Nvidia’s Earnings Report May Impact the Upward Momentum of U.S. Stocks
Wall Street is on edge as the options-driven momentum trade that has propelled the S&P 500 index to record highs may be facing a major obstacle. Nvidia Corp.’s earnings report, set to be released on Wednesday, could potentially reverse the market’s rally over the past four months, according to analysts.
Investors have increasingly relied on options to chase the market higher and boost returns as stocks rallied unexpectedly over the past year. This has led to a surge in demand for bullish out-of-the-money calls, particularly on heavily weighted stocks in the main market indexes. The level of demand for these options has reached levels not seen since the meme-stock craze of 2021.
Nvidia, a leading chipmaker, has been at the forefront of this momentum trade, contributing significantly to the S&P 500’s recent gains. With its stock already up nearly 50% this year, the company’s earnings report could be a make-or-break moment for the market. If Nvidia doesn’t guide up significantly, it could jeopardize the market’s upward trajectory.
The options market is anticipating a decline in implied volatility after Nvidia’s earnings report, which would lead to cheaper options and potentially prompt market makers to sell off stocks they accumulated to hedge their positions. This could result in selling pressure across the broader market, affecting other technology names with a similar call option skew.
Many analysts have expressed unease about the role the options market has played in driving the market higher since October. With expectations for interest-rate cuts by the Federal Reserve diminishing and lackluster earnings outside of megacap technology companies, the market’s rapid advance has left stocks trading at their richest levels relative to expected earnings in more than two years.
Despite concerns about the sustainability of the momentum trade, timing when the momentum will fade remains challenging. Momentum tends to beget momentum, making it difficult for traders to profit by betting against it.
In the week ahead, all eyes will be on Nvidia’s earnings report and the potential impact it may have on the market. While the calendar of market-moving events is relatively light, the release of minutes from the Fed’s January meeting may provide further insights into the future direction of interest rates.
As investors await Nvidia’s earnings report, uncertainty looms over the market’s upward momentum. The outcome of this report could be a turning point for the market, potentially reversing its recent gains and impacting the overall trajectory of U.S. stocks.
