- Magnificent Seven still represent more than a third of the S&P 500’s total stock market valuation
- However, the Magnificent Seven stock index has drooped over the past three months
- Nvidia shares are no higher than they were last June
- Fourth-quarter results and any guidance for the future could be a key test for momentum of the investor favourite
“The US stock market is hitting a bit of a flat spot as the S&P 500 is no higher than it was three months ago – thanks to worries over trade wars, softer economic data and lofty valuations – and quarterly results from America’s (and the world’s) second-largest company represent the next test for sentiment,” says AJ Bell investment director Russ Mould.
“Nvidia is due to report its fourth-quarter and full-year results on Wednesday and investors will be looking forward to the usual demolition of forecasts and also positive guidance for the next quarter from chief executive Jensen Huang.
“Failure to deliver the customary upside surprise might not sit well. Nvidia’s shares are no higher than they were last summer, despite strong earnings and ongoing investor enthusiasm for all things related to artificial intelligence, so any unexpected disappointment could cause some share price turbulence.
Source: LSEG Refinitiv data
“Nvidia’s loss of share price momentum may simply reflect the law of large numbers, as expectations rise and it gets harder for the company to produce big upside surprises. It may reflect niggling concerns over the sudden rise of China’s DeepSeek AI-powered chatbot which, at face value, challenges the narrative that generative AI and large language models (LLMs) require more chipsets and processing powers, more server and computing power and more energy and electrical power for them to progress at the desired rate. It may also reflect ongoing worries that the new Blackwell chipset has yet to overcome an overheating issue which could affect demand for Nvidia’s latest product.
“Either way, worries about AI, and the return on the massive investments made and promised by the likes of Google’s parent Alphabet, Meta Platforms and Microsoft, to name but three, are weighing on Nvidia’s shares and sentiment toward the Magnificent Seven more widely. An index which tracks the shares of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla is trading near three-month lows.
Source: LSEG Refinitiv data
“It must be noted that such lulls are not uncommon, especially ahead of a set of results, but bulls of US equities more generally will be looking to Nvidia for reassurance, given how the Magnificent Seven represent just over one-third of the total stock market valuation of the S&P 500 benchmark index between them.
“Students of stock market history will remember that similarly lop-sided markets in the late 1960s (US tech stocks), the early 1970s (the Nifty Fifty) and the late 1990s (tech stocks again) all eventually tipped over.
Source: LSEG Refinitiv data
“From a fundamental, earnings point of view, Nvidia has beaten consensus estimates and raised guidance for each of the past seven quarters, which helps to explain its stellar share price performance. Chief executive Jensen Huang set a higher bar still for the final quarter of this fiscal year as he guided toward further sequential improvement in both the top line and profits, alongside the third-quarter results, although he was a little more cautious on near-term costs.
“Whether Mr Huang was just sandbagging the numbers or not, we are about to find out, and it is against that guidance that these fourth-quarter figures will be benchmarked. Analysts will also look for any steer on what the first quarter of the new fiscal year to the end of April may look like.
“Nvidia has guided second-quarter sales to $37.5 billion, some 70% above the $22.1 billion achieved in the same period a year ago.
“Should Mr Huang give a steer for the first quarter of the year to January 2026, the current consensus forecast is $42 billion, compared to $26 billion in the first three months of the fiscal year just ended.
Source: Company accounts, Zack’s, NASDAQ, consensus analysts’ forecasts, company guidance alongside second-quarter results.
“Mr Huang’s guidance for gross margin of 73.0% to 73.5% (down from 75% in the third quarter), $4.8 billion in operating expenses and a 16.5% tax charge implies a net profit of $19.7 billion, some 60% higher than the figure of a year ago but just 2% higher than the prior three-month period (which is why some analysts think Nvidia is indeed sandbagging the numbers so it can deliver its customary upside surprise).
“All of this also points toward the analysts’ consensus forecast for the headline earnings per share (or EPS) figure of around $0.84, compared to $0.81 in the third quarter and $0.52 in the comparable fourth quarter period of a year ago.
“For the third quarter of the year, analysts’ forecasts are looking for net income of $21.5 billion and EPS of $0.90.
“In this context, investors may look out for any comments from Mr Huang on reported delays in the launch of the new Blackwell data centre chipset, owing to teething technical troubles. Production of Blackwell was due to ramp up rapidly, as Nvidia has looked to maintain its technological lead by quickly improving upon the Hopper chipset.
Source: Company accounts, Zack’s, NASDAQ, consensus analysts’ forecasts, company guidance alongside second-quarter results.
“The possible Blackwell glitch raises one small question and Nvidia’s balance sheet raises another, at least in the minds of some.
“The company had to work through an inventory bulge in 2022 and has done a good job since. Inventory may be rising but given the strong sales growth that is hardly a surprise and inventory days are back to pretty normal levels, by historic standards, at around 78 days.
Source: Company accounts
“However, those with expertise in accounting may note the way in which trade receivables are rising – this is related to revenues possibly booked by Nvidia but where payment has not yet been received. Nvidia’s own website offers detail on the customer funding it provides (given the expensive nature of its products). Investors with long memories will remember how Cisco and some internet equipment giants provided so-called vendor financing in the late 1990s and how that helped to boost near-term demand but exacerbated the slowdown that followed as an investment boom turned to bust.
Source: Company accounts
“That said, Nvidia’s sales growth is currently so rapid that days receivable are not above historic norms, so there may only be trouble ahead if customers start to slow their purchases for any reason.”
