Wall Street convinced Nvidia will rally on earnings, but retail investors are losing enthusiasm

Nvidia's upcoming earnings report is drawing divergent investor sentiment; institutional investors remain over 70% bullish, expecting a beat, while retail monthly flows have significantly declined from a peak of $140 billion to $50 billion. Despite revenue growth decelerating from triple-digits to an anticipated 53% year-over-year for Q2, a beat could sustain high valuations and potentially reignite retail interest. However, an in-line result might signal peak margins and a shift from hypergrowth to stabilization for the S&P 500's largest component, with Goldman Sachs noting a relatively subdued 2% implied one-day move post-earnings, below historical averages.

Analysis

A significant divergence in sentiment is evident for Nvidia (NVDA) ahead of its upcoming earnings report. While institutional investors remain highly bullish, with over 70% anticipating an earnings beat according to Goldman Sachs, retail investor participation has declined sharply, with notional monthly flows falling from a peak of approximately $140 billion to $50 billion. This pullback occurs against a backdrop of decelerating, albeit still strong, growth; after five quarters of triple-digit expansion, revenue growth slowed to 69% in the fiscal first quarter and is forecast to be 53% year-over-year to $45.9 billion for the second quarter. The market reaction hinges on whether Nvidia can beat and raise guidance, which could restart positive revisions and sustain its high valuation. Conversely, an in-line or disappointing result, similar to the last two quarters, could confirm that margins have peaked and shift the narrative from hypergrowth to stabilization. Despite Nvidia's significant influence as the S&P 500's largest component at an 8% weighting, the options market is pricing in a relatively subdued one-day move of approximately 2%, which is below its two-year average realized move, suggesting expectations for a less volatile reaction than in the past.

Key Decisions for Investors

• Investors should weigh the divergence between strong institutional conviction and the sharp decline in retail investment, noting that retail sentiment has been a prescient indicator this year.
• The primary focus should be on whether Nvidia can exceed the expected 53% revenue growth and provide strong forward guidance, as a failure to do so could shift the narrative from hypergrowth to stabilization and trigger a valuation reassessment.
• With the options market implying a relatively muted 2% post-earnings move, which is below its historical average, consider that a significant price swing may not be the base case, warranting caution on highly leveraged directional positions.
• Given Nvidia's 8% weight in the S&P 500, portfolio managers should be prepared for the earnings outcome to directly influence broad market indices, irrespective of their direct holdings in the stock.