Nvidia to offer AI trades reality check
Nvidia's profit report next week could steer the U.S. stock market's course, as investors seek confirmation that the AI-driven investment trend, which has powered equities for two years, is intact after last month's panic-selling triggered by the Chinese startup DeepSeek. Seen as a bellwether of the burgeoning AI industry, Nvidia is the world's second most valuable company, with a 6.3% weight on the S&P 500, according to LSEG. A recent stumble, however, came after the Chinese startup DeepSeek unveiled a lower-cost AI model that was seen as a threat to the dominance of U.S. rivals, driving Nvidia down roughly 17% on January 27, equivalent to $593 billion - a record one-day market value loss.
By Carolina Mandl
NEW YORK (Reuters) - Nvidia's profit report next week could steer the U.S. stock market's course, as investors seek confirmation that the AI-driven investment trend, which has powered equities for two years, is intact after last month's panic-selling triggered by the Chinese startup DeepSeek.
Seen as a bellwether of the burgeoning AI industry, Nvidia is the world's second most valuable company, with a 6.3% weight on the S&P 500, according to LSEG. Its shares have skyrocketed over 550% over the last two years.
A recent stumble, however, came after the Chinese startup DeepSeek unveiled a lower-cost AI model that was seen as a threat to the dominance of U.S. rivals, driving Nvidia down roughly 17% on January 27, equivalent to $593 billion - a record one-day market value loss.
Shares have almost fully recovered from the tumble and the company said DeepSeek's advances prove the need for more of its chips, but apprehensive investors fear earnings could revive some market turbulence.
"It's a tough setup going into the conference call next week because there is some anxiety of wanting to kind of call the top on Nvidia. So I would not be surprised to see rotation and fairly violent market reaction under any circumstance," said Mike Smith, Allspring's head of growth equity team.
He said investors could rotate out of AI trades into sectors such as healthcare, software and financials.
Nvidia options imply a 7.7% swing for the shares in either direction following the results, in line with the stock's average move of 7.6% on the day after results over the last 12 quarters, according to data from options analytics service ORATS. With the AI chipmaker's market capitalization hovering around $3.4 trillion, the options-implied stock move equates to a market value swing of about $260 billion, roughly the size of Wells Fargo.
Nvidia is expected to post on February 26 a fourth-quarter profit of $20.89 billion, driven by a roughly 72% rise in revenues from a year earlier, LSEG data showed.
With good fourth-quarter numbers on their way, all eyes will be on the guidance Nvidia provides for both supply and demand for its chips to justify its own rich valuation, as well as the sector's outlook.
Nvidia recently traded at about 32 times forward 12-month earnings estimates, down from about 40 in early November, according to LSEG Datastream. The S&P 500 trades at 22 times forward earnings.
"Nvidia is the last piece of the market puzzle right now that might help reset investor sentiment," said Matt Orton, chief market strategist at Raymond James Investment Management, adding the equities market has performed well despite uncertainties around U.S. tariff and fiscal policy, a drop in retail sales and a hotter-than-expected consumer price index.
"It can be the catalyst to help the market break out once again," he said.
Markets have changed since the selloff triggered by DeepSeek, as Nvidia has lost a lot of its power to move all stocks since the beginning of this year. The correlation between the chipmaker and the S&P 500 fell to 30% in 2025 from 71% last year, according to Schwab's calculations.
Still it does not mean stocks are bulletproof in case the bellwether Nvidia disappoints. "It's important to separate the difference between the psychological effects of Nvidia on the market from the statistical effect. To me, it is more of a psychological move," said Joe Mazzola, Schwab's head trading and derivatives strategist.
Investors will also be watching next week's release of U.S. inflation numbers for January, especially after data last month showed that inflation increased by the most in eight months in December, amid robust consumer spending on goods and services.
Hotter-than-expected inflation data would probably prompt the Fed to wait longer to cut interest rates.
(Reporting by Carolina Mandl; additional reporting by Saqib Ahmed in New York; Editing by Lisa Shumaker)
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