Martin Gamble on US markets: Nvidia fails to inspire despite upgrades

US markets crept higher despite relative softness in the Nasdaq Composite after a muted response to Nvidia’s earnings, with the smaller companies Russell 2000 index leading the way with a gain of nearly 2%.

Minutes from April’s FOMC meeting showed most policy makers were concerned by rising inflation from the war in Iran and believed a rate hike might be appropriate.  

This could make it difficult for incoming chair Kevin Warsh who had been on record about lowering rates.

IBM was one of the biggest gainers this week after the US government said it was in line to receive a $1 billion package to boost quantum computing and take stakes in some companies.

The news gave a boost to specialised quantum computing stocks with D-Wave Quantum and Rigetti Computing gaining more than 20%.

Investor fatigue sets in at chip giant Nvidia

It was never going to be easy for Nvidia to beat sky high expectations going into second quarter earnings, so the fact it delivered another beat and raise could be applauded.  

Nevertheless, investor fatigue appears to be setting in. This is just the latest example of Nvidia earnings coming in ahead of expectations and the shares dipping in response. Though, for context, the shares have still advanced 66% over the last year.  

The law of large numbers does not appear to be slowing Nvidia down with CEO Haung projecting AI infrastructure spending to reach a staggering $3 trillion to $4 trillion by the end of the decade compared with an estimated $750 billion in 2026.

Historically, Nvidia would have been expected to gobble up most of that spending with its high-end chips and software systems. The picture is more nuanced however because demand for agentic AI tools and inference is likely to take a bigger slice of the pie, opening the door to increased competition.

In the meantime, Nvidia looks set to increase shareholder returns after announcing a 25-fold increase in the dividend to $0.25 and unveiling an $80 billion share buyback.

Walmart flags rising retail prices

Despite delivering first quarter earnings ahead of analysts’ expectations Walmart shares fell more than 7% this week after the retail bellwether gave a cautious outlook amid rising cost pressures.

Revenues rose 7.3% to $177.8 billion with US same-store sales growing 4.1% compared with 3.8% expected, driven in part by strength in ecommerce and membership fees.

However, the retailer said it absorbed $175 million in higher than planned fuel costs as prices at the pump jumped to more than $4 per gallon and inflation remained elevated.

“If the current elevated cost environment persists, we’d expect somewhat higher retail price inflation in Q2 and the second half of the year,” explained chief financial officer John David Rainey.

Walmart retained guidance for annual sales growth in a range of 3.5% to 4.5% and adjusted earnings per share of between $2.75 to $2.85, which was unchanged from February.

The lack of an upgrade was not what the market was hoping for with the shares trading near all-time highs and on a forward price to earnings ratio of more than 40 times.

Target – margin pressure overshadows progress

Falling margins helped overshadow an otherwise positive update from US discount retail chain Target on 20 May.

The company beat forecasts for revenue and profit in the first quarter and hiked full-year sales guidance, but the hefty slump in profitability year-on-year spooked investors in an environment where cost pressures are only likely to become more acute.

Target has been paying staff more but also boosting marketing spend and capital expenditure on store refits and new openings as it looks to get more customers through the tills.  

The difficult backdrop faced by the business was also reflected in some heavy caveating around the outlook to reflect the current macroeconomic and geopolitical uncertainties.

There were some signs of underlying progress under CEO Michael Fiddelke who took the helm last August. The company has boosted digital sales and has revamped its membership programme as it looks to boost customer loyalty.

The main thing which gets people shopping in Target though is its value credentials and sustaining these means its margins will always be vulnerable to rising costs and its own spending.