Nvidia's Earnings Volatility and the Growing Skepticism in AI Valuations

The AI sector's meteoric rise has been fueled by unprecedented demand for computing power, with Nvidia (NVDA) at the forefront. However, as the company prepares to report Q3 2026 earnings, the narrative is shifting from unbridled optimism to cautious scrutiny. While Wall Street projects a 56.3% year-over-year revenue jump to $54.83 billion and a 54.3% EPS increase to $1.25, the exit of high-profile investors like Michael Burry and Peter Thiel has cast a shadow over the sustainability of AI-driven megacap momentum. This article examines the interplay of Nvidia's earnings volatility, macroeconomic risks, and regulatory pressures to assess whether the AI sector's valuation euphoria can withstand a tightening risk environment.

Earnings Momentum and Analyst Optimism

Nvidia's dominance in AI chip deployment remains unchallenged, with $500 billion in commitments for its Blackwell and Rubin processors from 2025 to 2026-10-15% above analyst estimates. This surge is driven by surging demand for AI inference and reasoning applications, supported by increased production of GB300 chips. Analysts remain overwhelmingly bullish, with 37 out of 39 covering firms recommending a "Buy" and an average price target of $233.76. Bank of America's Vivek Arya, for instance, maintains a "Buy" rating with a $275 price target, citing attractive valuations at 27 times 2026 earnings forecasts.

Yet, this optimism is not without caveats. Competitive pressures are intensifying, as OpenAI diversifies its supplier base to include Broadcom and AMD, while Google's custom TPUs gain traction. These developments threaten Nvidia's pricing leverage and long-term dominance, particularly as rivals close the technological gap.

Investor Skepticism and Structural Risks

The exit of Burry and Thiel-two of the most prominent skeptics in the market-has amplified concerns about AI valuations. Burry's $1.2 billion short position and Thiel's complete liquidation of 537,742 shares signal a growing belief that AI infrastructure spending may not translate into proportional revenue realization. This skepticism is compounded by structural risks, including Nvidia's reliance on TSMC for chip manufacturing in Taiwan, a region vulnerable to geopolitical disruptions. Analysts warn that any supply chain shock or regulatory shift could destabilize both Nvidia's operations and the broader AI ecosystem.

Moreover, the AI sector's valuation multiples are straining against historical norms. The Magnificent 7 (including Nvidia) traded at a 30x forward P/E and 10x P/S ratio in Q3 2025-40% higher than the dot-com peak. By comparison, C3.ai, a pure-play AI software firm, has seen its shares plummet 55% this year amid a 19% revenue decline and a $116.8 million net loss according to reports. Such divergences highlight the fragility of AI valuations in a high-interest-rate environment, where capital-intensive firms face elevated borrowing costs and operational risks according to analysis.

Macroeconomic and Regulatory Headwinds

The sustainability of AI megacap momentum hinges on macroeconomic and regulatory dynamics. Interest rate trends in 2025 remain a critical wildcard. Citigroup's Q3 2025 adjusted EPS of $2.24, which exceeded forecasts despite a 14.14 P/E ratio and beta of 1.37, underscores the sensitivity of capital-intensive sectors to borrowing costs. For AI firms like Nvidia, which require massive R&D and manufacturing investments, rising rates could erode profit margins and delay infrastructure ROI.

Regulatory scrutiny is another looming threat. As AI applications expand into government and industrial sectors, compliance with evolving data governance frameworks will become paramount. The potential for antitrust actions or export controls-particularly in advanced chip manufacturing-could further constrain Nvidia's growth trajectory.

Conclusion: A Tenuous Balance

Nvidia's earnings growth and market leadership are undeniable, but the AI sector's valuation euphoria is increasingly at odds with macroeconomic and competitive realities. While the company's Blackwell and Rubin orders validate its technological edge, the exit of key investors and regulatory headwinds suggest a recalibration is inevitable. For the Magnificent 7 to sustain their momentum, they must demonstrate that AI-driven revenue growth can outpace rising costs and competitive erosion. Until then, investors would be wise to approach AI valuations with a healthy dose of skepticism.