Nvidia is set to report earnings next week, and investors are understandably on edge given the swings in shares of the artificial intelligence chipmaker over the past nine weeks since it briefly became the most valuable public company in the world. After sinking to a recent bottom under $100 per share in the broader market’s Aug. 5 plunge, Nvidia has roughly gained 25%. The Club stock, which still needs to climb another 13% to reach its all-time intraday high above $140, has advanced 150% this year — by far our best performer in 2024 and the best among the S & P 500 companies. Since the overall market has been tied to Nvidia’s ups and downs, we understand why the company’s upcoming quarterly results are being viewed as a make-or-break moment and could very well dictate where Wall Street goes next. While expectations are high and caution is certainly warranted, we don’t think it’s quite that simple. NVDA YTD mountain Nvidia YTD Earlier this week , Jim Cramer turned to technical analyst and market historian Larry Williams for some help reading tea leaves. Williams believes Nvidia is the “lynchpin” of the market, so, in line with his cautious market view, he’s expecting to see some selling pressure around the time Nvidia reports after the bell Wednesday. “The charts as interpreted by Larry Williams suggest that we’re likely in for some pain as August comes to a close, pain that he predicts will continue through mid- to- late-October,” Jim said on Tuesday’s “Mad Money.” So, what does that mean for the Club and other shareholders? The rapid recovery from the lows of earlier this month pushed the market into overbought territory this week as measured by S & P Short Range Oscillator . When that happens, our discipline requires us to look at trimming some of our stock exposure. This week, we exited Estee Lauder and made small sales in Morgan Stanley and Abbott Laboratories . While we did add some more Amazon , our net trades resulted in about 1.2% of the total portfolio moving out of stocks and into cash. The Club’s cash position stands at just above 9%, a little bit more than we usually carry. Overbought conditions can be worked off in one of two ways: through a pullback, or a period of consolidation. The last time the market was extremely overbought was on July 11 after the S & P 500 closed at 5,584. While it went to finish at a record high of 5,667 on July 16, the index closed at a recent low of 5,186 on Aug. 5. The Oscillator got the late July into early August sell-off spot on. While the Oscillator and Williams’ work do point to possible selling pressure ahead, we don’t want to get too bearish. That’s because our view on the economy remains positive given employment conditions and the current trend of inflation — not to mention what’s universally expected next month to be the Federal Reserve’s first interest rate cut since beginning its tightening campaign in March 2022. “Larry’s cycle forecasts are more about predicting when the market’s likely to change course than they are about predicting the scale of a given move,” Jim explained. Investing is all about balancing risk and reward, and right now, the risks are slightly elevated given the seasonality and technical setup. However, we don’t think the risks are so elevated as to warrant more than a small cash raise. Moreover, Williams does see us rebounding as we get to the back half of October. As long-term investors, concerns that we may see a two-month bout of volatility in the context of sustainable gains built on healthy economic and corporate fundamentals just isn’t a reason to get overly bearish. Now to Nvidia, specifically, the bar is certainly high heading into next week’s earnings — something we highlighted as concerning during Wednesday’s Morning Meeting . There have been varying degrees of chatter about delays in Nvidia’s new Blackwell chip platform, which could impact guidance. The company has been in a quiet period, so it hasn’t been able to address these market rumors. Indications are that the delays are not that extensive. While known on the Street, that doesn’t mean that a hiccup in guidance will be forgiven, especially since the stock’s recent rebound has been so quick. We still view Nvidia as an “own it, don’t trade it” stock, but we also don’t keep our heads in the sand. Ahead of next week’s earnings, we think there are two key considerations for members to ponder as they look to balance the caution warranted from Williams near-term with his and our more bullish long-term view on the market and Nvidia. “Own it, don’t trade it,” a designation that Jim has bestowed on only Nvidia and Apple , does not mean that a position should be allowed to grow to the point of being the bulk of a diversified investor’s portfolio. Consider the size of your Nvidia position. If it’s so large that a 10% to 20% pullback in the stock is going to have you pulling your hair out and losing sleep, then consider this recent rebound a gift that’s providing another chance to lighten up a bit. That’s not to say we’re advocating selling for any fundamental reason or intend to sell ourselves ahead of the print. To be sure, though, any further gains from here would push the Club’s position above our general 5% weight threshold. So, we will continue to assess our exposure. Rather, we say this simply to highlight that investors should be scrutinizing position size and adhering to what they’ve determined the maximum exposure they’re comfortable having to any one company. We also can’t dismiss that such a move can happen again. After all, it was only about two weeks ago that Nvidia shares were trading at just below $100 each, which if revisited would amount to a roughly 23% pullback from current levels. The construction of your portfolio more broadly, including your cash levels, must also be top of mind. We’re not saying that Nvidia’s earnings report is necessarily make-or-break for the market given the strength of the recent rally, which has largely been in the tech sector. But it will certainly influence the broader market action in the days and perhaps weeks following the release. Keep in mind your aggregate portfolio exposure more broadly to Nvidia’s peers and/or names in the tech sector – those that are most likely to be in the blast radius of an Nvidia-induced sell-off should one materialize. The market wants to bucket together our Super Six mega-caps — Nvidia, Apple, Alphabet , Amazon, Meta Platforms and Microsoft — and they sometimes trade with a high correlation as seen over the past three months. We get it. The idea is that these names are pretty much all tied into the AI trade, so investors, perhaps lazily, want to be able to say if one isn’t doing well, it’s a sign the AI trade is at risk of rolling over and, therefore, if all these names have been beneficiaries then they must all get sold. We don’t think so. Diversification comes in many forms — and when you get past their surface similarities, the Super Six are very different companies serving very different end markets. Also, Nvidia’s revenue is largely generated from the capital expenditures of the rest of the Super Six, excluding Apple. So, any pullback in that capex spending would certainly hurt Nvidia’s revenue and guidance. However, it would also be beneficial to the cash flow and profits of the rest of the group. These companies will, at some point, need to harvest the profits of their massive AI data center spending. We don’t think it is as simple as saying that one “bad” print from any name, even from Nvidia, is enough to declare the AI trade dead or that the returns won’t materialize. Microsoft, after all, guided for an AI-based acceleration in its Azure cloud growth later in its fiscal year. Even if Nvidia’s guide is light next week, we will be digging into the call to better understand if it’s the result of companies tempering their future ability to monetize AI, or a pushout. Our money is on that any hiccup, should there be one, would be the result of the latter. Generally, pushouts are delayed sales, not lost all together, and they tend to provide buying opportunities. A knee-jerk sell-off of the cohort should be considered a buying opportunity. Bottom line The one consistent theme we heard from the Super Six companies that have reported is that the risk when it comes to AI spending is underspending, not overspending. In line with that, none of Nvidia’s key customers — Amazon , Meta Platforms, Microsoft , and Alphabet — indicated that the spending on AI infrastructure was set to slow down anytime soon. It certainly didn’t in the quarter Nvidia is about to report and appears to have sustained into the current quarter. We’ll see if that also will continue on Nvidia’s end. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Nvidia is set to report earnings next week, and investors are understandably on edge given the swings in shares of the artificial intelligence chipmaker over the past nine weeks since it briefly became the most valuable public company in the world.
