Nvidia's Strong Quarter Has Tech Poised For Further Upside As Investors Prep For Powell Speech

(Thursday market open) Yesterday’s tech-driven rally appears to be extending into Thursday after chipmaker Nvidia NVDA reported a blowout quarter last night, fueling bullishness over artificial intelligence (AI).

Nvidia shares surged in premarket trading after the company reported a more than ninefold surge in quarterly income and a doubling in revenue. Nvidia shares have more than tripled this year with growing expectations that demand for the company’s advanced chips will increase to serve the market for so-called generative AI applications, such as ChatGPT and image recognition.

Stock futures based on the S&P 500® index (SPX) and the Nasdaq Composite® (COMP) were up about 0.6% and 1.2%, respectively, in premarket trading. On Wednesday, both benchmarks jumped to their highest closes in more than a week. A modest pullback in Treasury yields Wednesday contributed to buying interest, helping overshadow more retailer earnings that raised concern over consumer spending.

Earnings expected Thursday will provide further insight into retailer performance and consumer spending, along with updates from a few additional big tech companies. Discount retailer Dollar Tree DLTR earlier reported earnings and revenue that surpassed expectations. Other companies expected to report results include Gap GPS, Intuit INTU, Nordstrom JWN, Ulta Beauty ULTA, and Workday WDAY.

“It looks like tech growth and dominance will probably be the theme today,” says Kevin Gordon, senior investment strategist at the Schwab Center for Financial Research, noting futures based on the Dow Jones Industrial Average (DJI) and Russell 2000 (RUT) are lower in premarket trading. “Unless economic numbers today are far outside expectation, market attention will shift to Powell’s Friday speech at the Jackson Hole Economic Symposium, which will help shape the market’s near-term outlook for interest rates.”

Morning rush

• The 10-year Treasury note yield (TNX) increased about 3 basis points to 4.23%.

• The U.S. Dollar Index ($DXY) rose 0.3% to 103.74.

• Cboe Volatility Index® (VIX) futures were up 0.11 at 17.06.

• WTI Crude Oil (/CL) futures were little changed at $78.86.

Stocks in spotlight

Tech watch: Nvidia easily topped Wall Street expectations with earnings per share (EPS) of $2.70 for its previous quarter, about 60 cents above forecasts. Revenue for the previous quarter, at $13.5 billion, exceeded expectations, as did the company’s estimate of $16 million for the current quarter’s revenue.

“A new computing era has begun,” Nvidia CEO Jensen Huang said in a statement. “Companies worldwide are transitioning from general-purpose to accelerated computing and generative AI.”

Shares of Snowflake SNOW, another tech company that released results late Wednesday, also rose in premarket trading after reporting quarterly revenue of $674 million, up 36% year-over-year.

Retail report: Results from Dollar Tree reinforced a theme among retailers this earnings season that suggests budget-conscious consumers appear to be “trading down” to lower-priced merchants. Dollar Tree posted EPS of 91 cents, about 3 cents above expectations, and net sales of $7.32 billion, up 8.2% from the same quarter last year. However, the company dialed back its full-year outlook, citing factors including higher “shrink” trends and fuel prices.

What to watch

Early Thursday, the Census Bureau reported Durable Goods orders fell a larger-than-expected 5.2% in July, compared to the 4% month-over-month drop analysts expected, based on a Briefing.com consensus. The decline partly reflected weaker orders for aircraft and related parts. Excluding transportation, durable goods orders rose 0.5% month-over-month, versus expectations for a gain of 0.2%.

Economists track durable goods spending for a sense of consumer and business appetite for big-ticket items built to last at least three years, such as washing machines, computer equipment, and vehicles.

Also Thursday, the Labor Department said weekly initial jobless claims totaled 230,000, down from 240,000 last week and less than the 240,000 analysts expected, according to Briefing.com.

Among other economic reports this week is the final August University of Michigan Consumer Sentiment numbers on Friday. Analysts expect the sentiment reading to be unchanged from the preliminary figure of 71.2 released two weeks ago. In the previous report, university researchers said consumers seemed to have grown more optimistic as inflation fell, noting “substantial improvements” relative to three months earlier.

Eye on the Fed

The Fed is widely expected to keep its benchmark funds rate unchanged for at least another month. As of this morning, the probability that the Federal Open Market Committee (FOMC), the Fed’s policy-setting arm, will maintain current rates after its September 19–20 meeting is nearly 85%, down slightly from a week ago, according to the CME FedWatch Tool.

Longer-term, the same indicator reflects growing uncertainty over whether the Fed’s sharp rate-hiking cycle is near an end. Expectations the funds rate would remain at its current 5.25%–5.50% target range after the FOMC meeting in November were about 55%, down from 64% a month ago, based on the FedWatch Tool.

One critical question for the Fed is what the “neutral” interest rate is—the rate that neither stimulates or restricts the economy, says Collin Martin, director of fixed income strategy at the Schwab Center for Financial Research.

“Powell’s speech might address what the ‘neutral’ or ‘equilibrium’ rate of interest is, to provide a sense of just how tight monetary policy actually is right now,” Collin says. “Aside from that, we don’t expect anything too significant from Powell that would change our outlook on the trajectory of Fed policy.”

CHART OF THE DAY: NOW HEAR THIS. The communications sector has been sending out bullish signals to technical analysts. In May, the Communications Services Select Sector Index ($IXC—candlesticks) completed what many technicians would call an inverse head and shoulders pattern. From the bottom of the head to the shoulder line, the index stretched about 78 points. Many technicians use this measurement to set a price target. The blue line marks the difference between the two points and has been duplicated to set the potential target. The IXC did rally about half the target before pulling back. The recent pullback could be another opportunity for traders to take part in the index’s turnaround. Data Sources: ICE, S&P Dow Jones Indices. Chart source: thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Big corn harvest coming: Grocery shoppers may catch a break from soaring supermarket prices, which have been driven in part by crop shortfalls due to drought or other adverse weather. Reports from the annual Pro Farmer Crop Tour of the Midwest this week suggest American farmers are poised to reap a bumper corn harvest this fall. Both corn and soybeans are used to feed livestock and provide ingredients for a multitude of products lining supermarket shelves. Crop scouts in Ohio, Indiana, and Nebraska—all major grain producers—estimated corn yields above last year’s levels, when extended drought hurt crops in parts of the Midwest. In east-central Nebraska near Grand Island, scouts saw a healthy corn crop, except for a couple of areas that had been hit with hail, according to Pro Farmer. They were impressed at how the corn and soybeans are holding up under this current heat wave. Crop Tour results appear to back up government forecasts for a big harvest. Earlier in August, the U.S. Department of Agriculture estimated this year’s corn harvest at 15.1 billion bushels, up 10% from 2022.

New rides getting more affordable: New-vehicle affordability improved in July, continuing a trend that’s lasted much of this year as strong income growth, lower prices, and greater incentives offset slightly higher interest rates, according to the Cox Automotive/Moody’s Analytics Vehicle Affordability Index. The typical monthly payment fell to the lowest level since October, and the number of median weeks of income needed to purchase an average new vehicle in July declined to 42.3 weeks from 42.8 weeks in June. “The new-vehicle market has seen improving or stable affordability so far this year as consumers see discounts and incentives grow relative to the manufacturer’s suggested retail price (MSRP),” said Cox Automotive Chief Economist Jonathan Smoke. “After entering the year with affordability at an all-time low, we are finally seeing some improvement, which should allow some consumers who were priced out of the market to jump back in.”

“Just-in-time” retail comeback: With the pandemic mostly in the rear-view mirror, major U.S. retailers such as Target TGT and Walmart WMT are returning to the “just-in-time” inventory model and no longer buying excess goods in case shipments arrive late, Reuters reports. According to analyst data from Walmart, Target, Home Depot HD, and Lowe’s LOW—the four highest highest-volume publicly traded importers of goods via ocean container ships—combined inventories declined by 4% in the second quarter, the largest quarter-over-quarter drawdown since 2015. With less unsold merchandise on hand, the retailers may be in a better position to bring in new seasonal goods for the peak holiday season.

Calendar

Aug. 25: Fed Chair Powell speaks at Jackson Hole Summit, and final August University of Michigan Consumer Sentiment

Aug. 29: June S&P Case-Schiller home price index, August Consumer Confidence Index, and expected earnings from Best Buy Co. (BBY), Big Lots (BIG), Box, Inc. (BOX), and HP Inc. (HPQ)

Aug. 30: August ADP employment and revised Q2 Gross Domestic Product

Aug. 31: Weekly Initial Jobless Claims, July Personal Consumption Expenditures (PCE) price index, July Personal Income and Spending, August Chicago Purchasing Managers Index (PMI), and expected earnings from Dell Technologies (DELL), Dollar General (DG), Hormel Foods (HRL), Lululemon Athletica (LULU), and UBS AG (UBS)

Sept. 1: August Employment Report, Construction Spending, and the Institute for Supply Management Manufacturing Index

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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