Nvidia Revenue Doubles on AI Demand, US Inflation Tops Forecast

Nvidia reported Q2 fiscal 2027 revenue of $96.2 billion, more than double the prior year and exceeding analyst expectations of $92 billion, driven by strong data center demand for AI chips [2]. This "blowout" performance comes as hotter-than-expected US inflation data for July bolstered bets on a Federal Reserve interest rate hike, creating a "tug of war" between strong earnings and rising rates in equity markets [1, 3].

Nvidia's AI-Driven Growth

Nvidia's data center revenue reached $89 billion, a 117% increase year-over-year, significantly topping forecasts [2]. The company's CFO, Colette Kress, also provided full-year fiscal 2028 revenue guidance, projecting a 70% increase, notably higher than the Street's 45% expectation. This guidance, a rare move for Nvidia, helped push its share price up approximately 5% to $220 in after-hours trading, despite initial concerns over margins [2]. Ahead of the report, Nvidia shares had dipped 0.4% [1]. The strong results are seen as potentially deepening the divide between semiconductor stocks, which have benefited from AI enthusiasm, and software stocks, which have faced pressure this year [1, 3].

Inflation and Fed Policy Outlook

US annual inflation for the 12 months through July rose 3.7%, slightly above the 3.6% analysts expected, according to a Commerce Department report [1, 3]. The Fed's most closely watched inflation gauge, the July PCE data, showed year-over-year headline inflation at 3.7%, with core readings at 3.3%, both in line with consensus [2]. While the year-over-year headline figure is down from 4.1% in May, it remains nearly double the Fed's 2% target and has been above it for five years [2]. This "sticky" inflation has temporarily put upward pressure on interest rates [1].

The latest data slightly strengthened the case for a Federal Reserve interest rate hike, with Fed funds futures indicating about a 44% chance of a September increase, up from roughly 36% before the data release [1, 3]. This comes as US economic growth remained unchanged at 1.5% in the second quarter, a revised estimate that matched consensus but was below the pace seen a year ago [1, 2, 3]. This scenario leaves the Fed "caught between slowing growth and elevated price pressures," making decisions on easing or tightening policy complex [2].

US equity markets were subdued on Wednesday ahead of Nvidia's earnings and the inflation data [1, 3]. The Dow Jones Industrial Average fell 0.04%, the S&P 500 gained 0.03%, and the Nasdaq Composite lost 0.06% [1, 3]. Information technology and industrials were the biggest boosts on the S&P 500, rising 0.3% and 1% respectively, with Microsoft and Apple each gaining 0.5% [1, 3]. Yields across the curve were higher following the inflation data [2].

What to watch

• Jackson Hole Symposium: Federal Reserve Chair Kevin Warsh's speech at the Jackson Hole symposium on Friday will be closely watched for any indications on future monetary policy [1, 2].
• Oil Prices: Oil prices are subdued, with WTI and Brent crude hovering just above their 200-day Simple Moving Averages, as discussions between Iran and Oman regarding the Strait of Hormuz continue amid mixed messages on the security situation [2, 3].
• Market Reaction to Fed Speak: Any signals from Fed officials regarding the balance between inflation control and economic growth will influence market expectations for interest rates and equity performance [2].

The current market environment reflects a tension between robust corporate earnings, particularly in the AI sector, and persistent inflationary pressures that continue to influence Federal Reserve policy decisions.