Opening Market Update

Nvidia Earnings Loom as Yields Weigh on Stocks

May 22, 2024 Joe Mazzola
Major indexes fell early Wednesday ahead of earnings from chip giant Nvidia later today and amid caution following hawkish Fed talk that sent Treasury yields higher.

Published as of: May 22, 2024, 9:05 a.m. ET 

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(Wednesday market open) Earnings from AI bellwether Nvidia (NVDA) this afternoon could inject volatility into a placid market trading like it's already summer.

Major indexes stepped back in early trading Wednesday, reflecting hesitancy ahead of Nvidia and an overnight rise in Treasury yields following hawkish remarks yesterday from Federal Reserve speakers.

Nvidia is the third-largest U.S. company by market capitalization and there's a chance of shares moving sharply up or down as investors initially digest results. Expectations are high following the firm's recent string of impressive reports, and any letdown could be reflected in the tech sector and beyond. 

That's especially true for semiconductors, including Nvidia competitors like Advanced Micro Devices (AMD), Super Micro Computer (SMCI), and Intel (INTC). Shares of companies that make the underpinnings for chip technology like Taiwan Semiconductor (TSM) and ASML Holding (ASML) might also see an impact.

Before Nvidia, investors can mull Federal Reserve minutes from the April 30–May 1 meeting, due out at 2 p.m. ET. The minutes might not offer drama considering most policy makers seem to be on the same "wait and see" page on rates. Still, the release could hint at how their thinking evolved from previous meetings where they penciled in three rate cuts for 2024. One Fed speaker said this week that projection now looks too aggressive. Two others expressed hesitancy about cutting rates too soon (see more below). The next projections are due June 12.

"With the employment report about three weeks away, it’s hard to find a near-term catalyst that will change the outlook for the Fed," said Cooper Howard, director, fixed income strategy at the Schwab Center for Financial Research.

Futures based on the S&P 500® index (SPX) dropped 0.2% shortly before the close of overnight trading and futures based on the Nasdaq-100® (NDX) inched down 0.04%. Futures based on the Dow Jones Industrial Average® ($DJI) eased 0.2%.

Read all our market commentary on our Insights & Education page, and you can follow us at @SchwabResearch.  

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Morning rush

  • The 10-year U.S. Treasury yield (TNX) rose four basis points to 4.45%.
  • The U.S. Dollar Index ($DXY) climbed to 104.83.
  • The Cboe Volatility Index® (VIX) rose to 12.17, still near four-year lows.
  • WTI Crude Oil (/CL) dropped nearly 1% to $77.90 per barrel, near recent lows.
  • Bitcoin (BTC) climbed 0.4% to $69,748. 

Stocks in spotlight

Nvidia saw revenue triple from a year ago in its previous earnings report. Demand for its AI chips appeared to run hot in the first quarter, judging from earnings results of big AI chip buyers like Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), and Meta Platforms (META).

The last few quarters, Nvidia kept enthusiasm bubbling by guiding for much more revenue than analysts had expected. The question is how long the company can keep this kind of parabolic growth going. It matters for the market as a whole because Nvidia now has a 5% market capitalization weighting in the SPX and constitutes 6.5% of the NDX, Reuters pointed out. That kind of weighting gives the stock tremendous influence on the path of the indexes.

If Nvidia's growth appears to slow or if its outlook disappoints, the news could cause hand wringing about the pace of AI implementation and overall business demand for high-tech products. That also might be concerning for the major indexes. The S&P 500 communication services and info tech sectors are up 21% and 16%, respectively, year to date, and many of the big names trade at historically high valuations. This could make them prone to selling on any bad news.

Nvidia forecasted fiscal Q1 revenue of $24 billion, which would again represent massive growth from the same quarter a year earlier when revenue barely topped $7 billion. Heading into earnings, consensus from Yahoo Finance is for EPS of $5.59 and revenue of $24.65 billion.

Stocks on the move:

Target (TGT) shares dropped 7% in premarket trading after the retailer missed analysts' average EPS estimate and saw revenue fall more than 3%. Same-store sales, or sales at stores open at least a year, also fell more than 3%, though sales losses matched Wall Street's expectations. The company suffers from cautious customers shying from discretionary purchases.

"Higher interest rates, economic uncertainty, high credit-card balances and other factors have [consumers] concerned, and consumer confidence took a meaningful dip in April," said Christina Hennington, Target’s chief growth officer, on the company's earnings call, according to media reports. "We remain cautious in our near-term growth outlook, and we expect consumer discretionary trends to remain pressured in the short term."

Earlier this week, Target said it would cut prices on 5,000 items this summer, which obviously won't affect Q1 results but could have an impact on margin going forward. This reinforces ideas that Target might be continuing to struggle as shoppers search for lower prices elsewhere. Walmart (WMT), for instance, reported a solid quarter, suggesting it's pulling customers from higher-priced stores like Target.

Gone to the dogs: Petco (WOOF) jumped 22% in premarket trading today following a narrower-than expected quarterly loss and better-than-expected sales. Guidance was in line with expectations. Pet lovers can crunch on another animal-related earnings report next week when Chewy (CHWY) shares its results.

Toll Brothers (TOL) shares climbed 1% after the company beat analysts' revenue estimates for the quarter and saw deliveries rise 6%. The luxury home builder also raised its guidance for fiscal 2024 home deliveries.

Lululemon (LULU) dropped nearly 4% in premarket trading after the departure of its chief product officer. Analysts said this raises new worries about possible future sales weakness, according to Bloomberg.

What to watch

The Existing Home Sales report for April is due out just after Wednesday's open, and analysts expect a reading steady with March's seasonally adjusted annual rate of 4.19 million, Briefing.com said. That would be down from a year earlier as supplies are still tight due to high mortgage rates that crept back above 7% for the 30-year this week. The MBA Weekly Mortgage Applications Survey this morning rose 1.9%.

Next week's reports could have more impact than the run-of-the mill data ahead of the long Memorial Day weekend. Readings after the holiday include the government's second gross domestic product (GDP) estimate and the Fed's favored inflation metric, Personal Consumption Expenditures (PCE) prices. Data between now and the June 11–12 Federal Open Market Committee (FOMC) meeting follow recent cooler U.S. numbers that appeared to ease worries about another Fed rate hike.

The market still builds in around 87% chances of at least one Fed rate cut this year and nearly 50% chances of two. It projects almost no chance of a rate hike.

For the first time this week, only one Fed speaker shows up on today's calendar instead of several. Treasury yields slipped yesterday after Fed Governor Christopher Waller called the latest inflation data "reassuring" and said odds of a rate hike are "very low," Reuters reported.

The cloudier aspect of Waller's speech was his contention that he'd need to see several more months of good inflation data to feel comfortable cutting rates.  Boston Fed President Susan Collins voiced similar hesitation about chances of near-term cuts. Their remarks appeared to weigh on the Treasury market, sending yields up this morning and hurting major equity indexes.

Overseas prices: Speaking of inflation, it's back in the news today if you're watching markets in Canada and the U.K. The readings are mixed, with Canada's inflation falling to a three-year low and sparking June rate cut hopes, but U.K. year-over-year inflation higher than expected. There's less hope now of a Bank of England (BoE) rate cut next month, Reuters noted.

Back home, results from a 20-year bond auction by the U.S. Treasury Department later today could influence yields.

Tomorrow, be on the lookout for S&P Global U.S. preliminary manufacturing and services PMI data due just before the open, with New Home Sales out soon after. Analysts expect a slight drop in April new home sales to a seasonally adjusted annual rate of 680,000, from 693,000 in March, Briefing.com said.

Tuesday in review:

The Nasdaq Composite® ($COMP) edged to a second-straight record close Tuesday one day ahead of expected quarterly results from Nvidia. Nvidia gained 0.6% and closed at a record high near $954, extending the stock's year-to-date gain to almost 93% amid ongoing bullishness over AI-driven chip demand.

Banking and consumer staples were among the market's strongest performers Tuesday, while utility shares extended a sharp upswing over the past month. The Dow Jones Utility Average® ($DJU) added 0.5% and closed at a 12-month high. Transportation companies were among the weakest performers.

Eye on the Fed

Early today, futures traders place zero chances of a 25-basis point rate cut at the FOMC's June 11–12 meeting, rising to roughly 18% for the late-July meeting, based on the CME FedWatch Tool. Investors build in 58% chances of at least one rate cut by September, a number that's slipped over the last week.

Thinking cap

Ideas to mull as you trade or invest

Fill 'er up: The U.S. summer "driving season" is just ahead and the government on Tuesday announced an effort to keep gas prices down by selling 1 million barrels (42 million gallons) of gasoline in the Northeast Gasoline Supply Reserve. /CL is trading in a tight range between roughly $77 and $80 recently and OPEC isn't expected to announce any output changes when it meets early next month. Investors await today's weekly U.S. crude and gasoline supply data and watch crude come under pressure amid ideas that U.S. interest rate cuts could take longer to develop. AAA pegs the average U.S. gas price heading into Memorial Day weekend at $3.59, just barely up from $3.54 a year ago. Higher gas prices would likely hinder transportation stocks like airlines and trucking firms, and could hurt hotels and casinos, too. But EV makers might welcome pain at the pump.

Emerging markets: China and India, the two largest emerging markets, are taking very different paths that reflect their diverging demographic and economic landscapes, writes Schwab's Chief Global Investment Strategist Jeffrey Kleintop. Read his latest post to find out how the countries' economies differ, the latest on their financial markets, and what that it all could mean as far as opportunities and risks for investors.

Beyond AI with NVDA: Traditional gaming and automotive businesses also come under a microscope when Nvidia reports, especially following the cautious guidance for traditional (non-AI) chip demand from around the industry. Remember, before AI exploded, Nvidia was mainly thought of as a video game chip company. Also, while AI demand appears robust, Nvidia has warned about headwinds from China. Export restrictions related to tension between the United States and China over technology continue to weigh on Nvidia and the rest of the tech sector. Any word on progress of chip technology engineered for the China market would probably get Wall Street's attention when Nvidia reports. 

Calendar

May 23: April New Home Sales, and expected earnings from Medtronic (MDT), Ralph Lauren (RL), and Ross Stores (ROST).

May 24: April durable goods orders, University of Michigan Consumer Sentiment—final.

May 27: U.S. markets closed for Memorial Day holiday.

May 28: S&P Case-Shiller Home Price Index and May Consumer Confidence.

May 29: Expected earnings from Salesforce (CRM), Dick's Sporting Goods (DKS), and Chewy (CHWY).