Nvidia’s Earnings Report: An Underpriced Risk

Nvidia (NASDAQ:NVDA)’s upcoming earnings report is seen as an “underpriced risk” for the broader market, according to analysts at Bank of America.

While recent market focus has shifted to Federal Reserve Chair Jerome Powell’s dovish remarks at Jackson Hole and potential rate cuts, BofA cautions that investors may overlook the implications of Nvidia’s results on equity indices.

BofA points out, “Nvidia results have been a key driver of equity indices,” underscoring that any underperformance could significantly impact the market.

Despite current market optimism, BofA argues that potential downside risks linked to Nvidia’s earnings are not fully accounted for by investors.

To mitigate this risk, BofA recommends that “S&P put spreads offer better protection than NVDA-based hedges,” particularly since S&P 500 faces clustered vulnerabilities to market shocks.

The analysts highlight the favorable entry point for these put spreads due to the “fastest ever VIX retracement and steeper skew,” making S&P options less expensive compared to Nvidia options during previous earnings seasons.

Furthermore, BofA notes that the market is in the “early innings of an AI arms race,” with hyperscalers investing $52 billion in the second quarter, representing a 54% year-over-year increase. This emphasizes the significance of Nvidia’s earnings, considering its pivotal role in the AI sector.

Although the Magnificent 7 tech giants have significantly contributed to the S&P 500’s growth, BofA observes that “earnings are broadening out” across various sectors, potentially cushioning the market against Nvidia-related shocks. Nevertheless, the firm insists that market risks linked to Nvidia’s earnings remain underappreciated.