On May 22nd, the world of finance was rocked as Nvidia, the dominant player in the artificial intelligence (AI) sector, released its latest earnings report. The company reported a staggering net profit of $14.88 billion, reflecting a breathtaking 628% year-on-year increase. The stock surged over six percent in after-hours trading, climbing past the $1,000 mark, signaling bullish sentiment among investors.

Despite the overall decline in U.S. stock markets due to hawkish remarks from the Federal Reserve, U.S. exchange-traded funds (ETFs) listed in China experienced an unprecedented rise, reaching historic highs. Nvidia's stellar performance has not only captivated investor attention but also added momentum to these ETFs, with premium rates exceeding 2%. By the close of trading on May 23rd, the Shanghai U.S. Equity 50 ETF had gained 1.33%, closing at $1.217, while the Nasdaq ETF rose by 1.21% to settle at $1.752.

Wall Street analysts have once again revised their price targets for Nvidia shares, as $1,000 is no longer considered an outrageous figure. Goldman Sachs has set a 12-month price target of $1,100, a significant increase from the previous estimate of $875 just three months prior. Institutions have also upgraded Nvidia's earnings per share (EPS) forecasts for the fiscal years 2025 to 2027 by an average of eight percent.

The role of heavyweight stocks in influencing overall market indices cannot be overstated. Matt Weller, Global Research Director at Gain Capital, commented on this, elucidating that Nvidia accounts for about 4% of the Nasdaq 100 index. He expressed confidence in the ongoing upward trend, emphasizing that ever since the index broke through the 18,400 resistance level, it has maintained this critical point and continued to rise. Weller suggested that traders would see any pullbacks to the 18,000 to 19,000 range as potential buying opportunities as long as Nvidia’s earnings and outlook do not fall significantly below expectations.

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The enthusiasm surrounding Nvidia has notably fueled cross-border ETF investments. By May 23rd, Nvidia's share price rested at $949.5, down 0.46%, but the after-hours trading following the earnings report saw an impressive spike of 6.68%, with shares reaching around $1,012.89.

Nvidia's reported sales and profits surpassed expectations on Wall Street. The company anticipates revenues of approximately $28 billion for the current fiscal quarter, which is double year-on-year; however, this increase is partially attributed to a higher comparison base following the recent AI boom. Nvidia announced revenue of $26 billion for the last quarter, setting a new record, with net profit soaring from $2 billion a year prior to the astonishing $14.88 billion noted in the current report.

CEO Jensen Huang has asserted that a new industrial revolution has commenced, predicting substantial productivity enhancements across nearly all sectors due to AI, alongside improvements in cost and energy efficiency for businesses. He affirmed the ongoing robust demand for Nvidia's existing AI chips and its next-generation products expected to launch later in the year.

Investors are particularly eager for updates regarding the Blackwell graphic processing unit (GPU), set to be released in the latter half of the year, with significant orders reportedly already secured from technology giants like Microsoft and Amazon.

Over the past twelve months, Nvidia's share price has more than doubled, and its market capitalization has eclipsed $2 trillion. The company announced a 1-for-10 stock split that will take effect on June 7th, alongside an increase in dividends from $0.04 to $0.10 per share, which analysts foresee will further invigorate market sentiment.

The hawkish Federal Reserve minutes released early Thursday contributed to a rebound in the dollar and a general retreat in commodities and U.S. stocks, but the active trading of U.S. ETFs within China persisted, not least due to the excitement generated by Nvidia.

According to Lei Zhiyong, deputy director at Morgan Stanley Fund’s equity investment division, Nvidia has now exceeded market expectations in earnings reports five times since October 2022, including this latest release. At this juncture, the market is highly concerned about the sustainability of growth in Nvidia and the broader AI sector. Huang reiterated during the conference call that the upcoming industrial revolution is underway, forecasting tangible productivity increases across “almost all industries” due to AI.

Nvidia's diverse operational sectors encompass gaming platforms, data centers, artificial intelligence, autonomous vehicles, and professional visualization, with data centers emerging as a particularly strong segment. The recent increases in Wall Street's price targets stem from the sustained demand for AI servers and improved supply conditions. Currently, Nvidia is trading at a striking 35 times earnings—only 36% of Goldman Sachs's target premium, substantially lower than the median premium of 160% over the last three years.

Private equity managers have conveyed that Nvidia's major clients—many part of the so-called "Seven Giants" in tech—express optimistic forecasts regarding capital expenditures related to generative AI, highlighting that Nvidia's GPUs are in short supply.

For instance, Alphabet has reported significant progress in generative AI services and indicated that its capital expenditures for the remaining quarters of 2024 will exceed those of the first quarter—approximately $12 billion—due to investments in technological infrastructure. Microsoft has noted that AI contributed 7 percentage points to Azure's growth in March, up from 6 in December and 3 in September, with current AI demand for Azure surpassing its existing capacity. Microsoft is targeting substantial quarter-on-quarter growth in capital expenditures for June and expects YoY growth in capital expenditures for the fiscal year 2025 to keep pace with rising demand for cloud and AI products.

However, a cautious optimism persists among some institutions investing in Nvidia. A QDII investment manager indicated that from a medium- to long-term perspective, Nvidia's data center GPU business faces two challenges: increased competition in the general GPU market, with AMD and Intel entering the fray, potentially impacting pricing and margins; and CSPs (Cloud Service Platforms, such as Amazon's AWS) having strong motives and capabilities to develop their proprietary AI accelerator chips. While broad computing services may remain elusive for the foreseeable future, the trend toward in-house deployment of alternatives to existing Nvidia chips is already becoming apparent.

Despite these challenges, institutions maintain a bullish outlook on the Nasdaq indices. As of Tuesday, the Nasdaq 100 index had posted slight gains over two consecutive days, establishing its second historic high since the week's beginning. While the U.S. stock market and the cross-border ETFs do not correlate perfectly, the general direction of U.S. stock indices will still heavily influence these ETFs.

Weller noted that since early March, Nvidia has encountered resistance at the $960 price point. He emphasized that given the current market conditions, a breakout above $1,000 is likely, with a subsequent rise toward $1,100 on the horizon.

In terms of the Nasdaq 100 index, with Nvidia representing approximately 4% of the index, it has successfully maintained its footing above the key 18,400 threshold since surpassing this resistance level and setting a record last week. Traders project that 19,000 could be the next target.

Overall, the market dynamics will remain tethered to macroeconomic data and shifts in Federal Reserve policy. In past remarks, Fed Chair Jerome Powell hinted at significant opportunities for rate cuts in future monetary policy decisions, but recent Fed minutes delivered a contrasting perspective, with officials indicating a willingness to tighten policy further if necessary and expressing dissatisfaction with Q1 inflation data.

Nonetheless, most institutions still predict that U.S. inflation will trend downward, with current market expectations of approximately a 50% chance of a rate cut by September. An economist from an international bank remarked that a recurring theme in the U.S. economic data has been the weakness in sectors sensitive to cycles and interest rates (such as production, trade, and certain investments), while consumption remains robust. This combination results in a rare economic situation where the U.S. retains around 3% economic growth amid high recession probabilities.

Looking ahead, the strong portions of the economy (consumption) are starting to slow, while the weaker segments (production/investment) show gradual improvement. Given that consumption typically constitutes a larger segment of the economy, future quarters may witness decelerated growth, though this would be a slowdown from elevated levels. The pressing question will revolve around the pace of the consumption slowdown relative to the recovery of investment/production sectors, with inflation's trajectory serving as a key variable influencing Fed decisions regarding potential rate cut timings and magnitude.

UBS posits that the "stickiness" of U.S. inflation is only temporarily concentrated in about two indicators (rents and travel). By autumn, the Fed should have ample evidence of enough economic deceleration and improved inflation metrics to support rate cuts. However, risks remain: the economy may not slow down; core inflation might hover closer to 3% rather than the targeted 2%; or the unemployment rate may begin to decrease again. Such scenarios could ring alarm bells and potentially prompt the Fed to resume rate hikes in 2025.