Finally, the US stock market has fallen. Will NVIDIA's earnings report next week be a turning point?

The uncertain inflation outlook and further delayed interest rate cuts are challenging investors' optimistic expectations for the stock market. Some analysts also pointed out that the quarterly performance to be announced by the heavyweight stock NVIDIA is more likely to become a catalyst to end the upward trend of the US stock market.

Overnight, the strong momentum of the US stock market since the beginning of the year finally showed some convergence. Two inflation data that exceeded expectations forced investors to realize that the Federal Reserve will not cut interest rates as quickly as they expected. However, even so, the decline in the overall market is still limited, with the Pro UltrPro Shrt S&Pro 500 falling 0.4% for the week, closing near its historical high.

The expected interest rate cut timeline has been postponed from May to June, which does not seem to make investors feel too nervous. At present, market attention has shifted to the performance of AI leader NVIDIA, which will be announced next week. Investors generally believe that whether the AI boom can continue is the key question determining the prospects of the US stock market.

Limited decline in US stocks despite sticky inflation

The CPI announced on Tuesday and the PPI announced on Friday, the two major inflation data, both showed higher growth rates than expected, indicating that US inflation did not cool down as expected by the market:

The US CPI in January increased by 3.1% year-on-year, although it is the lowest level since June last year, it is higher than the expected increase of 2.9%, and the previous value before December was 3.4%. The month-on-month increase in US CPI in January was 0.3%, higher than the expected increase of 0.2%, and the previous value before December was 0.3%.

The year-on-year growth rate of PPI in January was 0.9%, slower than expected, and the month-on-month growth rate exceeded expectations and accelerated to 0.3%. The year-on-year growth rate of core PPI was 2%, and the month-on-month growth rate was 0.5%, both of which exceeded analysts' expectations.

These inflation readings indicate that there is still too much uncertainty in price trends, and the Federal Reserve cannot relax its monetary policy. The market currently believes that the possibility of the Federal Reserve cutting interest rates at the March and May meetings is small, and June is the new consensus starting point for the Federal Reserve's interest rate cut cycle.

Pricing of swap contracts shows that traders expect the Federal Reserve to cut interest rates by a total of 85 basis points this year, a decrease of more than 40% compared to the forecast of 150 basis points two weeks ago. Two weeks ago, the market expected the first interest rate cut in May, and now it is most likely to cut interest rates in June.

Bank of America economists wrote on Friday:

Service sector inflation remains stagnant, and the Federal Reserve hopes to see more progress in service sector inflation to ensure that inflation is steadily returning to the 2% target.

At the same time, consumer spending, which is a pillar of US growth, has also slowed down. Retail sales in January fell sharply by 0.8% MoM, the largest decline in nearly a year. The expectation was a 0.2% MoM decline, far worse than the previous value. December data was revised down from a 0.6% MoM increase to 0.4%. Compared to the same period last year, retail sales only grew by 0.6%.

David Bianco, Chief Investment Officer for the Americas at DWS Group, wrote in a report:

Investors are beginning to realize that the macro conditions do not support a rapid rate cut. If the recent trend of job creation continues, there may only be two to three rate cuts this year.

No rate cut, no problem?

The strong US economy and job market continue to support the fundamentals of US companies. Market expectations for rate cuts have been decreasing. Whether or not there is a rate cut, it seems that it will not affect investors' bullish sentiment.

Pro UltrPro Shrt S&Pro 500 has recovered from the decline after CPI, and the "fear index" of Wall Street, the Cboe Volatility Index, has remained at a relatively calm level below 14 points on both Monday and Friday.

As earnings season comes to a close, US companies have once again delivered a solid quarterly performance. According to analysts' consensus expectations compiled by Refinitiv, Pro UltrPro Shrt S&Pro 500's earnings per share is expected to grow by more than 9% this year and another 13% by 2025.

Art Hogan, Chief Market Strategist at B.Riley Wealth, believes that the outstanding performance of US companies in the fourth quarter of last year has replaced expectations of Fed rate cuts as the key driver supporting the market's upward trend. The market narrative has shifted from "the Fed will cut rates significantly" to "as long as there is a rate cut."

Matthew Luzzetti, Chief US Economist at Deutsche Bank, even suggested that investors could consider the possibility of no rate cuts in 2024.

Luzzetti believes that higher inflation rates and a stronger labor market in 2024 may convince Fed officials that maintaining a tightening policy will not hinder economic growth.

A media sentiment survey shows that the proportion of self-proclaimed bulls has reached the highest level since the summer of 2021, and strategists have been raising their year-end target prices for Pro UltrPro Shrt S&Pro 500.

Bank of America's global fund manager survey for February shows the highest global economic growth expectations in two years, a decrease in cash levels, and the highest allocation to US stocks since the end of 2021. For the first time in the past two years, the majority of respondents believe that there will be no global economic recession in the next 12 months, and a soft landing has become a consensus.Research Affiliates' Chief Investment Officer for Stock Strategies, Que Nguyen, told the media:

Growth seems to be fine, and corporate profits are also resilient. So, a soft landing is still possible. Why shouldn't we be happy? Indeed, the overall inflation rate is higher than we would like, but Federal Reserve officials seem optimistic about everything and have indicated that the next step will be a rate cut, just that it may take longer.

Evan Brown, Head of Multi-Asset Strategies at UBS, wrote:

When robust economic prospects continue to improve, it enhances investors' confidence in companies' ability to achieve sustained profit growth, leading to an increase in risk appetite and valuations. This is the environment we are in today.

Of course, the hope for a quick rate cut by the Federal Reserve has been dashed, and investors can only rely on corporate earnings. Therefore, next week's earnings reports, especially NVIDIA's quarterly performance, will have a significant impact on market sentiment and may even determine the future prospects of the US stock market for the next few months.

NVIDIA's Earnings Report Next Week Will Determine the Fate of the US Stock Market

After the US stock market closes next Wednesday (early Thursday Beijing time), the AI leader NVIDIA will announce its quarterly earnings, which can be described as "highly anticipated."

Following its market capitalization surpassing $1 trillion in 2023, making it one of the "Seven Giants" of the US stock market, NVIDIA continued to rise by about 46% in 2024, surpassing Amazon and Google successively, becoming the third-largest company in the US market value, second only to Microsoft and Apple. The stock has contributed more than a quarter of the cumulative gains in the Pro UltrPro Shrt S&Pro 500 this year.

According to data from options analysis service company ORATS, after NVIDIA releases its earnings report, the stock price may experience a two-way fluctuation of about 11%, which is the largest expected volatility by options traders in the past three years before NVIDIA's earnings report, far exceeding the actual average return volatility of 6.7% during this period.

Due to NVIDIA's market capitalization of $1.8 trillion, such a scale of volatility will result in a potential fluctuation of about $200 billion in its market value, surpassing the market value of Intel and the market value of about 90% of the constituents of the Pro UltrPro Shrt S&Pro 500.

Options market data shows that investors have been buying call options on NVIDIA in large quantities over the past week.

As a barometer of the AI boom, the performance of NVIDIA's earnings directly determines whether this speculative frenzy can continue.

Keith Lerner, Chief Market Strategist at Truist Advisory Services, told the media:

When people say that the market has performed well this year, what they really mean is that tech stocks have performed well, and NVIDIA is at the core of it. The field of artificial intelligence is exciting, and if this optimism is not met in the earnings report, you may see a quick reversal of this sentiment and put pressure on the market sentiment.Kevin Landis, portfolio manager at Firsthand Capital, believes that NVIDIA's performance may play a key role in market sentiment given the company's size and importance in the field of artificial intelligence.

Every time the stock market surges, there is always one popular stock leading the way, and it's hard not to pay attention to NVIDIA and see how it is driving the market sentiment.

However, Ryuta Makino, an analyst at Gabelli Funds, also points out that investors have high expectations for NVIDIA. If the company only meets expectations without exceeding them, its stock price could drop by at least 10%.

According to data from LSEG, the average forecast of 33 analysts is that NVIDIA's earnings per share will be $4.56, and quarterly revenue will increase from $6.05 billion in the same period last year to $20.378 billion.