Nvidia earnings test a market jittery over soaring AI investment bets

Wall Street will get a sense of where the billions of dollars being spent on artificial intelligence are going when Nvidia Corp. reports its earnings after the bell on Wednesday. How the sinking stock market will react is another question. 

“This is a ‘so goes Nvidia, so goes the market’ kind of report,” said Scott Martin, chief investment officer at Kingsview Wealth Management, which owns shares of Nvidia and several of its Big Tech peers.  

Analysts expect the chip behemoth to show more than 50 per cent growth in both net income and revenue in its fiscal third quarter. The reason is fairly straightforward. Microsoft Corp., Amazon.com Inc., Alphabet Inc. and Meta Platforms Inc. — which taken together represent more than 40 per cent of Nvidia’s sales — are projected to increase their combined AI spending by 34 per cent over the next 12 months to $440 billion, according to data compiled by Bloomberg. 

The risk is that these numbers could become unreliable if the big AI spenders, in particular closely held OpenAI, have to pull back on their commitments. 

“These players in the AI space have gone out of their way to continually raise the expectations bar, and now they have to not only deliver on the numbers, but continue to feed the market’s rising expectations,” said Michael O’Rourke, chief market strategist at Jonestrading. “It is a dangerous game for public companies to play.” 

As long as they stick to their goals, Nvidia should benefit. And if Nvidia is doing well, the stock market typically feels it since it’s the biggest weight in the S&P 500 Index and the center of the AI trade that has propelled equities gauges to record after record over the past year. But with investors growing increasingly skittish about AI spending and Nvidia shares plunging more than 10 per cent since hitting a peak four weeks ago, how the results are interpreted will be key. 

The stock rose 1.5 per cent on Wednesday.  

“There are certainly people who think that if Nvidia’s results are strong, projecting bigger sales and activity, then everything is going to be OK,” Kingsview’s Martin said. 

Strong earnings and an encouraging outlook from Nvidia could provide a respite for investors, who are growing concerned about the valuation of AI stocks, the circular nature of financing on AI deals and the vast sums being spent on AI infrastructure without much to show for it. These fears have rattled tech stocks and equities in general, sending the S&P 500 to its worst four-day stretch since April. 

Despite the recent selloff, Nvidia shares are up 37 per cent this year, more than twice the almost 17 per cent return of the Nasdaq 100 Index. And the downturn has made the company’s stock market valuation relatively attractive. Nvidia trades at about 29 times forward earnings, far below its 10-year average of 35 and a slight premium to the Nasdaq 100’s multiple of roughly 26.  

“Nvidia at 30x doesn’t seem unreasonable at all given how fast its growth is,” Martin said. 

In terms of the earnings themselves, investors will be looking for strong numbers from Nvidia’s Blackwell series, which is expected to drive the next phase of the company’s growth. Margin expansion will also be key, especially for data centers, the unit that accounted for nearly 90 per cent of its revenue in the second quarter. But as is so often the case with AI stocks, the takeaway from Wall Street will likely depend on the outlook.  

“We are expecting them to report a pretty solid print,” said Jake Seltz, portfolio manager at Allspring Global Investments, which owns a substantial position in Nvidia. Seltz will be looking closely at the company’s guidance for next quarter, which for revenue at least will likely come in above the Street consensus, although “it’s hard to know if they’ll put a conservative guide out there,” he said.  

Analysts see Nvidia’s booming sales slowing in the coming years. The company is expected to post a nearly 60 per cent increase in revenue in its 2026 fiscal year, which ends in January, followed by 41 per cent in fiscal 2027 and 22 per cent in fiscal 2028.  

Even if Nvidia puts up the solid results that many on the Street expect, it might not translate into a jump in share price given waning investor sentiment. 

“I think the thing that the market is really grappling with at the moment is the total addressable market for all this AI infrastructure,” said Melissa Otto, head of technology, media and telecommunications research at Visible Alpha. 

Peter Thiel’s hedge fund sold its entire Nvidia stake in the third quarter, and SoftBank Group Corp. also exited its position in order to bankroll other AI investments. Scion Asset Management — the fund run by Michael Burry, who became famous for his bets against the housing market during the 2008 financial crisis — disclosed that it bought put options on Nvidia as Burry warned about a bubble tied to AI.  

Looking more broadly, an analysis of 13F filings from 909 hedge funds found a nearly equal split between those increasing and decreasing their Nvidia positions during the three months ending Sept. 30. How much of that selling is tied to profit taking rather than a bearish view of Nvidia and the state of AI remains to be seen.  

“Nvidia has been a stellar stock,” Otto said. “Maybe it makes a little bit of sense to take a little off the table and then think about where the next leg of growth is going to come from.”