The U.S. stock market crash in early August and the Federal Reserve’s economic conference in Jackson Hole, Wyo., last week took the attention away from Nvidia Corp.’s results that are coming up. BofA Global Research says that investors who are used to the company’s huge successes may not fully understand the risk of a letdown and how it would affect the market as a whole.
According to a note released on Sunday by Gonzalo Asis and his team at BofA Global, “don’t sleep on Nvidia’s earnings. They are a consistent driver of the S&P 500 returns and still a risk to markets if they disappoint.”
Asis and his team said that since January 2023, the quarterly earnings results for Nvidia NVDA -2.25%, the company the world knows best when it comes to AI, have been a major factor in the short-term success of the stock market. The chart below shows that how Nvidia’s stock changes after the company reports earnings is very similar to how the S&P 500 SPX -0.32% does in the two weeks after the report.
R-squared tells you how much of an index’s price changes can be explained by changes in another variable or an investment. If the value is 1, it means that all price changes in one variable can be explained by changes in the other variable. If the value is 0, it means that there is no relationship between the two variables.
After the market finishes on Wednesday afternoon, Nvidia is likely to release its earnings report for the second quarter. More people are worried about the state of the AI boom that has been driving megacap tech stocks and the market as a whole for almost two years.
According to FactSet, Nvidia stock has gone up more than 150% so far in 2024, while the S&P 500 has gone up almost 18%. Analysts at BofA said that Nvidia’s stock has added about 5 percentage points to the results of the large-cap benchmark index so far this year.
What if Nvidia doesn’t make its earnings?
To protect against bad results and the possible effect on the stock market as a whole, Asis and his team said it is “more attractive” to buy put options on the S&P 500 than on Nvidia’s stock.
Investors who buy put options have the choice, but not the duty, to sell a certain amount of an underlying asset at a certain price within a certain amount of time. Because put options get more valuable when the price of the underlying security goes down, they can be used to protect a stock or an index.
Options trading on Nvidia’s stock now predicts a 10% drop after the company reports earnings on Wednesday. However, Asis and his team said that the stock hasn’t dropped more than 8% on the day of reporting since 2018.
The sudden rise in the Cboe Volatility Index VIX 0.93% earlier this month, which is Wall Street’s closely watched “fear gauge,” shows that the market as a whole is becoming more fragile again. However, BofA analysts said that the S&P 500 has “often remained fragile after such large shocks.”
It has been going down since August 5, when it hit a high point above 65. Dow Jones Market Data says it has dropped more than 75% since then and was still well below its long-term average of 20 on Monday afternoon.
After the recent sharp rise, the experts said, “the fastest VIX retracement ever gives us a chance to load up on S&P-based hedges.”
To protect against what Asis and his team called “another broad market fragility shock,” the August nonfarm payrolls report, and next week’s release of the U.S. manufacturing PMI, as well as the fallout from Nvidia’s earnings, they said that the S&P 500 put options could be used.
Also, if you look at past earnings seasons (see chart below), the S&P 500’s options are cheap compared to Nvidia’s options.
According to Asis and his team, Sunday was still a good time to buy S&P options as a way to protect [Nvidia] gains.
U.S. stocks mostly went down in the afternoon on Monday because investors seemed to be leaving the tech sector before Nvidia’s earnings report on Wednesday and the personal consumption expenditures price index report on Friday.
FactSet data shows that the Dow Jones Industrial Average DJIA 0.16% went up about 0.2% to set a new record. The S&P 500, on the other hand, went down 0.3%, and the Nasdaq Composite COMP -0.85% went down 0.9%.
