The US returning diplomatic personnel to the Gulf and Iran/Oman talks over an ‘interim reopening of the Strait of Hormuz’ are keeping the market mood sweet ahead of two key announcements in the coming hours. First, the US will reveal its latest PCE update, then Nvidia will publish its Q2 earnings after the bell.

Sticky

US core PCE is expected to have remained steady near the 3.3% y-o-y level in July, significantly above the Fed’s 2% policy target, and is proving particularly sticky.

Several inflation metrics – especially the headline figures – eased in July thanks to lower energy prices. And the fact that US crude’s latest spike has proved limited gives a certain peace of mind to Fed watchers.

I am afraid, however, that without peace in the Middle East/Ukraine, the latter may not last.

Look at this spread!

US crude topped near its 100-DMA, which was just around the $89pb level, while Brent crude returned below its own 100-DMA after flirting with the $95pb level on the latest flare-up in Middle East tensions. The relatively subdued price action may have got you thinking that energy prices remained contained. But they have not.

Despite the retreat in crude oil, diesel prices in the US have spiked to their highest levels since the war in Iran started, diverging sharply from crude oil due to the prolonged closure of the Strait of Hormuz, amplified by Ukraine’s drone attacks on Russian energy facilities. And guess what, Russia is one of the world’s biggest exporters of diesel.

And higher diesel prices ripple through the economy: diesel is a key fuel for transportation, and it also accounts for roughly 3–5% of production costs for major American crops – like wheat, corn and soybeans.

The core inflation figures that help give direction to the Fed and other central bank policies exclude food and energy prices, but higher food and energy costs matter if they start showing up in broader goods and services prices. Chances are that rising energy costs are on their way to doing so (I am not even mentioning tariffs!)

A bigger problem is that we are no longer sure that bringing inflation back to 2% is the Fed’s main goal – or something it could achieve when the Treasury is out there trying to ease borrowing costs using other tools (yes, I am talking about the bond buybacks and the possibility of tapping into the TGA), hence keeping financial conditions too easy for the Fed to pull price pressures lower.

Hence, lower oil isn’t enough if it’s not backed by durable peace, and easing impact on refined product prices.

Alas, many hope that a softish PCE read and a positive reaction to Nvidia earnings could maintain optimism and let the sun shine over markets for a few more hours through the cloudy skies.

How’s Nvidia doing?

Of course, expectations are enormous – to say the least.

Q2 revenue is expected to have risen to nearly $92bn – that’s roughly +97% growth compared with the same period last year. Some Wall Street expectations see this number even higher, within the $93–95bn range, suggesting the effective “whisper bar” may be higher than published consensus – which could eventually play against a positive reaction to such a stellar quarter.

Remember, chipmakers’ stocks – especially Nvidia – have been performing extremely well since the start of the AI buzz – that was the beginning of 2023, when OpenAI suddenly stepped into our lives, and Nvidia became the mascot of the AI buzz thanks to its GPUs that are so widely adopted for AI training.

But then, the euphoria spread to CPU makers, and late last year to memory chipmakers.

Since then, AI demand has only grown faster for all of these companies’ chips. But that meant that Nvidia had to share its cake with competitors (like AMD and Qualcomm), but also with other chipmakers (CPU and memory chipmakers). Nvidia gained roughly 15% since the start of the year – rather dim compared with Micron’s nearly 240% gain or Intel’s 144% rally.

And this week, one of the reasons that kept the chip euphoria going – the significant rise in memory chip prices due to a prolonged supply shortage that led to massive profit gains for these very memory chipmakers – turned to bite Nvidia: reports suggest that customers have been notified that prices for servers containing Nvidia’s AI chips will rise by more than 15% in many cases due to soaring memory costs, especially the high-bandwidth memory (HBM) needed alongside Nvidia's GPUs. In fact, AI demand has created a severe memory supply squeeze, and systems based on Grace Blackwell and the upcoming Vera Rubin architecture are extremely memory-intensive.

Now, Nvidia has the margins and pricing power to pass these costs on to its customers, but for how long? Nvidia’s biggest customers, the Big Tech companies like Google, Meta and Amazon, are seeing their free cash flow squeezed by massive AI spending. Also, these same companies are building their own chips and could become increasingly inclined to replace Nvidia’s chips with their home-grown silicon as the latter hikes prices. Yesterday’s news suggested that OpenAI’s home-grown Jalapeno chip performed better than Nvidia’s in the current lineup. Rough.

One bright spot is that Nvidia has become relatively cheap compared with its own history and compared to Nasdaq 100; its trailing PE ratio is now in the low-30s, not far above the Nasdaq 100 average (circa 34x), because its massive net income growth has expanded fast enough to compress its PE ratio.

But investors are increasingly spooked by the circular deals, financing guarantees and extra risk that the company is taking onto its shoulders to keep the ball rolling. Some now call Nvidia ‘the central bank of AI’.

Hence, simply beating the $91bn guidance will not be enough. Any Q3 outlook below Wall Street’s roughly $104bn bar will likely leave investors focused on the growing macro-led pain instead – one that Nvidia cannot ease.