The Week Ahead (Nvidia and Canada's Top Bank Earnings; Canadian Q2 GDP and US PCE Inflation)

Nvidia is set to release its second-quarter earnings report for fiscal year 2024 after the market closes on Wednesday, August 28. Expectations are for revenue to rise to $28.54 billion, marking growth of around 211% year on year. EPS is expected to be $0.6, an annual rise of 136%.

Nvidia, the AI darling of Wall Street, has been boosted by strong demand for specialized GPUs used for data centre adoption of AI and machine learning. Customers such as Amazon, Microsoft, and Alphabet use Nvidia chips, which account for around 40% of customer revenue.

Earnings come as the share price trades up 160% year to date and investors will want to see fundamentals that support the valuation.

NVIDIA is expected to provide more details about the upcoming Blackwell GPU, whose shipments have already been delayed. Let’s not forget, though, that CEO Huang expressed optimism that Nvidia would see a lot of Blackwell revenue this year. Evercore analysts said that they considered the worries surrounding the Blackwell delay and supply chain constraints overdone.

Analysts anticipate generally positive earnings from banks, though increased provisions for credit losses due to potential defaults remain a concern. The Bank of Montreal (BMO) may face a significant rise in these provisions, particularly because a major US client's bankruptcy could notably affect its second-half figures, as Canaccord Genuity's Matthew Lee suggests.

Lee predicts a 56% year-over-year surge in BMO's credit loss provisions to $768 million, which could pose a potential risk to growth projections. National Bank of Canada's Gabriel Dechaine also foresees a rise in the sector's PCL ratio, citing higher insolvencies and certain consumer credit losses.

Bank of Canada's recent rate cuts, with more expected, could boost future loan growth, though Lee doesn't see an immediate effect on third-quarter results. He considers significant loan growth likely by the first half of 2025, while Dechaine believes adequate rate reductions could stave off a spike in loan losses.

Meanwhile, the Bank of Nova Scotia's acquisition of a stake in KeyCorp for $3.9 billion has met with mixed analyst reactions. Some analysts, like Lee, have lowered the bank's valuation due to slower projected capital returns and buyback pace.

Investors are also focused on the potential benefits of National Bank's purchase of Canadian Western Bank, a $5 billion transaction that will expand its presence into Alberta and British Columbia.

For the past five quarters, revenue has climbed about 11%. Earlier this year, Salesforce stock fell on its disappointing Q1 earnings report and outlook. Even so, Salesforce’s management remains confident that this is just a temporary headwind. CEO Mark Benioff noted that despite the lower revenue results for the quarter, Salesforce maintained its full-year guidance at $38 billion.

According to Bloomberg, the broader enterprise software sector has faced challenges, including increased competition and shifts in customer spending priorities. These factors likely contributed to slower-than-expected sales growth and delays in closing large deals.

In the coming week, investors should closely monitor several key macroeconomic events that could significantly impact the market. These include the US GDP, Initial Jobless Claims, and the US Core PCE Index.

The Fed’s preferred inflation measures are released on Friday, with consumer confidence (which includes inflation expectations) shortly after. Core PCE remains above the Fed’s 2% target at 0.2% y/y, and the deceleration of prices has slowed. The last thing the Fed wants to see is these measures of inflation tick higher.

If super core or core PCE rises just 0.1%, the view of a Fed soft landing is likely to remain. However, things get tricky if we see these figures dip below zero, particularly if accompanied by deflationary figures from personal income and personal consumption. While this scenario seems low probability, it would surely stir fears of a hard landing and weigh on risk, the US dollar, and yields as calls for a recession resurface.

The upcoming GDP report from Canada is anticipated to indicate a further slowdown in the nation's economy. The expected rise in GDP for the second quarter is projected at a 1.4% annualized rate, which falls short of Statistics Canada's earlier estimate of 2%.

It is believed that Q2's GDP growth was primarily driven by increased personal spending on services, which persisted in growth even as transaction data from our cards suggested a loss of momentum as the quarter progressed. Conversely, spending on goods is likely to have diminished, aligning with a 0.3% decrease in retail sales volumes for Q2. The forecast also suggests a drop in residential investment, mainly attributed to a slump in home sales. However, investment in structures is expected to have experienced robust growth, buoyed by heightened activity in the engineering and broader construction sectors.

Momentum in growth is predicted to have waned towards the end of the quarter, with an anticipated 0.1% decline in June's output—contrasting with the previously estimated 0.1% increase. A significant reduction in manufacturing sales volumes, down 2.1%, along with decreased oil and gas drilling activities, is likely to result in a 0.5% contraction in goods production. Output in service-providing sectors is expected to have remained steady, with no notable change from May. A 0.9% fall in June's wholesale sales volumes marks a second month of decline. While retail sales volumes stayed relatively stable with a slight 0.1% increase in June, a 3.4% rise in home resales may provide some balance.