Taking Stock of the Earnings Picture

This week's earnings focus is on Nvidia, a leader in the AI ecosystem, with expectations of $0.85 EPS on $42.6 billion in revenues, representing year-over-year growth of +39.3% and +63.7%, respectively, despite some estimate pressures due to margin concerns during the Blackwell GPU transition; however, CEO Jensen Huang noted strong demand for Blackwell from hyperscalers and sovereign wealth funds. Costco is also a key report to watch, expected to report $4.25 per share in earnings on $63.1 billion in revenues, representing year-over-year changes of +12.4% and +7.9%, respectively, and is well-positioned to navigate the uncertain tariff environment due to its primarily domestic sourcing.

Analysis

The upcoming earnings week is headlined by Nvidia (NVDA), a pivotal player in the artificial intelligence ecosystem, which is anticipated to report earnings per share (EPS) of 85 cents on $42.6 billion in revenues, marking substantial year-over-year increases of +39.3% and +63.7% respectively. Despite these strong growth projections, Nvidia's estimates have faced downward pressure, declining from 93 cents two months prior, primarily due to analyst concerns over potential near-term margin compression as the company transitions from its Hopper GPU to the new Blackwell unit. However, CEO Jensen Huang has indicated that the Blackwell production ramp-up is proceeding smoothly with demand from the four largest hyperscalers reportedly three times higher than for Hopper in the comparable prior-year period, and new datacenter deals with sovereign wealth funds in the UAE and Saudi Arabia suggest a continued strong growth trajectory. Nvidia's stock has underperformed year-to-date, influenced by broader AI sentiment shifts following the DeepSeek announcement and concerns over AI-focused spending by Mag 7 companies. For the Mag 7 group, Q1 earnings are on track for a +27.2% increase on +12.2% higher revenues, though growth is expected to decelerate. Costco (COST) is another key focus, expected to report $4.25 EPS (+12.4% YoY) on $63.1 billion in revenues (+7.9% YoY), with estimates inching upwards. Costco's strategic advantages include a loyal, higher-income customer base and significant domestic sourcing (over 70% of U.S. revenues, two-thirds of U.S. merchandise sourced domestically), making it resilient to tariff uncertainties. The broader retail sector, based on 28 S&P 500 retailers that have reported, shows Q1 earnings up +11.2% on +5% revenue, but EPS and revenue beat percentages (60.7% and 57.1% respectively) are notably below historical averages. Excluding Amazon (AMZN), which saw Q1 earnings rise +42.6%, the retail group's earnings declined -5% on a +3.8% revenue gain, highlighting significant margin pressures. Overall, for the 478 S&P 500 members that have reported Q1 results, earnings are up +11.6% on +4.3% revenue gains, though the 74.3% EPS beat rate and 63% revenue beat rate are below their respective 5-year averages of 78.3% and 71.1%. Looking ahead, while full Q1 2025 S&P 500 earnings are expected to rise +12.3%, estimates for Q2 2025 have been experiencing more significant downward revisions than seen in the recent post-COVID period, although Tech sector estimates showed signs of stabilization before potentially softening again.

Key Decisions for Investors

• Investors should closely scrutinize Nvidia's upcoming earnings for details on Blackwell GPU transition margins and production ramp-up, as continued strong demand from hyperscalers and new sovereign wealth fund deals could offset recent estimate pressures and stock underperformance.
• Consider Costco a resilient holding given its strong Q1 performance, positive estimate revisions, and defensive characteristics like significant domestic sourcing and a loyal customer base, which position it well against tariff uncertainties and broader retail margin pressures.
• Approach the broader retail sector, excluding strong performers like Amazon and Costco, with caution, as Q1 results indicate significant margin compression and lower-than-historical revenue beat rates for many players.
• While overall Q1 S&P 500 earnings growth is robust, investors should monitor the declining trend in EPS and revenue beat percentages and the downward revisions for Q2 2025 estimates, suggesting potential for increased market selectivity and a cautious outlook for near-term corporate profitability growth outside of specific outperformers.