As the market euphoria from Fed rate cut expectations gradually subsides, investors are refocusing their attention on U.S. corporate earnings prospects. Currently, the market is pinning its hopes on NVIDIA's Q2 earnings report scheduled for Wednesday, anticipating that the AI chip giant will deliver robust performance to restore confidence in the technology sector.

Morgan Stanley analysts Joseph Moore and Shane Brett warned in their latest research report that the upcoming earnings guidance may be more conservative than market expectations due to significant uncertainties surrounding sales prospects in the Chinese market.

Market optimism regarding NVIDIA's performance has notably intensified, with some analysts expecting Q3 revenue to reach $55 billion. However, Morgan Stanley points out that achieving the upper end of this optimistic range would require "billions of dollars" in sales from China as support.

The report indicates that with recent escalating concerns over AI chip trade restrictions between the U.S. and China, NVIDIA's management may adopt a more cautious approach toward the Chinese market segment when formulating business guidance.

Nevertheless, Morgan Stanley emphasized that this is primarily to manage short-term expectations, as they remain "very optimistic" about NVIDIA's growth prospects over the next 12 months.

**China Business Becomes Key Variable, Potentially Lowering Performance Guidance Threshold**

In recent communications with investors, Morgan Stanley observed a clear shift in market sentiment.

Previous concerns that troubled investors—including competition from DeepSeek, potential delays in the Blackwell architecture, rack-level challenges, and some clients' slowing data center construction—have largely dissipated, replaced by widespread optimism.

This optimistic sentiment is directly reflected in revenue expectations. Morgan Stanley's Q3 revenue forecast for NVIDIA stands at $52.5 billion, but the firm acknowledges that based on investor feedback, there are more optimistic voices in the market, with some sell-side institutions projecting figures as high as $55 billion.

The report states that how management assesses opportunities in the Chinese market is "a huge variable" affecting the final guidance outcome. Currently, while some licenses have been approved, future approval prospects remain unclear. Recent concentrated media coverage has further amplified these concerns.

The report cites Reuters reporting that NVIDIA has asked suppliers to slow down production of related products, to which NVIDIA responded that "we continuously manage our supply chain to respond to market conditions"—wording that is ambiguous but does not deny the reports.

Based on this series of uncertainties, Morgan Stanley judges that NVIDIA's management will adopt a conservative strategy regarding the China business portion when providing earnings guidance, which would actually "lower the expectation threshold to some extent."

**Short-term Conservatism Doesn't Change Long-term Optimism**

Despite expecting NVIDIA's short-term guidance may appear conservative due to China factors, Morgan Stanley emphasizes this hasn't shaken their confidence in the company's long-term fundamentals.

The report stresses that the firm remains very optimistic about NVIDIA's prospects over the next 12 months and possesses very strong anecdotal evidence.

Morgan Stanley believes investors need to understand factors that may influence short-term guidance, but this should not be conflated with the company's long-term growth potential. From a longer-term perspective, both the U.S. and China have incentives to ensure that U.S. chip access issues are "ultimately resolved."

The report states that concerns about China business actually "clarify expectations for prospects," and a more cautious earnings guidance starting point might instead leave room for subsequent stock performance.

Morgan Stanley concludes that even though market expectations are already high, given the strong growth momentum over the next 12 months, they remain bullish on NVIDIA's stock performance at current levels.