Nvidia Results Ahead, with Software Also in Focus

0:05Welcome to the Schwab Market Update Podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead.

0:17I'm Keith Lansford, and here is Schwab's early look at the markets for Wednesday, February 25th. NVIDIA's earnings later today arrive at an anxious time for the market, which continues to trade in back-and-forth fashion. Though major indexes advanced yesterday as slumping software shares climbed 1 % on what appeared to be technical buying and possibly short covering, the S &P 500 index didn't make much of an attempt to exit its tight near-term range. The SIBO Volatility Index, or VIX, also stayed just below the Key 20 level Tuesday, potentially indicating more choppiness ahead for equities. Investor uncertainty is a pick-your-poison that could include Iran, AI substitution, institution, tariffs, private credit troubles, mega cap debt, a suddenly hawkish Fed, or a host of other issues.

1:13While markets are often said to climb a wall of worry, that's arguably reached a new level so far this year, and it hasn't been accompanied by much of a climb lately. NVIDIA's quarterly earnings due right after the close potentially provide focus at least for one afternoon, but don't promise a reprieve from the market's anxiety. In fact, whatever the outcome, anxiety could increase. If NVIDIA reports very strong revenue growth and raises guidance, as analysts expect it to do, it could trigger fears that Magnificent Seven spending and debt levels might continue to rise. That outcome means investors might continue embracing more defensive sectors.

1:55If the opposite happens and NVIDIA falls short, it could suggest that the AI spending spree is slowing, possibly a pain point for the entire economy. Zeroing in on NVIDIA, analysts expect 72 % annual earnings growth to$1.53 a share and 68 % annual revenue growth to$66.1 billion.

2:22Though AI spending shows little sign of easing, NVIDIA and fellow chip firms face higher bandwidth memory costs amid sector shortages, which could affect projected margin growth. Last year, investors chipped away at shares of NVIDIA after earnings when they saw margin guidance fall below expectations. It's difficult to predict how long the recent memory price surge will persist, But right now, there doesn't appear to be any signs of an inflection point, said Nathan Peterson, Director of Derivatives Research and Strategy at the Schwab Center for Financial Research. Data center revenue, as usual, will be front and center, as will overall revenue guidance.

3:04NVIDIA remains under pressure every quarter, not to just exceed quarterly consensus, but to guide for growth exceeding analysts' average estimates. Another area to watch is an update on NVIDIA's recent massive chip deal with Meta platforms and comments on another deal inked with Meta yesterday by NVIDIA competitor Advanced Micro Devices. Any updates on new chip development timelines also could affect shares. However, some of these announcements might not come until mid-March when NVIDIA presents at its GTC conference. NVIDIA shares the spotlight with software firms, Salesforce, and Snowflake. These bow at an inauspicious time for the slumping software sector, dogged for weeks by AI substitution fears.

3:52Investors gravitated away from these stocks in droves this month, but hiding places were scarce as the same concerns spilled into sectors as diverse as financial services and trucking. Whatever Salesforce and Snowflake say today, it's not likely to be the end of the story. Other firms in software reported strong results and guidance recently, only to get dragged down anyway. Workday initially dumped 7 % after Tuesday's close, despite earnings that beat estimates and revenue that matched consensus. Fears of potential AI encroachment into the software space have led investors to shoot first rather than wait for earnings results to find out if the concerns are justified, Peterson said.

4:39Though their individual stories may not lift these two firms from the general carnage, things to watch include how both expect to benefit from AI, something their cohorts in the sector have emphasized recently in a pushback to the substitution worries. One line of thinking is that these companies own so much data, they're somewhat protected from AI companies that may intrude. Software forged some gains yesterday, perhaps as investors sought perceived bargains. The sell-off in software isn't a valuation-led one, as price-to-earnings ratios for some of the biggest software firms approach multi-year lows.

5:20The bigger driver could be fear of the unknown. Will AI improve processes or subtract jobs? The independent Citrini report published Monday foreshadowed a not-so-distant future where that was a strong possibility and spooked Wall Street. Data is a bit sparse this week, but Federal Reserve speakers are out and about. Chicago Fed President Austin Goolsbee sang from the hawkish hymnal early Tuesday, saying the Fed needs to address inflation before it can cut rates. Friday brings the January Producer Price Index, or PPI. The December report was hotter than analysts had expected and appeared to spill over into last week's warm December Personal Consumption Expenditures, or PCE, price data.

6:09As of late Tuesday, chances of a Fed rate cut next month were practically nil, according to the CME FedWatch tool. By mid-year, futures trading builds in 50-50 chances of at least one rate cut, but that's down from a week ago, possibly due to last week's stubborn inflation data and hawkish Fed speech since then. In Data Tuesday, the Conference Board's consumer confidence reading for February was a bright spot in what's been a rough patch for so-called soft data based on surveys. It rose to 91.2 from January's revised 89.0 and above the briefing.com consensus of 86.0. Also importantly, 12-month inflation expectations dipped slightly to 5.5 % from 5.6 % in January, though that remains in thin air, and economic expectations worsened.

7:03In trading activity over the past week, investor inflows were largest for global exchange-traded funds, and outflows were largest for U.S. large caps. Still, the S &P 500 index remains just below 7 ,000, and recent price action is consistent with consolidation in range-bound conditions between 6 ,800 and 7 ,000. The elevated VIX, however, could reflect weariness among investors and suggests the next breakout of this range could be to the downside. Demand for downside protection remains high and investors are paying up for this. Any move below the$6 ,780 or$6 ,800 range could lead to deeper sell-offs.

7:50A five-year note Treasury auction takes place this morning. Yesterday's two-year auction demand was slightly soft, Briefing.com noted, sending short-term yields higher Tuesday, but keeping the tenure unchanged at 4.03%. That is the lowest level since late November and has helped the yield curve flatten noticeably over the last week. This might be one source of pressure on financial stocks. On Tuesday, major indexes reversed Monday's dismal performance, led by tech. Software, as mentioned, helped key the gains. So did advanced microdevices, which climbed more than 8 % on news that has signed a multi-year deal with Meta platforms.

8:35In a press release, AMD said the deal will deploy 6 gigawatts of AMD's graphics processing units to power Meta's next generation of AI infrastructure. The deal comes a week after Meta announced a deal with NVIDIA on AI. Nine of 11 S &P 500 sectors finished up Tuesday, keeping market breadth relatively healthy, even as indexes generally march in place. The consumer discretionary, industrials, and technology sectors led, pushing back the defense of utilities and staples that had finished near the top during Monday's market retreat. By late Tuesday, nearly 62 percent of S &P 500 stocks traded above their 50-day moving averages, still historically robust.

9:22In Individual Trading Tuesday, Home Depot built a nearly 2 % rally after earnings per share of$2.72 easily beat the fact-set consensus of$2.53. Revenue and guidance met analysts' expectations, while sales at stores open a year or more rose 0.4%. The company expects comparable sales growth to be flat to up 2 % this year, and it approved a dividend increase. Lowe's, a competitor of Home Depot, the reports this morning, advanced almost 1.5 % Tuesday, possibly helped by Home Depot's results. Whirlpool fell nearly 14 % after the company announced what it called a strategic recapitalization that includes the selling of$800 million in new shares as part of an effort to fight debt, the Wall Street Journal reported.

10:16PayPal moved up 7 % Tuesday after Bloomberg reported that payments processor Stripe had expressed interest in PayPal. Stripe is a private firm. Constellation Energy climbed more than 6 % after Constellation beat Wall Street's quarterly estimates. However, it delayed guidance to late March. Salesforce led software names with a 4 % rise ahead of its earnings later today. Other software names on the climb Tuesday included Adobe and Applovin. And the small-cap Russell 2000 index rose as Treasury yields continued probing nearly three-month lows, but remains more than 2 percent below its all-time peak recorded a month ago.

11:02The Dow Jones Industrial Average climbed 370.44 points Tuesday, or 0.76%, to 49 ,174.50. The S &P 500 index advanced 52.32 points or 0.77 % to 6 ,890.07, and the Nasdaq Composite gained 236.41 points or 1.05 % to 22 ,863.68. This has been the Schwab Market Update Podcast. To stay informed, visit www.schwab.com slash market update or follow us for free in your favorite podcasting app. And if you like what you've heard, please consider leaving us a rating or a review. It really helps new listeners find the show. Join us for another update tomorrow.

12:01For important disclosures, see the show notes and schwab.com slash market update podcast.