Wall Street Lunch: Party On Or Party Over For Nvidia

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Nvidia (NVDA) is riding high ahead of results. Is it party on or party over? (0:15) Dig into ever-rising bond yields. (3:11) Dick’s Sporting Goods (DKS) spooks the sector with guidance cut. (4:52)

This is an abridged transcript of the podcast.

Our top story so far –

Nvidia (NVDA) hit a 52-week high of nearly $482 today as the momentum into earnings continued. So far, buying in anticipation of quarterly results has driven the stock, sector, and broader market higher.

The Godfather of AI – as the stock was named by analyst Dan Ives – is up more than 15% since its recent low on August 11. The stock has fallen back from highs as we record.

The chipmaker has become so dominant as an AI proxy that J.P. Morgan recently listed two metrics in a note: growth of revenue in AI-related companies and growth of revenue ex-Nvidia.

With earnings coming after the bell tomorrow, will the bulls snapping up shares and the analysts boosting price targets look prescient? Or are we in for a big sell-the-news reaction?

Seeking Alpha analysts made two opposing arguments on Nvidia in the last 24 hours.

Analyst Christopher Robb is expecting another strong quarter for the company.

He says while “revenue and earnings beats were significant last quarter, what gained the attention of investors was the incredible differential between what the company guided and what Wall Street expected: $7 billion versus $11 billion.”

The “momentum of demand and the rapidly increasing interest in AI suggest that demand is just starting its acceleration, opening the door for further potential strength and future earnings blowouts.”

Business Quant says the party may be over.

They say enterprise demand for GPUs “seems to be waning” as channel partners slashed guidance, and it’s likely the market sees “the full-fledged effect of this slowdown within the next 2 quarters.”

In addition, “AMD (AMD) and other major tech enterprises have stepped up their game.”

Now a look at today’s trading –

Stocks are fading an opening bounce, but the Nasdaq (COMP.IND) is leading again, up 0.4%. The S&P 500 (SP500) is up 0.2%, and the Dow (DJI) trails again, down slightly.

July existing home sales fell more than expected, with inventories and rates still unfavorable to buyers. Sales of existing homes dropped -2.2% M/M to a pace of 4.07 million vs. 4.15 million consensus.

The Nasdaq is looking to extend its Monday rally of 1.6%, which was its best day since July 28.

But BTIG market technician Jonathan Krinsky noted the “curious” action in that rally, with the Nasdaq’s Advance-Decline line at -175.

Krinsky said they “found just nine other times since 2006 when the (Nasdaq Composite) gained 1.3% or more and (advance/decline) was negative.”

“The most recent occurrence came on May 25 of this year, the day after Nvidia reported earnings.” He says that of 8 other occurrences, “returns 3–30 days out were quite mixed, with some strong returns but also some notable drawdowns, including March ’22, Aug. ’20, and Jan. and Sep. ’08.”

Rates have recovered from some early weakness. The 10-year Treasury yield (US10Y) is up 2 basis points to 4.36% after hitting a new 52-week high in the previous session. That was driven by a rise in real yields.

Digging down a little more into this recent jump in longer yields –

UBS’ Paul Donovan says caution “is needed when interpreting market moves in the dull days of summer, but there are concerns that the Federal Reserve may keep rates higher for longer” and that “policy fears are difficult to control because Fed Chair Powell’s 2022 policy errors trashed forward guidance.”

ING notes that in the absence of data releases, the 10-year move may be Jackson Hole-driven, where the “general consensus appears to be for a slightly hawkish leaning tone from the Fed Chair, not necessarily with regards to where the terminal rate should be, but with a pushback against the discount of rate cuts further out.”

ING says the fed funds strip could support a 10-year at 4.5%, adding in the term premium.

What does a rise in real yields mean for the U.S. economy (and its proxy, the stock market)?

T.S. Lombard economist Steven Blitz says it depends on what is causing real yields to rise.

“If it is growth, a higher demand for capital, all to the good. If it is a liquidity constraint (QT), all to the bad.”

He says it’s easy to look at QT and shifts in Japan’s yield curve control to say the current runup in real yields is a “liquidity event that is also squeezing bond holders everywhere.” But if that is all there is to it, “the equity market would be behaving worse, and … forward expectations for the funds rate would be falling, but they are rising.”

Expect questions about exactly that at Jackson Hole.

Looking to active stocks –

A host of retail results arrived.

Dick’s Sporting Goods (DKS) slashed its full-year guidance after a sizable Q2 EPS miss, sending shares tumbling. The retailer referenced a slowdown in sales in the outdoor category and a high rate of theft – known as shrinkage – drags on profits.

Macy’s (M) fell after saying it continues to take a cautious approach to the consumer in its guidance. Macy’s reaffirmed its 2023 sales forecast of $22.8 billion to $23.2 billion and EPS of $2.70 to $3.20. Comparable-store sales are set to drop 6% to 7.5%.

Lowe’s (LOW) bucked the trend, pointing to a strong spring recovery and Pro and online sales growth, which partially offset lumber deflation and lower DIY discretionary demand.

Zoom Video Communications (ZM) rose after solid results. Wall Street is saying the company is slowly returning to growth.

Medtronic (MDT) raised its full-year outlook as its financials for fiscal Q1 2024 topped expectations thanks to business-wide outperformance.

In the Wall Street Research Corner –

J.P. Morgan global strategist and noted bear Marko Kolanovic sounded an inflation warning. He says that the speed of the decline in inflation may disappoint investors.

While he’s sticking to his “long-held view that inflation will keep moderating,” he worries that there is “no cushion here anymore.”

It is “easier for inflation to move down from say 10% to 5%, but the move from 5% to 2% becomes incrementally harder,” he adds.