Wall Street’s biggest AI darling is about to report earnings next week, and the results could show whether the mega-cap-fueled market rally is justified as investors deliberate over the path forward for interest rates. Also on the table are the minutes of the last Federal Reserve meeting in January. Nvidia will report results next Wednesday and expectations are high for the powerhouse’s shares which have already risen around 250% over the past 12 months. In the fourth quarter, Nvidia is expected to post 118% annual growth to $59.04 billion in sales, driven by demand for its artificial intelligence server chips. The stakes are high for the markets too. Nvidia, which overtook Alphabet in market capitalization this week, is now the third-largest public company in the U.S. and a major contributor to S&P 500 gains. The AI chipmaker is up more than 40% this year, while the broader index is up about 5%. NVDA 1Y mountain Nvidia But failure to exceed expectations will likely hurt Nvidia and the overall market. In November, the last time Nvidia posted quarterly results, the AI chipmaker fell 1% even after beating estimates for top-line and bottom line. “The bar is a little high at this point,” said Ayako Yoshioka, senior portfolio manager at Wealth Enhancement Group. “And, you know, the stock could pull back a little bit even if they meet and/or beat expectations. I think there could be some profit taking in the name in the short term.” In fact, as of Friday, implied options movement for Nvidia is about 10%, according to a CNBC analysis of FactSet data. Implied options movement refers to how much a stock’s price can change, up or down, following a major event such as an earnings announcement based on trading in the options market. “If we get an 11%, 15% drop on Nvidia, that could really impact, I think, the overall markets,” Yoshioka said. “Just because you’re losing, you know, a good horse in the game.” Wall Street ended a see-sawing week, with all three major averages falling. The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite each advanced five weeks. All attention on interest rates The minutes of the Federal Reserve meeting will also be released next Wednesday, an event that is likely to take on greater importance after reports on January consumer prices and producer prices this week showed that the central bank still has a long way to go to reach its 2% level. inflation target. At the last meeting, Fed Chair Jerome Powell said he would continue to look for “stronger data” on inflation and dismissed the possibility of a rate cut in March. Investors’ hopes that rate cuts may still come sooner or later will be dashed if the Fed meeting minutes show an aggressive stance on policy. CME’s FedWatch tool shows that markets are currently pricing in only about a 50% chance of a quarter percentage point cut in June, based on interest rate futures trading. But the current high interest rate environment has many investors worried about the stock market, particularly the borderline valuations of mega-cap technology stocks and the additional downside risk seen in interest rate-sensitive sectors like banks regional. Geopolitical risks, as well as volatility related to this year’s US elections, are also expected to limit the upside in stocks. On average, Wall Street market strategists predict the S&P 500 will end the year at 4,936, according to a CNBC poll. But the broader index has already surpassed that target, having recently topped 5,000, and has repeatedly hit new record highs less than seven weeks into the new year. Playing Both Sides Some expect this to mean now is the time to diversify into the other 493 S&P 500 stocks that have yet to reach the Magnificent Seven. The equal-weighted S&P 500 Index rose just 1.7% in 2024, lagging far behind the market-cap-weighted benchmark. More and more investors expect that now is the time to work both sides of a traditional stock-bond portfolio, especially as bond yields start to look more attractive. On Friday, the yield on the 10-year Treasury bond was hovering around 4.3%. US10Y 1Y mountain 10-year U.S. Treasuries Josh Emanuel, chief investment officer at Wilshire Associates in Santa Monica, California, is starting to underweight equity risk and increase his exposure to fixed income. He particularly favors investment grade companies and government bonds which he believes could offset the risk in his stock portfolio if some exogenous event hits the markets. “In this environment, where everyone is comfortable with risk, it’s usually the risk that no one sees coming that ends up being the real risk that affects the markets,” Emanuel said. “And in that environment where risk materializes, the duration or interest rate sensitivity on the bonds will pay off.” To illustrate the point, Emanuel noted that today a 10-year Treasury bond could gain 9% to 10% in capital appreciation if yields fell one percentage point. “We really support diversification in this type of environment,” he said. Wealth Enhancement Group’s Yoshioka agrees that bonds offer better relative value than stocks at this point, saying investors can “play both sides a little bit” and extend duration to lock in higher rates. But he noted that he would take any pullback in stocks – of around 5%-10% – as an opportunity to buy back. Ultimately, he expects the rate cuts to be a boon for small caps, which have underperformed this year. The Russell 2000 Index is up just 0.7% in 2024. At least among individual investors, optimism remains high. In the week ending Feb. 14, bullish sentiment fell to 42.2%, down from 49% the previous week, but still above the historical average of 37.5% for the 15th consecutive week, the survey found. on sentiment from the American Association of Individual Investors. But this could be a recipe for disappointment as concerns move through the markets. “Retail investors are largely crowd followers. They’re not really crowd leaders,” said Chris Chen, wealth strategist at Insight Financial Strategists. “Eventually, there will be a correction and then they will run away from stocks.” “When it comes to stocks, it is advantageous for individual investors to be long-term investors rather than traders,” Chen added. Elsewhere, investors are expected to get profits from some of the major leading companies next week. Both Walmart and Home Depot will release results on Tuesday. Markets are closed Monday to celebrate the Presidents Day holiday. Next week’s calendar All times ET. Monday, February 19, 2024 President’s Day Tuesday, February 20, 2024 10:00 AM Leading Indicators (January) Earnings: Public Storage, Palo Alto Networks, Diamondback Energy, Caesars Entertainment, Walmart, Home Depot Wednesday, February 21, 2024 2:00 PM FOMC Minutes Earnings: Nvidia , Marathon Oil, Etsy, Analog Devices, Exelon Thursday, February 22, 2024 8:30 AM Chicago Fed National Activity Index (January) 8:30 AM Continuing Claims for Unemployment Benefits (02/10) 8:30 AM Initial Claims (02/ 17) 9:45 AM Preliminary Composite PMI (February) 9:45 AM Preliminary S&P Manufacturing PMI (February) 9:45 AM Preliminary S&P Services PMI (February) 10:00 AM Existing Home Sales (January) Earnings: Holdings in Reservations, Live Nation Entertainment , Intuit , Edison International , Dominion Energy , Moderna , PG&E , Keurig Dr. Pepper Friday, February 23, 2024 Earnings: Warner Bros. Discovery – CNBC’s Nick Wells and Kif Leswing contributed to this report.