The Beginning of the Worries

Nvidia announced another very strong quarter after the bell. The company surpassed its own revenue forecast by around $2bn (again!) and printed a sales number of $35.1bn. That’s around $5bn more than last quarter’s number and almost the double of the amount earned during the same period a year ago. The company printed a total profit of an eye-watering $19.3bn – that’s also around $2bn more than pencilled in by analysts. And it made a revenue forecast of $37.5bn for the current quarter. That’s $2bn more than the actual revenue – as it has been the case for the past few quarters – but only slightly above the consensus of $37bn.

To me, being lower than the most optimistic of the Wall Street forecasts is not a concern, bit there are two flags that are emerging right now.

• The company’s gross margin slightly fell last quarter from 75% to 74.6%. This number is still around 20 percentage points above AMD’s profit margin and more than double Intel’s BUT the switch to the now-famous Blackwell chip – and the manufacturing challenges, there – has been costlier than thought and took a toll on the profit margin. And Nvidia expects its gross margin to dip to 73% before rebounding back to mid-70s as it reaches large-scale production.
• Happily, demand for Blackwell chips is expected to exceed supply for a few more quarters but the composition of Nvidia’s customer book worries. Big Tech companies make up to 50% of revenues – up from 45% a quarter earlier. And these companies will be done buying chips at large-scale at some point. And come that day, Nvidia must find new clients. The problem is that companies other than Big Tech certainly don’t have the same means to make Nvidia’s bread and butter when competition proposes more affordable AI chips. Hence, competition and market share will become a challenge.

Nvidia fell 2.5% in the afterhours trading. Failure to break a record post-earnings, and the rising worries regarding margins and competition could lead to a certain profit taking over the next few sessions. The 100-DMA – near $125 per share – should provide the first important support to a potential pullback. We expect dip buying opportunities to emerge into $117pb – the minor 23.6% Fibonacci retracement on the AI rally.

But one thing is clear, yesterday’s announcement sounded like the next few quarters won’t be as fun as the last few ones.

As such, the S&P 500 and Nasdaq futures are in the red this morning, and we could see a deeper retracement from the ATH levels with the lack of support from Nvidia earnings.

Elsewhere, the US 20-year note sales saw a tepid demand, and Federal Reserve’s (Fed) Michelle Bowman called for caution on further rate cuts citing at slower progress in reducing inflation. The US 2-year yield rebounded yesterday, as the 10-year yield steadied near 4.40% level. Activity on Fed funds futures points at a near 50-50 chance for the December rate cut right now, and that hawkish shift in Fed expectations continues to give support to the US Dollar new a year-high levels.

This being said, the major counterparts also see some hawkish shift to their own expectations, and the latter slows the US dollar purchases. The UK, for example, printed a higher-than-expected set of inflation figures yesterday morning. Headline inflation in the UK jumped to 2.3% and core inflation to 3.3%. The jump in numbers was expected for October amid a 10% rise in the British energy price cap, but the higher-than-expected figures tamed the dovish Bank of England (BoE) expectations. And because things are expected to get worse before they get better with Donald Trump’s tariff plans and the expansionary fiscal policy from the British government, the first rate cut from the BoE is fully priced in for March, and a second for August. That hawkishness gave an energy shot to the GBP bulls yesterday, although most of the gains were given back rapidly on Fed hawkishness. Moving forward, a smaller divergence between the Fed and the BoE outlook should help throw a floor under Cable near the current levels and encourage recovery in the coming weeks.

Across the Channel, news weren’t encouraging for the European Central Bank (ECB) doves, either. Wages in the Eurozone jumped by 5.4% from a year ago, the most since the single currency exists. Germany is to blame. Wages, there, jumped by 8.8% in Q3 from a year earlier. The jump in wages growth will complicate the ECB’s plans to cut rates at the desired speed. Consequently, the retreat in dovish ECB expectations could slow down the euro selloff, and levels near $1.05 could serve as a dip to shoulder a rebound toward the 1.07-1.08 range.