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Nvidia's Surging Shares: A Sign of Strong Results Powering a Fresh AI Market Rally?

Investors are optimistic as Nvidia's shares rise about 2%, anticipating strong results that could fuel a new wave of market success in AI technology.

Nvidia building
Nvidia building

Expectations for Nvidia's Growth

Nvidia (NASDAQ: NVDA) shares rose about 2% on Wednesday on growing expectations that the chip designer will deliver another strong outlook and boost markets as it reaps the benefits of early investments in artificial intelligence. Shares of the most valuable chip company, which has been pivotal in driving this year's stock market rally, briefly scaled a record high in the previous session.

Investor Confidence Before Second-Quarter Results

Ahead of its second-quarter results after the closing bell, investors have upped their bets on the company whose high-end chips are used in generative AI such as ChatGPT. Nvidia's shares have surged 14% in the past week and tripled in value so far this year.

Market Reliance on Nvidia's Performance

"It's not often that the fate of the market rests in the hands of just one stock, but it very much feels like that is what's going on at the moment," said JJ Kinahan, chief executive officer of IG North America. Nvidia's stellar outlook in the previous quarter lifted the chip firm to a $1 trillion market value in May and set off a rally in the S&P 500 technology sector, which surged 8% in the five sessions after its results.

Stock Fluctuations and Options Data

Options data showed the stock could swing nearly 11% by Friday, larger than the 8.6% average move in either direction seen a day after Nvidia's results over the last eight quarters. It will still be below the 24.4% jump after the last earnings report.

Nvidia's Role in the Megacap Stocks Group

Nvidia is part of the so-called Magnificent Seven group of mega-cap stocks including Apple (NASDAQ: AAPL) and Tesla (NASDAQ: TSLA) that have powered the S&P 500's 14.3% rise this year. Investors expect upbeat results from Nvidia, whose shares are the top performer on the S&P 500 this year, to revive a U.S. stock rally that has paused in recent weeks.

Valuation and Wall Street Expectations

The stock's surge has pushed its valuation multiple to nearly 43 times the consensus earnings for the next 12 months, just below its three-year average of 45, according to Refinitiv data. Wall Street expects the chip designer to report a 112.6% jump in third-quarter revenue to $12.61 billion. Investors will be looking at sales at Nvidia's data center unit, home to its prized H100 chip used in AI.

Risks and Potential Market Impact

"Last quarter's gargantuan upside surprise probably cannot be repeated as most investors' expectations for the AI-focused graphics cards maker have 'priced in perfection'," said Jake Dollarhide, co-founder of Longbow Asset Management Company. "Anything below that seemingly unattainable bar could lead to more market turbulence, particularly for the Nasdaq," he added.