Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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Nvidia earnings will show another quarter of explosive growth
Peter Garnry
Chief Investment Strategist
Key points
- Nvidia's strong AI-driven growth: Nvidia is expected to report a significant revenue increase of 113% YoY for FY25 Q2, driven by high demand for its AI chips (Hopper H100 and H200). Analysts anticipate Nvidia will surpass consensus estimates and possibly raise guidance for fiscal Q3, indicating continued strong momentum in the AI industry.
- Potential political and economic impact of a "Blue Sweep": Although still considered unlikely with a 10% probability, a "Blue sweep" in the upcoming elections could lead to corporate tax hikes, negatively impacting equity markets and valuations. A Harris victory with a split Congress remains the more probable outcome, affecting fiscal stimulus extensions in 2025.
- Growing momentum for weight-loss drugs: Eli Lilly's Zepbound study shows promising results in preventing diabetes, reinforcing the growing demand for GLP-1 weight-loss drugs. This success could lead to more government and insurance support, further boosting the obesity drug market alongside AI and defense stocks.
Nvidia earnings: The AI growth wave is not ending yet
Nvidia earnings on Wednesday is by far the most important event in global equities. Analysts expect FY25 Q2 (ending 31 July) revenue to hit $28.7bn up 113% YoY and EBITDA of $18.9bn compared to $7.4bn a year ago. Given the underlying momentum in the AI industry and the results we have seen from other companies in the AI ecosystem, we lean in direction of Nvidia beating consensus and lifting guidance for fiscal Q3 surpassing estimates. Demand is still driven by its Hopper chips H100 and H200. Besides revenue guidance the market will anxiously look for an update of its Grace Blackwell 200 chip (GB200) which was scheduled for launch in Q4 2024, but has been postponed to Q1 2025 due to a design flaw. As the chart below shows, the momentum in estimated FY25 Q4 (ending 31 January 2025) revenue is still momentum and has increased from roughly $25bn in the beginning of the year to now $35bn. Our view is that the AI wave will continue until the next GB200 investment has run its course as Google, Meta, and Microsoft will take another bet on compute power to see what it can create in terms of models and new AI applications.
Is the “Blue sweep” scenario suddenly in play?
The “Blue sweep” scenario was unthinkable just one month ago, but with the Harris momentum in polls (see chart) it is no longer a fantasy. It is important to say that this scenario still has a low probability (around 10%). What would it means if we get a “Blue sweep”? Well, it would mean that Harris and the Democratic Party could more easily implement corporate tax hikes from 21% to 28% and just shave off a significant portion of after-tax free cash flows. That would obviously be negative for valuations and equity markets. For now the most likely scenario is a Harris victory with a split Congress which has implications for the macroeconomy in 2025 as it would make extensions of fiscal stimulus much more difficult.
Eil Lilly Zepbound study to bolster case for weight lose drugs
Together with AI and European defence stocks the obesity theme has been strong this year as demand is extremely high for the new class of weight-loss drugs Wegovy from Novo Nordisk and Zepbound from Eli Lilly. This week, Eli Lilly announced the results of a three-year long study following patients with the risk of developing diabetes. The study showed that those patients that were on Zepbound compared to the control group had a 94% less likelihood of developing diabetes. This is more evidence that the new GLP-1 weight-loss drugs are preventive as much as curing and thus will likely add support for more government incentives, but also incentivizing insurance companies to increase coverage for these weight-loss drugs.
The week ahead: Nvidia earnings, Germany inflation, and US initial jobless claims
- Earnings: The key earnings to watch in the week ahead are PDD (Temu, Mon), Nvidia (Wed), and Salesforce (Wed). We have already previewed Nvidia above, so our focus here is on PDD and Salesforce. Analysts expect PDD to report Q2 revenue of CNY 100bn up 91% YoY as its e-commerce platform Temu continues roll over the world with great success connecting the global consumer directly to Chinese factories. PDD is also one of the few Chinese stocks that still have a positive sentiment around it. Salesforce is expected to report FY25 Q2 (ending 31 July) revenue of $9.2bn up 7% YoY as business spending on IT applications is still under pressure from cost focus and attention on AI investments.
- Germany inflation: Important figures as they are fundamental for the ECB’s thinking on its policy rate path. Estimates are looking for Germany’s August inflation figures to hit 2.1% YoY down from 2.3% YoY in July confirming that inflation has eased and providing flexibility for the ECB to cut its policy rate by 25 basis points (the current market pricing) at the next rate decision meeting on 12 September.
- US initial jobless claims: Not typically a macro figure we are talking about, but the past two weeks the figure has gotten more attention, because it is a timely indicator on the US labour market. Recent Fed speeches have highlighted US labour market weakness and impacted the market’s pricing of the future Fed funds rate, but the past two weeks, the initial jobless claims have confirmed that the weak July figures were temporary and driven by hurricanes and forced the market to scale back bets on rate hikes. US initial jobless claims are out on Thursday.
Previous weekly equity market updates
- The big rebound in equities, Palo Alto earnings on tap (16 August 2024)
- European banks: Strong Q2 earnings as rate cuts loom (14 August 2024)
- Low recession probability, strong earnings, and US inflation (9 August 2024)
- Election drama, Tesla bounce, and earnings kick-off (5 July 2024)
- US election heats up, Alfen rout, and Micron earnings (28 June 2024)
- French election, king Nvidia, and FedEx earnings (21 June 2024)
- Tech rally, inflation surprise, and EU trade war (14 June 2024)
- AI bonanza drives new highs and dangerous index concentration (7 June 2024)
- Chinese setback, AI woes, and ECB decision (31 May 2024)
- Nvidia earnings, electrification boom, and bubbles (24 May 2024)
- New all-time high on speculative stocks comeback (17 May 2024)
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