"AI Faith" faces a major test! The "heavy checkpoint" on the road to new highs for U.S. stocks: Can NVIDIA deliver a perfect earnings report this week?

After Federal Reserve Chairman Jerome Powell indicated that interest rates would be cut in September, market sentiment has eased somewhat; however, the U.S. stock market will face a new test. That is: to assess whether the main factors driving the rise over the past few years still have momentum, namely the fervent pursuit of artificial intelligence. This week, the U.S. stock market will welcome the most significant earnings report—NVIDIA (NVDA.US), which will announce its latest quarterly performance after the market closes on Wednesday (Thursday morning).

Last Friday, market sentiment was relatively low at the opening, and the S&P 500 index was on track for a five-day losing streak, potentially marking the longest consecutive decline since January. Wall Street traders had previously reduced bets on an imminent rate cut by the Federal Reserve, but Powell's remarks alleviated these concerns, propelling the S&P 500 index to its best single-day performance since May, just shy of its all-time high by less than two points.

Regarding the AI boom, traders hope that NVIDIA can alleviate concerns about investments in the AI sector and effectively prove that the recent rise in the stock market is not merely a bubble phenomenon in tech stocks.

According to Eric Beiley, Executive Director of Steward Partners Wealth Management, "NVIDIA is crucial for the stock market because any further enhanced momentum is enough to ignite this market and make it boil. The potential risk is that if these AI investments fail to deliver results and the outlook is cautious, it could lead to market volatility." He holds shares in the company but has begun to increase hedging measures after its stock price surged.

NVIDIA's weighting in the S&P 500 index ranks first, accounting for nearly 8%, and its core position in the development of artificial intelligence makes it a bellwether for the entire market. The products of this tech giant are ubiquitous, with 40% of its revenue coming from Meta (META.US), Microsoft (MSFT.US), Alphabet (GOOGL.US), and Amazon (AMZN.US)—all of which are among the top ten weighted stocks in the S&P 500 index.

All these factors make NVIDIA's quarterly earnings report and its future outlook an important market event.

Under Pressure

Kim Forrest, Chief Investment Officer of Bokeh Capital Partners, stated, "The current pressure remains very high. Over the past few years, much of the market's rise has been built on NVIDIA and its partners. So I am a bit concerned."

This is not to say that investors have no clue about NVIDIA's performance results. At the beginning of the earnings season, the results announced by its large clients have mostly been robust, including commitments to increase previous investments of billions of dollars in capital expenditures. This is encouraging for the profitability and outlook of this chip manufacturer. B. Riley Wealth Chief Market Strategist Art Hogan pointed out: "Typically, when people start to question tech stocks, NVIDIA tends to release a report within two weeks; this has indeed happened frequently. NVIDIA could become a positive driving force."

Last Friday, NVIDIA's stock price rose by 1.7%, ending a three-day decline, which was its longest consecutive drop in a month. The stock is currently less than 3% away from its all-time high set in early August. Wall Street analysts expect NVIDIA's adjusted earnings per share for the second fiscal quarter to be $1.01, a 48% increase year-over-year, with revenue exceeding $46 billion, a 54% increase from the same period last year.

Of course, a strong report can drive NVIDIA's stock price up and lift the market, while any misstep—whether actual or misunderstood—could abruptly halt this upward momentum and put significant downward pressure on the market. According to data, options traders have factored in a 6% probability of the stock price moving up or down.

While lower interest rates should help growth stocks like NVIDIA perform better, they do not address the issues arising from the market's overvaluation. The price-to-earnings ratio of the S&P 500 index is about 22 times future earnings, higher than its 10-year average of 19 times. NVIDIA's price-to-earnings ratio is about 34 times its composite future earnings, lower than its average of 39 times over the past five years.

Overvaluation Risk

Beiley stated: "Valuations are astonishingly high. However, investors still turn a blind eye, holding onto hopes that these hot companies in the AI sector will continue to deliver outstanding performance."

A significant issue facing NVIDIA is whether its products can be sold in the Chinese market. The Trump administration recently approved NVIDIA and AMD (AMD.US) to resume sales in China, but on the condition that they pay 15% of their sales to the U.S. government. However, it was previously reported that China was discouraging its companies from using NVIDIA's H20 chip, which was designed for sales in China, leading the company to inform suppliers to halt production.

Jones Trading Chief Market Strategist Michael O’Rourke stated: "The market's previous expectation was that NVIDIA would eventually be allowed to return to the Chinese market, but the current issue is that the U.S. government claims the reason for allowing H20 sales is that it is nearly obsolete, which has dissatisfied China. China is also concerned that the U.S. might implant backdoors in the technology using NVIDIA's chips."

Wall Street analysts have long been optimistic about NVIDIA's stock, believing there is no need for concern at this time. Just in the past week, at least 9 of the 79 analysts covering the company have raised their price targets based on positive expectations for the company's quarterly report, with an average target price exceeding $194, indicating about a 9% upside from last Friday's $178. **

Of course, NVIDIA's report is not the only factor that could trigger market volatility this week. Traders will also closely monitor the inflation situation in the PCE data to be released on Friday. However, concerns about the company's performance potentially triggering a sell-off are dominating market sentiment.

Beiley said, "I am worried. The current economy is facing tariff pressures, and employment growth is also showing signs of slowing down. Therefore, once there is negative news about these high-priced stocks, they are very likely to drop significantly. Moreover, the entire market is also susceptible to concentrated risk."