Issue 112: NVDA Earnings

This Week’s Highlights

• NVDA shares slip, despite solid Q3
  All eyes were on chip behemoth Nvidia’s earnings after Wednesday’s close, and although they reported strong results, with great things to say about the AI revolution and their forthcoming Blackwell chips, results seemingly fell short of Wall Street’s ‘whisper numbers’.
• Rosy outlook in Philly Fed survey
  Zooming out to the broader US economy and focusing on manufacturing, we look through a nominally negative update of the Philadelphia Fed’s monthly business outlook survey—taken after the US election—and see signs of improving conditions on the horizon.
• Japan macro data inform BoJ policy
  Last week brought CPI and PMI figures for Japan’s economy, with softening headline inflation and a strengthening core pointing to price increases closing on the BoJ’s 2% target; at the same time, a weaker-than-expected PMI ought to curb the bank’s hawkishness.​​​​​​

The CIO’s Take:

• As big as Nvidia is, it’s just one stock—and yet, we couldn’t help but believe, going into last Wednesday’s earnings, that investors’ reaction would offer hints at the potential staying power of a bullish ‘risk on’ sentiment witnessed post-election. The stock’s lackluster response to a solid quarter is telling of how high expectations have gotten.
• The Philly Fed’s manufacturing survey, conducted after the votes were counted on November 5th, showed a clear bump in manufacturers’ outlook. We believe the US economy is resilient, though we want to see the details as Trump policies unfold before deciding exactly what impact the election might have on the macro landscape.
• We see Japan’s macro data as positive, on balance, with last week’s CPI offering evidence of inflation—especially the core and services measures most relevant to BoJ policy—fairly close to target. Meanwhile, a seemingly delicate recovery in domestic sentiment and growth will, we’re confident, keep the bank from tightening too fast next year.​​​​​​

NVDA Earnings

Investor fears going into earnings
It’s become customary in the last couple years for the market to approach Nvidia earnings with the same interest and care it applies to a crucial Fed meeting or the most important macro data releases. With a post-election rally pushing US stock valuations to dizzying heights and NVDA itself up a mind-boggling 192% YTD as of Wednesday, our sense was that most investors were on edge ahead of the company’s Q3 FY 2025 report last week, worried about how sensitive the stock—and the US market, more generally—might be to a rare miss by the tech giant.

Nvidia made solid progress in Q3…
Thankfully, fears of a big undershoot didn’t materialize. As usual, Nvidia beat on both the top and bottom line, posting EPS of $35.1 billion versus $33.2 billion Wall Street was expecting, with fourth-quarter revenue expectations rising to $37.5 billion, slightly above analysts’ consensus forecast of $37.1 billion. CEO Jensen Huang reassured investors that the “Age of AI” is real, that this trend will continue to see massive spending on the company’s chips that drives continued growth, and that its troubled next-gen Blackwell chips will ship this quarter amidst “very strong” demand.

…But not enough to ‘wow’ investors
And despite what was by all accounts a solid quarter, NVDA proceeded to sell off during after-hours trading on Wednesday, ultimately finishing a choppy next two days 2.7% lower than Wednesday’s close and almost 4.7% off an all-time high set back on November 7th, just after the US election. After almost tripling in value this year going into earnings, those aren’t big declines, to be sure. But they do reflect the reality that, as time goes by, investors have adjusted expectations on NVDA, making it much harder for the company to far surpass an increasingly high bar (see below).

US Manufacturing

Headline Philly index negative
Of course, it’s not all about Nvidia. The company’s earnings last quarter were impressive, but there’s on the order of $27 trillion in GDP generated by other companies in the US economy that also matters for investors’ portfolios. That’s why we’re keeping an eye on things like the Philly Fed’s business outlook survey, released last Thursday. Representing one of the first big post-election barometers for business conditions in the US, the regional Fed’s headline manufacturing index went negative in November after a strong positive reading in October (see below).

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Digger deeper, positive signs
Economists polled by the Wall Street Journal expected the index to decline, but only modestly, forecasting a reading of +8.2 for the month; that made Thursday’s data a big negative surprise. That said, more granular data suggests there’s reason to be optimistic. An index of new orders and shipments also fell in November, but remained firmly in expansion territory; likewise, employment-related component indices fared well, with number of employees rising over 10 points and the average employee workweek popping by almost 30 points.

Manufacturing outlook positive
Indeed, the Philadelphia Fed concluded that “broad indicators for future activity suggest more widespread expectations for growth over the next six months”—in other words, one of our earliest indications of manufacturers’ sentiment since the resolution of Election Day uncertainty and another quarter-point cut from the FOMC looks optimistic. Taken together with a sharp rise in the New York Fed’s Empire survey back on November 15th, pundits are expecting a solid reading for the ISM manufacturing PMI, expected out next week, on December 2nd.

Politics can shape sentiment
A strong US economy certainly helps the Fed, providing policymakers with some flexibility in terms of how quickly they reduce rates. And we continue to see good signs for a potential soft landing, which would obviously be great news for stocks. On the other hand, it’s worth noting that last Friday’s University of Michigan consumer survey showed a rise in positivity about the direction of the economy driven entirely by a surge in Republicans’ sentiment. When the sugar high of a big election win wears off, what ultimately matters is what kinds of policies materialize going into next year.​​​​

Update on Japan

Tracking Japanese growth, inflation
We’ve been bullish on Japan’s return to growth for some time and, like many investors banking on a further rebound in Japanese shares, have been closely following the country’s macro data and considering how developments there might affect the pace of BoJ hikes. Last Friday brought important data on both growth and prices, with the spotlight squarely on October CPI data released by the Ministry of Internal Affairs and Communication. That report showed headline inflation easing from 2.5% last month to 2.3% in October, the lowest level since January (see below).

Data shows solid core inflation
On the other hand, so-called “core core” CPI, excluding volatile energy and fresh food prices, increased 2.3% year-over-year in October, up from 2.1% in September, and higher than the 2.2% economists expected. As illustrated in the (chart above), services prices also rose in October, reversing a general decline since late last year. For a central bank concerned about getting things just right on inflation, we imagine such readings increase policymakers’ comfort in achieving a 2% target—perhaps explaining some relatively hawkish comments by BoJ governor Ueda on Thursday.

BoJ likely to hike gradually
But how swiftly and by how much will the BoJ move rates? Another piece of data out Friday might shed some light on that question. The au Jibun Bank flash Japan manufacturing PMI showed continued contraction, slipping from 49.2 to 49 in October, dragged by soft demand in the private sector and price pressures caused by a weak yen. As the country’s new administration settles in, we expect rate hikes to resume in January—which will help buttress the yen—though the economy’s obviously fragile state happily dictates tightening should be cautious, which should be good for stocks.