Wentz Weekly: Magnitude of Nvidia’s Earnings Beats Narrowing

Wentz Weekly Insights
Magnitude of Nvidia’s Earnings Beats Narrowing

The week before Labor Day weekend tends to be one of the lowest volume weeks of the year when it comes to trading, and that is just the way last week shaped out. Volume was low and an uneventful and quiet week was a contributing factor. Two of the biggest events were Nvidia’s second quarter earnings report Thursday after the close and the personal income and outlays data from Friday that included key inflation figures.

Overall stocks finished mixed with an outperformance in the value oriented names (over growth) and the Dow index (over the S&P 500 and Nasdaq). Cyclical sectors like financials and materials did well while technology and consumer discretionary were lower. The S&P 500 equal weight index outperformed the cap-weighted index by over 0.5%, which has been a welcomed trend since July when market began increasing the probability of more rate cuts in 2024.

Helping these rate cut odds was inflation data on Friday that was exactly in line with expectations. No surprises means the Fed will stay on track, as they have communicated over the past month, with the first interest rate cut of this cycle next time the FOMC meets in two weeks. In the data release, the PCE price index, which is the Fed’s most followed inflation reading, increased 0.2% in July and is up 2.5% from a year ago. Its core index, which excludes volatile food and energy prices, rose 0.2% in the month and up 2.6% from a year ago, all figures exactly as expected.

Other data in the report included the average income growing 0.3% in the month, now 5.0% higher from a year ago. Consumer spending rose 0.5%, continuing its solid trend, and up 5.8% from a year ago. However, the savings rate remains historically low at 2.9%, well below the 10-year pre-pandemic average of 7.5%.

Markets now believe there is a one-third chance the Fed will cut interest rates by 50 basis points, according to the CME FedWatch Tool (50 bps equals 0.50% – markets consider one cut as 0.25%, two cuts would equal a 0.50%). We believe there is a chance, but it hangs on the outcome of this week’s labor data. Weaker data, like less job openings and less payroll additions, would mean a higher chance of a more aggressive move by the Fed, like cutting rates 50 bps instead of 25 bps, but could also send a message to markets that the Fed believes conditions are deteriorating quicker.

The more anticipated event came Thursday afternoon with Nvidia’s second quarter earnings report. The company has been one of the most followed due to the stocks incredible two-year run and its importance in the artificial intelligence space – it develops the advanced chips for accelerated computing and generative AI. The company posted revenues of $30.04 billion. This was above its guidance of $28 billion and above its revenue from a year ago of $13.51 billion, a 122% increase over the 12 month period. Its net income was $16.6 billion, an increase of 168% from $6.2 billion a year ago. It also provided a revenue forecast of $32.5 billion (+/- 2%) for the current Q3 versus the market’s expectation of $31.7 billion.

The big question for investors was over its next generation of GPUs (graphic processing units) that run on the new Blackwell GPU microarchitecture and potential supply issues and potential customer shipping delays. The company brushed off the concerns, saying the anticipation is “incredible” and samples of the product have been shipping to its partners. It added that it expects to ramp production in the fourth quarter and to ship “several billion dollars” in Blackwell revenue in Q4.

Despite the much better than expected results and guidance, as well as positive sentiment by management, the stock fell 6.4% after its earnings. The fact is the magnitude of earning beats are narrowing, and after a more than 500% increase in shares since January 2023, the stock cannot maintain this trend forever.

After a quiet week last week and the unofficial end to summer, things should pick up this week and we expect volatility to return. For one, we will see a lot of economic data this week with a focus on the labor market. The consensus for the DOL’s report on Friday sees 160,000 new payrolls added in August. Labor Day also marks the unofficial start to the presidential election season, and markets see more volatility the three month period prior to the election. From a seasonality standpoint, September is historically the weakest month of the year for stock returns with it being the only month that averages a negative return. Since 1960, September sees an average performance of -0.87%, according to Raymond James.

Week in Review:

It was an overall mixed week for stocks with an outperformance by value over growth and the major indices finishing as follows: Dow +0.94%, S&P 500 +0.24%, Russell 2000 -0.05%, Nasdaq -0.92%. Treasuries gave up a small amount of recent gains as yields rose slightly, but the yield curve steepened and nearly un-inverted. The 2-year Treasury yield rose one basis point to 3.93% while the 10-year Treasury yield rose 11 bps to 3.91%. Crude oil fell 1.7% for the third consecutive monthly decline over continued worries of weakening Chinese demand despite production issues from Libya. The dollar index rose 0.97% after seeing a sizeable decline the first three weeks of August. Meanwhile, gold fell 0.7% while Bitcoin fell 7.8%.

Recent Economic Data

• Personal Income & Outlays: Personal income and spending, along with inflation, were all pretty much in line with expectations for July:

  • Personal income rose 0.3% in July, slightly higher than the 0.2% expected, and are 5.0% higher compared to a year ago. Wages and salaries rose 0.3% and are up 4.8% from a year ago.

  • Consumer spending rose 0.5% in July, in line with expectations, after a 0.3% increase in June. Spending is up 5.8% from a year ago. Higher consumer spending was driven by both goods and services with spending on goods increasing a solid 0.7% while services spending rose 0.4%.

  • The personal savings rate was 2.9%, a very low and historically low savings rate, the only time it was lower since 2007 was when it hit 2.7% for one month in 2022 after the pandemic. The 10-year average (prior to the pandemic) was 7.5%.

  • The PCE price index rose 0.2% in the month as expected, after a 0.1% increase in June, and is up 2.5% from a year ago, matching June’s annual rate. The core PCE price index rose 0.2%, also as expected, and up 2.6% from a year ago.

• GDP: Second quarter GDP grew at an annual rate of 3.0%, according to the second estimate of GDP (based on more complete source data), which is slightly higher than 2.8% from the first estimate a month ago. The main reason for the upward revision was consumer spending seeing an upward revision from 2.3% to a pretty strong 3.0% and contributed 1.95% to the total GDP growth. Higher consumer spending was offset by a downward revision (slightly) to everything else including nonresidential fixed investment, residential investment, government spending, and inventory investment.

• Money Supply: The US money supply (includes cash, deposits at banks, and money market balances) increased $29.3 billion, or 0.1%, for the eighth increase of the past nine months after declining 14 of the 15 months prior to that. After a record increase of 41% from the beginning of the pandemic to the peak April 2021, which contributed to inflation, money supply has since declined 3.1% from the highs to today. Over the past 12 months, money supply is up 1.3%, a more normal level of growth.

• Durable Goods Orders: New orders for manufactured durable goods increased a very strong 9.9% in July, about double the increase that was expected, but came after a 6.9% decline in June. New orders have increased five of the last six months. As usual, the large decline then large increase was due to transportation orders (aircraft due to their high prices), but when looking at the index excluding the transportation category, orders were somewhat weak, declining 0.2%. The input to GDP for business investment, shipments of nondefense core capital goods excluding aircraft, declined 0.4% and comes after no change in June and a 0.6% decline in May.

• S&P Case Shiller Home Price Index: Home prices hit a new high after a 0.2% increase in June, according to the latest data from the Case Shiller home price index. Home prices are up 5.4% over the past year, which decelerated from the 5.9% annual increase in May and 6.4% from April. The report notes, while housing and overall inflation have slowed, the gap between the two is still larger than historical norms with home price inflation averaging 2.8% more than the CPI, a full percent above the 50-year average. “Before accounting for inflation, home prices have risen over 1,100 percent since 1974, but have slightly more than doubled (111%) after accounting for inflation.” The city seeing the highest price increase over the past year was New York (+9.0%) followed by San Diego (+8.7) while the city with the smallest increase was Portland (+0.8%) followed by Denver (+1.9%) and Dallas (+2.0%).

• Jobless Claims: The number of jobless claims the week ended August 24 was 231,000, a decrease of 2,000 from the prior week. The four-week average moved down 5k to 231,500. The number of continuing claims increased 13k to 1.868 million, bringing the four-week average to 1.863 million. Altogether, pretty steady level of claims.

• Mortgage Rates: The prime mortgage rate averaged 6.35% in the latest week, a 11 basis point drop from the week prior, now down from 7.22% from the summer highs and down from 7.79% from the cycle high (highest since 2000). The rate is the lowest since April 2023.

Company News

• Intel Exploring Options: Intel has reportedly hired Morgan Stanley and other advisors to defend against activist investors, even though no official activist campaign has been announced. Later in the week Bloomberg reported the company is exploring options to turn around its business including possibly splitting its foundry business that produces chips, which would mark a significant turn in the company’s strategy. Sources in the report notes the company is expected to make smaller moves first, then decide on a potential major split later.

• Apple’s Unveil Event: Apple said it will hold an event September 9 for its new iPhone 16 and other new products and features where analysts expect the company to reveal its AI feature Apple Intelligence. Separately, Bloomberg reported Apple is planning to cut about 100 jobs from its services segment to shift its focus to other critical divisions. The cuts will affect engineering roles and have the biggest impact on teams responsible for Apple Books and its Bookstore.

• Chipotle Honey Chicken: Chipotle is testing a new menu item at 80 restaurants – chipotle honey chicken. Based on its consumer taste tests, which it does before testing in a select number of restaurants, it said this new item surpassed expectations and achieved the highest ratings of any new chicken product it has ever tested.

• Super Micro Shorted: Super Micro Computer shares fell last week after it said it will not file its 10-K (annual report) on time stating “Additional time is needed for SMCI’s management to complete its assessment of the design and operating effectiveness of its internal controls over financial reporting.” One day prior to that announcement, shares fell after research firm Hindenburg Research released a short report on the company citing accounting manipulation.

• New Alexa: The Washington Post reported Amazon is planning an overhaul of its Alexa device, and its planned launch of the new product was delayed to October. The new upgraded version is said to require a paid subscription. The newer version will include what they are calling a Smart Briefing – a feature that will provide daily, AI generated summaries of news articles based on customer’s preferences.

• Uber’s Investment: Uber said it has made strategic investment in computer vision and robotics company Wayve, in effort to advance and accelerate its work with global original equipment manufacturers and enhance its autonomous driving efforts.

• Big Lots Potential Bankruptcy: Big Lots is reportedly considering a bankruptcy filing within weeks but is also seeking investors to avoid a potential bankruptcy filing. The plans are not final and could change, according to the report, and comes after years of sales declines at the company. It was previously reported in February that Big Lots was dealing with shrinking liquidity and was looking for new financing.

• OpenAI New Valuation: Apple and Nvidia are in talks to invest in OpenAI, creator of ChatGPT and which Microsoft is already a major investor, as part of a new fundraising round that could value the company at over $100 billion, according to WSJ. The last private deal in February valued OpenAI at $80 billion. Separately, OpenAI signed deals with the US government to provide its AI models for research, testing, and evaluation.

Other News:

• Private Equity in NFL: The NFL said the owners of NFL teams have agreed to allow private equity firms to buy up to a 10% stake in a team. The investor will need to commit a minimum of $2 billion and can invest in up to six teams and require a minimum hold period of six years. The league told investment firms and team owners that it plans to take a share of the private equity profits on any future sale of ownership. Prior to this change, the NFL was the only major sports league in the US that prohibited ownership in a team by a private equity group.

• Mutual Fund Holdings: The SEC said it has approved a new rule that would make it mandatory for mutual funds and ETFs to report their portfolio holdings on a monthly basis, which replaces the quarterly requirement. The rule goes into effect December 2025 and requires all holdings to be reported within 30 days of the end of the month.

• Crude Oil: Crude oil fell a little less than 2% last week with several developing pieces moving oil prices. There was an upward pressure on prices after Libya lost over half of its production, about 700,000 (slightly less than 1% of global supply), with exports halted as it deals with a standoff between Eastern and Western political factions over control of its central bank, creating instability in the region. Also helping was Iraq saying it would cut some production in order to meet OPEC+ production targets after having overproduced. However, oil was 1.7% lower on the week due to downward pressure on prices from continued concerns over weak demand from China and the increasing expectation OPEC+ will vote to unwind production cuts.

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