The most important indicator of market direction and sentiment this week will be Nvidia’s (NVDA) earnings report for the quarter that ended in April on Wednesday, May 25.
Wall Street analysts and expect earnings of $1.09 a share. (That’s the consensus. The range of estimates is a relatively narrow $1.13 to $1.04)
Last year Nvidia reported 78 cents for the quarter so hitting the analyst target this year would represented year over year earnings growth of 39.7%
That kind of earnings growth is what investors expect from a stock trading at 43.76 times trailing 12-month earnings per share. (That PE, I’d note, is down from 90.63 in 2021.)
In a normal market I’d expect traders to bid up the price of Nvidia shares and Call options ahead of earnings on a bet that the company will beat earnings estimates. (Nvidia doesn’t normally report big surprises. The stock is very extensively followed and information on its key markets is relatively valuable and accurate. The surprise on the January 2022 quarter was just 12.8%.)
But this isn’t a normal market. Companies have been reporting substantial earnings misses even as they beat projections on revenue growth. So there’s a fair amount of worry ahead of Nvidia’s report.
As a result attempts to profit from enthusiasm ahead of earnings have been relatively tempered. The Call Option on Nvidia with a strike price of $170 was up only 1.51% today. (The stock itself gained 1.22% to $168.98 by the close today May 23.)
I’m watching Nvidia’s Wednesday earnings (after the close) and the company’s guidance for the rest of 2022–or more precisely I’m watching the market reaction to the earnings–for an indication of investor sentiment. If the company hit projections with a 10% or so beat, and the stock climbs, then I think the odds for a summer rally increase. (A lot will also depend on guidance for the rest of 2022.) If the company meets expectations but the stock falls anyway, I’ll downgrade my optimism about a summer rally. And if the company misses estimates and reports pessimistic guidance for the remainder of 2022 and the stock tumbles, I’ll have to rethink the whole idea of a summer rally except for a small group of summer travel and hospitality stocks.