Nvidia’s forecast sinks tech stocks, dampens Wall Street optimism

Tech stocks tumble: Shares of Nvidia and other major tech companies took a hit late Wednesday, dimming investor optimism that Nvidia's strong AI chip forecast would drive further gains for top Wall Street players.

Nvidia's stock tumbled 6 per cent, shedding over $180 billion in market value following its earnings report, which was a key event on Wall Street this week. Other AI-related firms saw their combined value drop by approximately $100 billion.

Forecast falls short

The company's forecast for third-quarter gross margins fell short of market expectations, and revenue projections were mostly in line with estimates. As a result, shares of Broadcom and Advanced Micro Devices fell about 2 per cent, while Microsoft and Amazon each declined nearly 1 per cent.

Despite Nvidia’s impressive performance in exceeding analyst expectations for several quarters, the company's forecast could not meet the sky-high expectations of investors. "They beat expectations, but with such high anticipation, it’s hard to see how they could have delivered a number that would satisfy everyone," said JJ Kinahan, CEO of IG North America and president of online broker Tastytrade.

The tepid reaction to Nvidia’s earnings might influence market sentiment, particularly as September is historically a weak month for the S&P 500, which has dropped an average of 0.8 per cent since World War II, according to CFRA data.

Investors are also keenly awaiting next week's US employment report to gauge whether the labour market's recent weakness, which unsettled stocks earlier in August, has improved. If Nvidia’s stock continues to decline on Thursday, it would fall short of the 11 per cent price movement the options market had anticipated, according to options analytics firm ORATS.

AI growth dims

Nvidia’s rapid growth in AI technology has significantly boosted Wall Street over the past year. However, investor enthusiasm has wavered recently due to concerns about increasing expenditure by major players like Microsoft and Alphabet in the competitive AI landscape. 

Nvidia projected third-quarter revenue of $32.5 billion, with a margin of plus or minus 2 per cent, compared to analysts’ average estimate of $31.8 billion. The company also forecast an adjusted gross margin of 75 per cent, with a margin of plus or minus 50 basis points, while analysts had predicted a gross margin of 75.5 per cent.

Nvidia’s stock had dropped 2.1 per cent in Wednesday’s session before the earnings report. Despite this, it has surged approximately 150 per cent so far in 2024, making it a standout performer in Wall Street's AI rally.

(With Reuters Inputs)