In a week teeming with significant events, including Nvidia earnings and Jerome Powell’s Jackson Hole address, the S&P 500 concluded with a decent, albeit unspectacular, 0.8% gain. This brought an end to a streak of three successive weekly declines. Among the highlights of the week was Nvidia’s performance, which exceeded Wall Street estimates by a whopping 29.7%, a significant leap from the 18% beat in the previous quarter. This strong performance was a testament to the burgeoning potential of artificial intelligence in the current market, as Nvidia’s sales were 21% ahead of expectations.

However, despite the impressive earnings beat, the rewards for investors were somewhat mixed. Those who purchased a week before the results saw a 6% rise, while those who bought just before the announcement saw a slight decline of over 2% by the week’s end. This was not the expected outcome from such a substantial beat-and-raise, raising questions on what could have happened if Nvidia had merely met expectations or, worse, missed them. This scenario underscores the inherent risk and unpredictability in the stock market, even when dealing with high-performing companies like Nvidia.

Nvidia Earnings Beat Expectations, Yet Investors Struggle to Reap Rewards

Nvidia’s Earnings Triumph

Last week proved eventful with Nvidia’s earnings and Jerome Powell’s Jackson Hole address. The S&P 500 enjoyed a modest 0.8% gain, breaking a streak of three consecutive weekly declines. Nvidia’s earnings outpaced Wall Street estimates by a staggering 29.7%, significantly higher than last quarter’s 18% beat. This performance awakened the market to the potential profitability of artificial intelligence ventures. Nvidia’s sales exceeded expectations by 21%, and its sales guidance for the forthcoming quarter surpassed estimates by an impressive 27%.

Investors’ Mixed Fortunes

Despite these robust figures, the rewards for Nvidia’s investors were somewhat lackluster. An investor who purchased Nvidia shares a week before the results announcement would have seen a mere 6% rise. An investor who bought shares immediately prior to the announcement would have finished the week down by just over 2%. These are hardly the returns one would anticipate from such a significant earnings beat.

Options Traders’ Disappointments

The situation for option traders was equally disappointing. The at-the-money calls rapidly turned negative and had lost almost half their value by the end of the first trading day following Nvidia’s results. The out-of-the-money calls, at a not unlikely $500 strike, lost about two-thirds their value.

Kevin Muir’s Perspective

Kevin Muir, a former institutional trader who now runs The Macro Tourist, analyzed the situation at Nvidia. He suggested a less risky approach to Nvidia investment was to be long volatility well ahead of the actual earnings announcement, with the intention of riding it higher in anticipation of the earnings. Muir generally advises buying ahead of others’ anticipation, cautioning that "Playing the actual event is a tough way to make money.”

Market Updates

In other news, China announced a reduction in stamp duty and reduced margin requirements. U.S. stock futures rose, the 10-year Treasury was at 4.22%, and crude oil prices climbed back over $80 per barrel. Troubled utility Hawaiian Electric Industries saw its stock rise in pre-market trade, after a 19% tumble on Friday. Grocery delivery service Instacart filed for an initial public offering.

Takeaways

In the world of investment, timing is often everything. The Nvidia case underscores the point that even when a company significantly exceeds earnings expectations, it doesn’t automatically translate into substantial gains for investors. This calls for strategic anticipation in investments, as suggested by Kevin Muir, rather than relying on immediate events. The market dynamics are complex and warrant careful consideration, underscoring the importance of a well-diversified investment strategy.