Nvidia earnings look make or break for market
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Welcome to Seeking Alpha's Wall Street Brunch, our Sunday look-ahead to this week's market-moving events, along with the weekend's top news and analysis. Hello, today is Sunday, May 25th, and I'm your host, Kim Kahn. It's a holiday-shortened week for Wall Street, with the markets closed Monday for Memorial Day, and it's also NVIDIA Earnings Week.

When traders can forget tariffs, deficits, struggling consumer sentiment, the housing slowdown, and the Fed for a moment, and zero in on artificial intelligence. AI is perhaps the biggest tech innovation momentum trade since the dot-com boom, and Nvidia is the linchpin stock.

Wall Street expects EPS of 73 cents on $43.18 billion for the coming quarter when the company issues numbers on Wednesday, but it's the guidance that will dictate stock direction and almost certainly broader market direction. What's notably different from previous results are the analysts' revisions going into the release. While revenue revisions have seen the usual bullishness, 29 up and 4 down, downward earnings revisions surpassed upward revisions 8 to 6.

The cut in EPS estimates came in the middle of April when the company said it would take a $5.5 billion charge related to H20 processors exported to China.

But the gang at T3 Live note that since then, the president went on a deal-making rampage in the Middle East with a major emphasis on AI. NVIDIA CEO Jensen Wang said the company would sell more than 18,000 Blackwell chips to Saudi Arabia, plus the U.S. is partnering with the UAE to build a major AI campus, and NVIDIA is joining the party. And the Financial Times reported that Oracle will drop $40 billion on NVIDIA chips for OpenAI's new U.S. data center.

So, could NVIDIA deliver monster guidance on its Wednesday earnings report? It seems possible, they said. Oppenheimer analyst Rick Schaefer says the company is likely to top estimates for the first quarter, but its guidance will likely be roughly in line, despite the loss of the H20 chips in China. Production of flagship GB200 rack-scale systems appears to have moved past their initial growing pains, he said. We believe Blackwell 200 and 300 NVL72 equivalent volumes still on track,

to meet or exceed 40,000 this year. We see GB300 Ultra on track for a seamless 3Q debut. Top five hyperscale customers make up about 50% of sales, though management continues to diversify Topline. Among the SA analyst community, on the bull side, KM Capital says it's a golden opportunity to snap up shares of Nvidia before earnings, with the stock significantly undervalued.

The management is relentless in driving innovation and fortifying the company's ecosystem of hardware and software, which cements NVIDIA's strategic positioning in the AI era, they said. The techie disagrees, issuing a strong sell on Friday based on the technical setup, noting that the stock has simply run too hot and that the risk-reward scenario looks unfavorable at these levels, with even a solid quarter potentially triggering a sell-the-news market reaction.

Also on the earnings calendar, on Tuesday, Okta reports. Joining Nvidia on Wednesday are Salesforce, HP, and Elf Beauty. Costco, Dell, Marvel, Lee Auto, Ulta Beauty, and Best Buy issue numbers on Thursday. On Friday, we get results from Canopy Growth.

Looking to the economy, on Tuesday, April durable goods orders will be released, along with the Conference Board's measure of May consumer confidence. Wells Fargo economists note that April was "...the first time since July 2022 that more consumers expected incomes to fall rather than rise over the next six months."

They estimate the Consumer Confidence Index rose a touch to 87.3 in May, as the 90-day pause on the sky-high reciprocal tariff on China provided relief. Recent announcements proposing hiked tariffs on the European Union and Apple were made after the survey cutoff. On Friday, April spending and income figures are due. Those, of course, arrive with the Fed's favorite gauge of inflation, the Core PCE Price Index.

The consensus is for the core PCE to rise just 0.1% on the month, with the annual rate dropping to 2.2% from 2.3%. But ING says a benign core PCE deflator inflation print will likely not move markets because if tariffs are going to spike again, this situation may not last as companies pass costs on to customers. Raymond James' chief economist Eugenio Alemán says April is likely the final disinflationary month for the remainder of the year.

In the news this weekend, outages on social media platform X in recent days are an indication that major operational improvements need to be made, Elon Musk says. The failover redundancy should have worked but did not, he posted Saturday morning. I must be super focused on X slash XAI and Tesla plus Starship launch next week as we have critical technologies rolling out, he said.

And, according to the latest estimates from the Budget Lab at Yale, all U.S. tariffs implemented so far this year translate to an increase in consumer prices of 2.2% in the short run, or the equivalent of a loss of purchasing power of $3,600 per household on average in 2024 dollars. Consumers face an overall average effective tariff rate of 21.9%, the highest since 1909.

Even after consumption shifts, the average tariff rate will be 20.7%, the highest since 1910, the Budget Lab said. The Budget Lab at Yale is a nonpartisan policy research organization that analyzes federal policy proposals. For income investors, Warner Music Group, Johnson & Johnson, and Yum! Brands go ex-dividend on Tuesday. Warner has a June 6th payout date, with J&J paying out on June 10th and Yum! paying out on June 6th.

Electronic Arts goes ex-dividend on Wednesday and pays out on June 18th. Dow, Goldman Sachs, and Union Pacific go ex-dividend on Friday. Dow pays out on June 13th. Goldman pays out on June 27th. And Union Pacific has a payout date of June 30th.

And in the Wall Street Research Corner, global financial markets could face a dramatic shift triggered by Japan's bond market turmoil, according to noted bear Albert Edwards, chief global strategist at Societe Generale. Edwards warned that recent developments in Japan may signal the end of the favorable investment environment established since the 2008 financial crisis, potentially reshaping global financial landscapes in the coming months.

Japanese long-term government bond yields are experiencing an explosive rise, with the recent 20-year JGB auction described as the worst since 1987. Japan's bond market has functioned as the keystone of global yield suppression, with Japanese institutions historically supporting the markets through yen-funded carry trades and substantial foreign bond purchases, particularly U.S. treasuries. Edwards notes,

This era appears to be ending as capital returns to Japan while the Bank of Japan loses control of its long-end curve and FX hedge returns on treasuries become deeply negative.

The unwinding of these massive carry trades could create a loud sucking sound in U.S. financial assets if higher JGB yields continue to attract Japanese investors back home, he warns. Both U.S. Treasury and equity market returns remain vulnerable after being inflated by Japanese capital flows, with America's fiscal situation adding another lay of concern, described by Edwards as a ticking fiscal time bomb.

That's all for today's Wall Street Brunch. Look for links to stories in the show notes section. Don't forget, these episodes will be up with transcriptions at SeekingAlpha.com slash WSB. And join the elite community of real investors to unearth great investing ideas. Just head to SeekingAlpha.com slash subscriptions.