Will Nvidia Calm the Market or Accelerate the Correction?

The market was choppy and choppy on Wednesday as investors awaited the earnings report from Nvidia (NVDA). A late rally brought the indexes back to near-zero changes, but the overall picture remained weak, with about 4,000 stocks up and 5,400 down. The most notable weakness was among the so-called “Magnificent Seven” stocks, including Nvidia, which lost about 0.5%.

Ahead of the after-hours report, Nvidia needed to deliver very strong results to lift itself and the indexes higher. Otherwise, traders were watching for the possibility of a post-election gap-filling move. For (QQQ), that would mean a move down to around 491, or a loss of just over 2.2%.

Nvidia reported third-quarter EPS of $0.81, versus the consensus of $0.75, and revenue of $35.08 billion, versus the consensus of $33.15 billion. While those are good numbers, they don’t look impressive enough at first glance. The stock initially traded lower, but recovered on revenue guidance of $36.75-$38.25 billion, up from the previous estimate of $37.09 billion.

While Nvidia’s results aren’t quite the “breakout” many had hoped for, they’re good enough to prompt analysts to reaffirm their ratings and raise their price targets. I think the stock will likely continue to fall before dip buyers step in. I see no reason to rush into buying right now.

Once the news is digested, we’ll see how it affects the broader market. This isn’t a report that will spark a major rally, but it’s not a disaster either. Some support is expected around 2% lower.

If there’s one clear message from this report, it’s that investors should look beyond the S&P 500 to find returns driven by artificial intelligence (AI). The good news is that AI continues to thrive. It’s getting cheaper and easier to build AI, and the ecosystem of companies that are being founded to take advantage of AI continues to grow. Nvidia itself remains a hugely impressive company. But at such high valuations, investors are demanding something bordering on a miracle. “Just very good” results aren’t enough to impress them.

Before this report, Nvidia was trading at a price-to-earnings (P/E) ratio of over 50x, well above the 37x average over the past two years and nearing an all-time high. That’s a problem for the S&P 500, which has become heavily reliant on Nvidia to boost the index’s prices.

It’s often said that in a gold rush, the ones who make the most money are the ones who sell the shovels. Nvidia is launching a new generation of shovels—its Blackwell systems—that will make the process much more efficient. Demand for these systems has been “staggering,” with data center revenue more than doubling to $30.8 billion year-over-year. Nvidia’s total revenue grew 94% year-over-year. Still, shares initially fell 5.5% within minutes of the headlines.

Part of that may be due to the lack of specifics about the deployment of the Blackwell system, which began shipping this quarter. Nvidia is forecasting billions of dollars in revenue in the fourth quarter and more in the coming quarters, but it acknowledges that it won’t be able to produce enough Blackwell chips to meet demand. That’s a growth constraint that’s likely not unique to Nvidia. But it also presents an opportunity for investors.

Nvidia CEO Jensen Huang said that “almost every company in the world seems to be part of our supply chain.” The new technology means that $1 trillion worth of data centers and computer systems globally will need to be updated. Expanding the capacity needed to meet demand for the new chips will provide opportunities for Nvidia’s suppliers and the investors who fund them. This includes TSMC in Taiwan, Amphenol, Foxconn and many others.

TSMC represents 10% of the MSCI Emerging Markets index, while Amphenol is just 0.2% of the S&P 500.