S&P 500 books best day in nearly 2 months, Nasdaq rises 1.6% ahead of Nvidia earnings

What drove markets

Technology shares led the S&P 500 index and the Nasdaq Composite sharply higher on Wednesday as investors awaited Nvidia’s
NVDA,
+3.17%
earnings report which is due out after the closing bell and will be scrutinized as a bellwether for the artificial-intelligence frenzy.

See: Nvidia earnings: What Wall Street expects from the AI-chip giant

With Nvidia’s shares up 222.4% this year — against the S&P 500’s 15.5% gain — the chip maker encapsulates the enthusiasm for big technology stocks and AI excitement that together helped drive U.S. equity indices higher for much of 2023. Nvidia shares were up 3.2% on Wednesday, contributing to a 8.8% gain so far this week.

“It’s just like a sentiment indicator for how the market responds to what’s likely to be a really strong report,” said Matthew Stucky, senior portfolio manager at Northwestern Mutual Wealth Management Company, in a phone interview. “The key here is more on the guidance and the shape of the ongoing surging demand that they’re getting in the data center segment.”

Live blog: Wall Street gears up for Nvidia earnings report

Demand for Nvidia’s AI equipment is so high that the company is reportedly running up against limited supplies, so the earnings report is expected to offer investors a glimpse of how trends are balancing out. Nvidia’s CEO Jensen Huang said in March that the company has “ample supply” of AI capacity to meet the delivery demands through 2023, but that was before the latest wave of interest in these chips.

“If earnings are again stellar and guidance robust, it will help reignite the tech rally which has stalled in recent weeks. If they don’t, we expect short-term market volatility,” said Nigel Green, CEO of deVere Group, in emailed comments.

Green warned that hype around Nvidia and other megacap tech stocks, fueled by enthusiasm over AI, may be reaching dangerous levels “as it could lead investors to assume that these stocks are a silver bullet to build long-term wealth — and they are not, at least not on their own.”

Pricing of Nvidia’s stock options show traders think the shares may see a sharp move over the remainder of the week.

Check out: Nvidia stock options traders are bracing for larger move than usual after earnings

Stocks were also boosted after bond yields in Europe and the U.S. fell on data showing that eurozone economic activity contracted more than expected to a 33-month trough. Earlier this week, a sharp rise in Treasury yields, with the 10-year rate
BX:TMUBMUSD10Y
hitting a 16-year high on Monday, had been blamed for a broad, tech-led stock-market pullback.

The yield on the 10-year note was down 13 basis points to 4.197% on Wednesday from 4.327% in the previous session, extending the Europe-inspired decline after U.S. purchasing manager index readings came in weaker than expected.

The S&P flash U.S. PMI reading for August came in at 47, down from a July reading of 49. A reading below 50 indicates a contraction in activity. The services PMI reading fell to a six-month low of 51 from a previous reading of 52.3.

See: The U.S. economy is actually slowing down, not speeding up, these S&P surveys show

Meanwhile, a preliminary benchmark revision by the Labor Department signaled that workers on payrolls would be reduced by 306,000 as of March. That also provided support for stocks, indicating the labor market hasn’t been running quite as hot as previously thought, said Tom Hainlin, national investment strategist at U.S. Bank Wealth Management, in a phone interview.

The data could help cool expectations around future interest-rate increases by the Federal Reserve, helping to buoy a market that remains “very sensitive to what the Fed is going to at a high level,” he said.

See: Jackson Hole meeting: When is Jerome Powell’s speech? What investors need to know.

Investors were also looking ahead to Federal Reserve Chair Jerome Powell’s Friday speech at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming.

U.S. Bank’s Hainlin said he expects Powell to speak in “general terms” on Friday, with investors eager to hear any nuances around what policy makers are watching for clues to the path of inflation or the chair’s assessment of how a strengthening dollar or rising real yields are affecting financial conditions.

In other economic data, U.S. new home sales rose 4.4% to an annual rate of 714,000 in July, from a revised 684,000 in the prior month, the Commerce Department reported Wednesday. 

Companies in focus

• United Parcel Services
  UPS,
  +1.21%
  shares finished 1.2% higher after workers at the deliveries and logistics company voted for a new contract.

• AMC Entertainment
  AMC,
  -12.89%
  fell 12.9%, after an 18% drop on Tuesday. A reverse stock split is planned on Wednesday, to be followed by the conversion of the APE preferred shares.

• Peloton Interactive
  PTON,
  -22.60%
  fell 22.6% after the exercise vendor came up short with its revenue outlook for the latest quarter while disclosing that a bike recall has had a greater-than-expected impact on the business.

• Abercrombie & Fitch Co.’s
  ANF,
  +23.54%
  shares soared 23.5% Wednesday, after the teen clothing retailer blew past estimates for the second quarter and raised guidance. 

• Foot Locker
  FL,
  -28.28%
  slid 28.3% after the sporting goods retailer swung to a loss in the second-quarter, lowered its full-year guidance and said it’s suspending its quarterly dividend to conserve cash.

• NIKE
  NKE,
  -2.67%
  ended 2.7% lower, down 10 straight sessions and its longest losing streak on record, according to Dow Jones Market Data.

Jamie Chisholm contributed