Nvidia's post-earnings reactions don't always align with the big picture: Morning Brief

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Markets are at a crossroads.

On Monday, indexes for large-cap stocks (^GSPC), small-cap stocks (^RUT), and the Magnificent Seven (MAGS) all sliced through key support levels.

Then, on Tuesday, one of the most sensitive risk barometers — bitcoin (BTC-USD) — got taken to the woodshed, tanking the most since August (8%) and dropping to three-month lows. (A six-digit price is once again the target, not the base case.)

But investors can hold on to hope for a few more hours. After the bell today, the world turns to fourth quarter earnings for the lynchpin of AI euphoria, Nvidia (NVDA).

This two-plus-year bull market has weathered several multi-month periods when Nvidia's stock price sputtered. But the company's stock hasn't contributed to the bull market since last June, as its share price has effectively gone nowhere in that time.

Nvidia has a storied history of bullish reactions following earnings, but the results are unsurprisingly volatile. Yahoo Finance analyzed stock price movement after all 103 earnings results for holding periods of one day, one week, one month, one quarter, and one year.

Over the last 10 years (40 reports), buying Nvidia stock just before the earnings announcement has yielded a median return of 3% to 4% on the one-day, one-week, and one-month time frames. Holding for three months has yielded nearly 18%.

But the most substantial gains have been recognized by the longer-term holders, who have seen their holdings more than double (112%) over the following year. No surprises here.

The disparity highlights a key tenet of the returns of Nvidia — and most of the growth stock darlings and highfliers over the years. Initial reactions may not make for long-term trends. And, of course, volatile earnings reactions might net bullish results but can also cause significant discomfort in the near term.

But for all the Nvidia obsession, investors are right to question how much AI is still a picks-and-shovels or even an energy trade (as it morphed into in 2024).

On a recent episode of Stocks in Translation, Lee Munson, president and chief investment officer of Portfolio Wealth Advisors, said the energy trade linked to AI — think utilities and infrastructure — hasn’t played out as expected.