Nvidia has become one of the stock market’s giants, driven by the surge in interest in artificial intelligence (AI). The company has significantly benefited from tech companies purchasing its chips to power AI models, boosting its market value to over $3 trillion.
As Nvidia prepares to release its latest quarterly results, expectations are high, with analysts predicting a 112% year-over-year increase in revenue to $28.65 billion. This far exceeds the anticipated 5% revenue growth for S&P 500 companies, showcasing Nvidia’s remarkable performance.
However, Nvidia’s extraordinary growth has sparked concerns of overvaluation. The company’s stock surged nearly 150% in the first half of the year, reaching a valuation more than 100 times its earnings over the previous 12 months—significantly higher than its historical average and the broader S&P 500.
Nvidia’s rapid rise has made it a major contributor to the S&P 500’s overall returns, accounting for nearly 30% of the index’s gains in the first six months of the year, despite representing only 0.2% of the index’s membership.
The dominance of Nvidia and other Big Tech stocks has shown its downside as well. Over the summer, Nvidia’s stock dropped 27% from its peak in late June to early August, amid concerns that the tech sector had become overvalued.
This decline contributed to a broader pullback in the S&P 500, which fell nearly 10% from its all-time high. The significant influence of Nvidia and similar stocks meant that their declines could drag down the index, even on days when most other stocks were rising.
The recent declines have helped reduce some of the market excesses, according to analysts like Lisa Shalett from Morgan Stanley Wealth Management. Investors had heavily concentrated their bets on Nvidia and a few other Big Tech companies, leading to inflated valuations.
Nvidia’s upcoming earnings report will be closely watched to assess how much excess remains in its stock price, and whether the company’s performance can justify further gains.
The situation highlights the challenges faced by high-performing tech stocks like Nvidia. Even strong earnings reports, like those recently delivered by Alphabet (Google’s parent company), do not necessarily guarantee stock price increases.
This reflects the market’s current cautious sentiment, where high expectations have already been priced in, making it difficult for even stellar results to drive further stock rallies.
As a result, Nvidia’s upcoming earnings report has captured the market’s attention, potentially overshadowing even significant events like Federal Reserve Chair Jerome Powell’s speech on interest rates.
