Week Ahead: Can Nvidia deliver the AI dream?

Find out what you need to know for the trading week ahead

US stocks declined last week, with the S&P 500 down 0.42%, and the Nasdaq falling 1.34%, and it could be a quiet start to the week with Presidents Day in the US closing markets on Monday. Whether or not the US indices can recoup these losses could depend on the outcome of some key data releases including the FOMC meeting minutes and February PMI reports. Nvidia, the darling of the AI world, who’s share price has risen by more than 47% YTD, will report earnings on Wednesday evening. Unsurprisingly, there are big expectations for Nvidia, and if they fail to deliver this could be a major upset to the S&P 500, as the top five stocks in the US blue chip index have fueled 75% of its gains so far in 2024.

The long-term risks for Nvidia

When market breadth is so concentrated, the market is right to worry about earnings season. So far, the major AI stocks in the index have reported decent earnings, but Nvidia is the one everyone is watching, as it is creating the hardware that is powering the AI revolution. Nvidia has a 98% market share of the data centre GPUs that are powering the AI all over the world. This is great for profits now, but what about the future? Competition for generative AI hardware is heating up and it is unlikely that Nvidia’s 98% market share will last. Also, Nvidia’s client base is small, a mere 5 companies generate 46% of revenues, according to Barclays credit analysts. They include Amazon and Meta who are working on their own chips. The risks around Nvidia are the news stories of the future. This week, the focus will be on whether Nvidia can deliver another stellar quarter of growth. In Q3 it set the market alight when it tripled

revenues YoY. Another mega quarter is expected, with EPS and revenue growth expected to be 400% and 200% respectively, according to Bloomberg. Whether or not Nvidia can rally another 47% this year could depend on if it can 1, meet expectations for Q4 earnings season and 2, what it says about the future. The market has rewarded companies that have exceeded earnings expectations, and it has punished companies that have not done so. If Nvidia points to the growing competition, then it may need to give shareholders a sweetener, for example a share buyback announcement or even a dividend, to stem a share price slide.

Consumer stocks in focus as Walmart reports earnings

This week also sees results for some of the US’s largest retailers. Walmart, Target and Home Depot all release earnings reports and they will be important to gauge the financial health of the US consumer. Expectations are high for US economic growth this year, and this is all based around a solid consumer. These results will help to determine if that belief is true or not. If these results are strong, then it would give encouragement that the US consumer can propel economic growth this year, even though interest rates are at a two-decade high. Walmart will deliver results on Tuesday, and revenue is expected to rise, but at its slowest pace for 7 quarters. Profits are also expected to decline due to higher labour and product costs. Target is expected to see weak revenue and profits for the last quarter.

The consumer discretionary sector of the S&P 500 has lagged the overall index so far this year, however, it has started to pick up pace. If there are better than expected earnings from the key retailers then we could see this sector outperform, which would help with the market breadth issue facing the main US stock index so far this year.

Will ECB and FOMC minutes shift the dial for rate cuts?

Economic data is also worth watching this week as the major central banks remain in wait and see mode. The ECB and FOMC will release minutes from their most recent meetings. While we have heard from plenty of Fed speakers in recent weeks, the FOMC minutes are still worth looking at to see what direction the Fed is moving in overall. Within the minutes, there is likely to be a commitment to moving on rates depending on what the economic data says, and after a strong NFP report for January, combined with some higher-than-expected inflation readings, this could worry markets about the next move from the Fed. If the data continues to beat estimates, could the next move from the Fed be a hike, or a prolonged pause? The market is not expecting the Fed to cut rates until June, and even then, the conviction about cuts in the first half of 2024 is low. According to the CME Fedwatch tool, the probability of a single rate cut in June is currently 53%, a month ago there was only an 8% chance of a rates at 5-5.25% by June. There has also been adjustment about when rate cuts will come for the ECB and the BOE. The ECB is expected to be the first of the major central banks to cut rates in April, with the BOE expected to cut rates in August. This could help GBP to recover this week, after it fell against the EUR last week, the first time it has done so in 7 weeks.

UK house price data and PMI reports to show if green shoots continue to grow

The preliminary PMI reports for February will also be released for the US, UK and the Eurozone on Thursday. These are expected to pick up in the Eurozone and the UK, adding to signs of green shoots in Europe’s major economies. Although the UK has fallen into a technical recession, the outlook for 2024 is good. UK house prices are rising again according to multiple measures. Rightmove house prices for February rose by 0.9% on the month, with gains across all regions apart from London. Agreed sales in the first 6 weeks of this year were 16% higher than a year ago, listings and buying enquiries are also higher. Added to this, the ssj PMIs in January surprised to the upside, and retail sales also picked up at the start of this year. This could fuel a GBP recovery rally, especially as the BOE is expected to be the last of the major central banks to cut interest rates this year, which could give the GBP the benefit of an interest rate differential.

Can the Nikkei reach a record high?

European and Asian stocks outperformed the US last week, with the Eurostoxx index up 0.99%, and the FTSE 100 up 1.63%. Chinese and Japanese stocks also rose by 4.5% and 3.7% respectively last week. However, they have backed off of these highs at the start of the week, the Nikkei is flat and the Hang Seng is lower by nearly 1%. The Nikkei is inching closer to its all time high at 38,915, it will be interesting to see if the Nikkei can extend gains above the record high, if it does reach this level in the coming days. The Japanese economy also slipped into recession last quarter, and its deflator – a measure of inflation – for Q4 was 3.8%, down from 5.2% in Q3. This may not stop the BOJ from normalizing interest rates next month, which is likely to have a major impact on Japanese stocks going forward.

UK bank earnings in focus

There are some major UK earnings releases this week including Barclays on Tuesday, HSBC, Glencore and BAE Systems on Wednesday, Anglo American, Rolls Royce, Lloyds and Standard Chartered on Thursday. The UK banks will be in focus, after a generally weak earnings season for banks on Wall Street, and net interest income is the metric to watch. Looking at Lloyds first, the market expects net interest income to decline in 2023 and for it to forecast further weakness in 2024. Q4 revenues are expected to have declined by 1.9% vs. 2023, although for the full year 2023 revenues are expected to growth by more than 3% compared to 2022. The outlook for UK economic growth and what the BOE does next will be key drivers of Lloyds’ share price performance in 2024. YTD, the share price is down nearly 10%, however, it has picked up in the last month, and the share price rallied strongly on Friday after NatWest reported earnings.

The turnaround at Barclays is expected to continue

Barclays will also be in focus as the bank reports results and its first major strategic update since 2016. Will the bank pledge to further increase its retail banking presence, after focusing on the investment bank for most of the last 8 years? There are expectations that the bank could close its cash equities business and municipal bond trading desk or announce plans to buy an asset management business. Barclays is expected to report a loss of £123mn last year, due to restructuring costs, and revenues are expected to register a small fall in Q4 to £5.8bn compared to a year earlier. Net interest income is expected to rise 20% in 2023, however, the relatively small size of its retail business means that it hasn’t been able to leverage the rise in interest rates as much as some of its rivals. Barclays share price also rallied on Friday but is also lower YTD.

Can HSBC continue to outperform?

Finally, HSBC has fared better than its UK rivals so far this year and has weathered the Chinese economic storm better than many had hoped. Revenues for 2023 are expected to rise by nearly 20%, although there could be some signs of weakness in Q4, which may not bode well for 2024. EPS for Q4 is expected to be £0.44 for Q4, and £1.28 for 2023 as a whole, a 44% increase compared to 2022.

Overall, there is a lot of financial market information to digest this coming week, which opens the way for plenty of volatility and interesting market moves.

Chart 1: Lloyds, HSBC and Barclays 1 year performance, normalized, to show HSBC outperformance compared to its UK rivals.

Source: Bloomberg and XTB