When NVIDIA's "imperfect" earnings report meets Wall Street's "perfectionist" scrutiny, what happens?

On Wednesday evening (August 27) Eastern Time, the "world's largest company by market cap" NVIDIA delivered impressive financial results. However, a mere $200 million "flaw" instantly struck the market's hypersensitive nerves. The stock plunged over 5% in after-hours trading and lost more than $180 billion in market capitalization over the following two trading days.

The culprit? NVIDIA's datacenter business revenue of $41.1 billion for Q2 fiscal 2026 fell slightly short of market expectations of $41.3 billion. As some investors put it, this $200 million shortfall was "like scoring 98 points when everyone expected you to score 100 - still disappointing despite the strong performance."

Wall Street's harsh judgment of NVIDIA's performance stems from its massive $4.3 trillion market capitalization, which has become deeply intertwined with the entire U.S. stock market and even the American economy's "new engine" - AI datacenter construction. Any signal that deviates from expectations can be infinitely magnified, triggering severe chain reactions.

By any objective standard, NVIDIA's earnings report was impressive. Quarterly revenue reached $46.743 billion, up 56% year-over-year and slightly above market expectations of $46.23 billion. The core datacenter business revenue hit a new record of $41.1 billion, growing 56% year-over-year. Adjusted earnings per share came in at $1.05, up 54% year-over-year, also exceeding expectations.

However, these numbers still failed to satisfy Wall Street's "perfectionism." The $41.1 billion datacenter business revenue, missing analysts' expectations of $41.3 billion, was immediately interpreted by the market as a signal that cloud computing customers are becoming more cautious about AI infrastructure spending.

Baird investment strategist Ross Mayfield bluntly stated that the market has become accustomed to NVIDIA's high growth and has developed irrational "perfect expectations" for the company. Any minor flaw could be magnified and trigger overreactions.

An investor named Harry, who has held NVIDIA stock since 2023, told reporters: "Since Trump took office, overall U.S. stock market volatility has intensified, and investors are easily swayed by emotions. NVIDIA's decline this time has little to do with valuation but rather represents market overreaction." He had sold all his NVIDIA shares in April but quickly regretted it and bought back in July. In his view, short-term volatility is unavoidable, but NVIDIA has built a strong moat with its computing cards. "Buying on dips" is his current investment strategy.

Another investor, Chleo, who lives in Seattle, bought NVIDIA when the stock was around $70 and has held it ever since. She explained that strong earnings coupled with stock price decline is mainly due to the market's excessively high expectations for NVIDIA. "It's like scoring 98 points when everyone expected 100. In revenue of over $40 billion, a $200 million difference is almost negligible." Despite stock volatility, she remains bullish on NVIDIA's long-term growth prospects and plans to "buy the dips in batches."

Despite stock fluctuations, analysts remain optimistic about NVIDIA. WedBush analyst Dan Ives stated in a research report: "This earnings report is very important for the entire tech industry and serves as a guide, showing that the AI revolution is entering a new round of growth. There's only one chip company in the world driving this AI revolution, and that's NVIDIA." He predicts the company could reach a $5 trillion market cap by early 2026. Multiple investment banks have also raised their price targets for NVIDIA.

American media have pointed out that NVIDIA's continued profitability is more important to the entire stock market than whether the Federal Reserve will cut interest rates at its next meeting. This is the deep reason why Wall Street has such high performance requirements for the company - the entire U.S. stock market increasingly depends on NVIDIA's "mood."

NVIDIA's market cap now approaches $4.3 trillion, accounting for 8% of the S&P 500's total market capitalization. According to data from independent investment research firm Leuthold Group, this proportion exceeds that of any company they've tracked over the past 35 years. In the tech-heavy Nasdaq 100 index, NVIDIA's market cap proportion reaches 14.43%, even surpassing Cisco during the peak of the internet bubble.

This unprecedented concentration has had enormous impact on the entire U.S. stock market. As passive funds like index funds and ETFs manage vast amounts of wealth, they "passively" continue buying NVIDIA based on market cap weighting. Morningstar data shows that the number of ETFs providing leveraged exposure to NVIDIA now equals the number of ETFs tracking the S&P 500 index, which has a total market cap of $52 trillion. Among them, the larger GraniteShares 2x Long NVIDIA Daily ETF has accumulated $4.56 billion in assets since its launch in December 2022. Massive funds tied to NVIDIA's stock price create a domino effect.

Apollo Global Management Chief Economist Torsten Slok noted that in the first half of this year, 35% of the S&P 500 index's market cap growth came from NVIDIA alone. According to SimCorp calculations based on the Axioma US Equity Factor Risk Model, if NVIDIA's stock price falls 25%, the S&P 500 could drop 4.4% as a result.

JPMorgan data shows retail investors currently account for about 18% of U.S. stock trading volume, nearly double that of a decade ago. Most of these funds flow into the stock market through index funds, with S&P 500 tracking funds being the most popular. Slok believes that buying S&P 500 index funds typically gives the impression of purchasing 500 different stocks, thus achieving diversified investment. However, the reality is that the S&P 500's increasing concentration has become a major problem.

As NVIDIA's market cap continues to break records, some Wall Street investors can't help but compare it to Cisco during the early internet bubble period. However, in terms of profitability, NVIDIA's performance far exceeds Cisco's at that time. Data shows Cisco's five-year average net profit margin from 1996 to 2000 was about 17.2%, while NVIDIA's five-year average net profit margin as of January 2025 reached 40.34%.

The stock market serves as the economy's "barometer." As stock index weights increasingly concentrate toward NVIDIA and other AI companies, the driving force of the American economy is undergoing a historic change: the "money-burning" frenzy triggered by AI datacenter construction is replacing traditional consumer consumption as the largest engine driving economic growth.

Renaissance Macro Research analysts estimate that since 2025, AI datacenter spending's contribution to U.S. GDP growth has exceeded consumer spending, marking a historic first. Some analyses even suggest that without the AI datacenter construction boom, GDP might have actually contracted against the backdrop of unclear macroeconomic conditions. Therefore, datacenter spending may have delayed the onset of economic recession.

This shows that the U.S. economy has become deeply tied to NVIDIA, as most AI-related spending flows to the company. NVIDIA CFO Colette Kress stated on August 28 that in the latest quarter, "large cloud service providers" accounted for approximately 50% of the company's datacenter revenue, while datacenter business represents 88% of NVIDIA's total revenue.

Alphabet, Microsoft, Meta, and Amazon have announced plans to collectively invest $400 billion in capital expenditures this year, with most going toward AI infrastructure construction. NVIDIA's Q2 fiscal 2026 revenue is highly dependent on two mysterious major customers. "Customer A" accounts for 23% of total revenue, while "Customer B" represents 16%, with their combined share reaching 39%. This proportion has risen significantly from 25% in the same period last year (14% and 11% respectively). NVIDIA expects total AI infrastructure spending to reach $3-4 trillion by the end of this decade.

Morningstar senior equity analyst Brian Colello stated that NVIDIA's GPUs and AI infrastructure remain in a supply-shortage situation. Unlike the internet bubble era, NVIDIA's current customers are some of the world's largest tech companies, which continue to spare no effort in expanding their infrastructure.

Although NVIDIA has a more solid profit foundation and stronger customer base compared to the internet bubble period, this highly concentrated revenue structure itself constitutes the market's greatest risk. When a company's fate becomes so closely intertwined with the entire market's pulse and even a nation's economic growth, no investor can ignore the cold winds it faces at such heights. NVIDIA's growth continues, but the "perfectionist" shackles it bears are becoming increasingly heavy.

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