much traders are willing to pay for bullish positioning, is rising rapidly, suggesting some urgency in purchasing bullish options following Federal Reserve Chairman Jay Powell’s dovish speech at Jackson Hole, according to Charlie McElligott, a cross-asset strategist at Nomura.
Meanwhile, volatility traders provide options traders with overwriting, underwriting and outright volatility selling. This means that traders have a long gamma position that acts as a market stabilizer because they have to buy futures when prices fall.
Thursday’s rally in Nasdaq 100 futures follows a pattern seen all week: The contract fell during regular trading hours before rising again overnight. In a bearish signal, however, the market’s overall performance remains on a downward trend, with the Nasdaq 100 more than 6% below its July record high.
As for the reaction to Nvidia, William Marsters, senior distributor at Saxo UK, said Wednesday’s share price declines were a possible “overreaction.”
“Investors have become too accustomed to exceptional results,” Marsters said. “The real test will be today’s normal trading session, which will paint a clearer picture of how customers react.”
The Fed’s rate-cutting bets have also helped reduce the market’s dependence on the performance of mega-cap technology stocks. Small caps and profitless tech companies, for example, have seen inflows as lower borrowing costs would boost their profits. The broadening was evident in a version of the S&P 500 that is stripped of market-cap bias. The equal-weighted index hit an all-time high last week.
“Futures are higher as the market expands,” said Craig Johnson, chief market technician at Piper Sandler & Co. “It’s no longer just about Mag-7 stock, and there’s some relief that Nvidia didn’t fail in its much-delayed Blackwell launch.”
– With support from Allegra Catelli, Michael Msika and Natalia Kniazhevich.
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