Nvidia Earnings Sustain the AI Stock Rally—Just Without Nvidia

Nvidia’s earnings were great for AI stocks, just not Nvidia’s.

“The overall strength of the July quarter results may offer some reassurance for investors after signs of stalling momentum for the large-cap tech rally,” wrote UBS analysts of Nvidia’s earnings in a note on Thursday.

That was evident on Thursday. The S&P 500 hit a fresh record high, with some of the market’s favorite AI stocks among the strong performers, including Micron (MU), GE Vernova (GEV), Nvidia competitor Broadcom (AVGO), and nuclear power providers Vistra (VST) and Constellation Energy (CEG). Major cloud providers Amazon (AMZN), Alphabet (GOOG) and Oracle (ORCL) all rose more than 1%. 

Meanwhile, Nvidia (NVDA) shares fell nearly 1% after the AI chip giant reported earnings that beat estimates. The disconnect between Nvidia and the rest of the AI trade may boil down to expectations, according to Morgan Stanley analyst Joseph Moore.

“For the stock to sell off slightly after hours on these types of numbers certainly indicates that sentiment has largely caught up to the growth potential,” wrote Moore in a note on Thursday morning. “But outside of China geopolitics, this is a very clean beat and raise quarter,” he added.

Persistently Strong AI Demand

Enthusiasm about artificial intelligence has been the driving force behind much of the stock market’s gains over the past three years. Tech giants like Microsoft (MSFT), Amazon and Meta (META) have seen their sales, stocks and spending on AI infrastructure soar amid surging demand for AI products and services. 

But the rally has repeatedly hit bumps in the road, as it did last week when jitters about an AI bubble cropped up after OpenAI CEO Sam Altman questioned the AI rally’s sustainability and an MIT study found the vast majority of companies have seen no material return on their AI investments. 

Nvidia’s report on Wednesday, though, painted a picture of robust and growing AI demand. The company forecast sales would total about $54 billion in the third quarter, a more than $7 billion increase from Q2. That growth rate of about 15%—robust on a year-over-year basis, let alone quarter-over-quarter—doesn’t include any sales to China, which once accounted for about 20% of Nvidia’s data center revenue, according to Moore.

Based on management’s commentary and Morgan Stanley’s market research, Nvidia’s growth forecast “represent[s] undershipment of true demand,” said Moore. He pointed to strong sales of Nvidia’s Hopper architecture, launched in 2022 and superseded by the Blackwell system last year, as evidence of unmet demand. “Compute shortages remain intense enough customers are still buying three year old Hoppers to serve some of that demand,” Moore said. 

There was additional evidence of strong AI demand in cloud data software provider Snowflake’s better-than-expected quarterly report on Wednesday. The results were driven by “strength in migrations,” according to Citi analysts, suggesting “large enterprises’ increasing budget allocation towards database modernization as part of AI projects.”

Earnings, Positioning More Reason for Optimism

UBS analysts pointed to several other reasons, aside from AI hype, to be optimistic about the prospects for technology stocks this year. “Second-quarter earnings for big tech have been robust and broad-based, with most companies beating both sales and EPS estimates,” the analysts wrote. They expect tech earnings to grow 15% this year, and hold in the low teens next year.

Earnings should be boosted in the near term by U.S. dollar weakness. The U.S. dollar index has fallen about 10% since the start of the year, a decline that, by UBS estimates, should translate to a roughly 2.5% increase in the S&P 500’s earnings. “We see more room for the US dollar to decline from current levels, with the Federal Reserve’s easing cycle set to kick off next month.”

High stock valuations have been a recurring source of anxiety for tech investors throughout the AI rally. “Valuations are currently at the upper end of historical ranges,” the analysts note, but recent surveys of individual investors and assessments of institutional portfolios suggest there’s room for the market to become even more bullish on mega-cap tech stocks.