Nvidia Earnings Set to Drive SP 500’s Direction

• Markets take a breather ahead of Nvidia’s earnings

• U.S. GDP and inflation data are in focus

• Labor data next week will be a crucial factor in determining the size of the first rate cut

Nvidia's Earnings are a Critical Test for the Broader Market Rally

The SP 500 faces a crucial test as three key events—Nvidia’s earnings, U.S. inflation data and labour market data could heavily influence market sentiment and determine the index’s near-term direction.

Nvidia, a leading chipmaker and a key player in the artificial intelligence (AI) sector, is set to report its second-quarter earnings on Wednesday. The company's stock has skyrocketed almost 160% year-to-date, significantly contributing to the SP 500’s 18% gain since the start of the year.

Nvidia has become one of Wall Street's most valuable companies, but this success also comes with exceptionally high expectations. Investors are keen to see if Nvidia can maintain its remarkable earnings growth, driven by the booming demand for AI technology.

However, the stakes are high. Nvidia not only needs to beat consensus estimates but must also deliver robust guidance to reassure investors that the AI boom is far from over. Anything less than stellar results could trigger a pull back, potentially sparking volatility in the broader market.

Nvidia is expected to report sales of around $28.84 billion, more than double the revenue from the same quarter last year, and net income is also forecasted to double. The company’s guidance for the third quarter will be especially critical, as concerns grow about the long-term sustainability of AI-driven growth begin to emerge.

PCE Inflation in Focus as September Rate Cut Expectations Grow

This week, the Federal Reserve will closely examine a series of key economic indicators ahead of its September rate decision. Among the most significant are the Commerce Department's revised second-quarter GDP figures and the Personal Consumption Expenditures (PCE) price index, which is the Fed’s preferred measure of inflation.

While the inflation data will be under scrutiny, recent comments from Fed officials suggest the focus has shifted towards labour market risks, with inflation now seen as sufficiently close to target to support a rate cut as early as next month.

Fed Chair Jerome Powell signalled on Friday that "the time has come" to lower the Fed funds target rate, adding that "the upside risks of inflation have diminished." These remarks have strongly indicated that a rate cut at the Fed's meeting on the 18 ^th of September is almost guaranteed.

The August Labour Market Data is a Key Factor for Fed Policy Decision

The August jobs report, due on the 6 ^th of September, will play the most crucial role in determining the Federal Reserve’s next steps. A strong report could support a cautious approach to rate cuts, while a weaker report might prompt the Fed to take more aggressive measures.

Fed fund futures are fully pricing in a 25-basis-point rate cut at the September meeting, with a 38% chance of a more substantial 50-basis-point reduction. The market has also priced in 103 basis points of easing for this year, with an additional 122 basis points anticipated in 2025.

If the August employment report is stronger than the July’s, the FOMC is likely to implement an initial series of three consecutive 25-basis-point cuts in September, November, and December. However, if the August report turns out to be weaker than expected, a 50-basis-point cut would become more likely.

Source: TradingView

Technical Analysis

The SP 500 has rebounded strongly from its early August low with current price action trading close to its record high of 5,639. The rally has lost momentum over the past five trading sessions showing that the bulls are running out of steam.

While at this juncture in time there is no reversal signal evident on the chart and we favour levels towards 6,000 by the end of the year, we are expecting volatility to increase again as we approach the seasonally weakest month of the year – September.

We anticipate volatility to stay elevated until November, followed by a robust rally after the U.S. elections, potentially driving the SP 500 into new record-high territory. Overall, our view on the market remains positive and we see any short-term pull backs as a buying opportunity.

Conclusion: A Decisive Week for the SP 500

In summary, this week could be decisive for the SP 500, with Nvidia's earnings, U.S. GDP and inflation data, which could significantly influence the direction of the market. Nvidia's performance will be key to see if the AI-driven rally is sustainable, while the inflation report and the jobs data next week will provide critical insights into the Federal Reserve’s likely course of action. Together, these events could set the tone for the market in the coming weeks, either reinforcing the SP 500's gains or introducing resurgence in volatility.