This week, Nvidia Corp. shares stopped rising at a very high level, which made investors wonder if the S&P 500 and Nasdaq Composite are about to take a big hit if the leader of a group of market winners continues to stumble.
I talked on the phone with Melissa Brown, managing director of applied research at SimCorp. “Because it’s the biggest stock in the U.S. market, if it goes down, the market kind of has to go down,” she said.
“It’s hard to imagine that one stock would go down a lot while everything else looks good,” she said.
There’s no guarantee that a drop for Nvidia NVDA, -3.22% would be very bad for the broader indexes. This is especially true if it leads to rotation into left-behind sectors, which would happen more if those parts of the market start to earn up, Brown said.
Since the spring of last year, Nvidia shares have gone through the roof as the company’s sales and profits went through the roof thanks to the huge demand for its semiconductors that make AI possible. Shares have gone up 155% so far in 2024, which includes this week’s 4% drop that happened soon after Nvidia briefly passed Microsoft Corp. MSFT, +0.92% to become the most valuable company in the world.
Along the way, Nvidia and a small group of other AI winners have been more and more responsible for the gains seen by the S&P 500 SPX and the tech-focused Nasdaq Composite COMP, which have gone up more than 14% and nearly 18%, respectively, in 2024.
Ross Yarrow, managing director of U.S. equities at Baird, said that as of Wednesday, Nvidia had been responsible for 5.28 percentage points of the S&P 500’s year-to-date gains. This was the most of any company in any year since 2020.
According to S&P Dow Jones Indices, the top 10 stocks in the S&P 500 made up 34% of its market weight by the end of May. This was the highest share of the top 10 stocks in at least 30 years (see chart below).
Investors were nervous before Nvidia’s loss, but it wasn’t because of concentration. It was because they saw that not many stocks were going up at all. Brown said that SimCorp’s data showed that over the last few weeks, only 30% of S&P 500 stocks had done better than the index on a five-day rolling basis. This meant that 70% of S&P 500 stocks were doing worse than the index as a whole.
In a note, Tom Essaye, founder of Sevens Report Research, said that the poor performance may be due to worries about signs that the economy is slowing down. It could mean the end of the “immaculate disinflation” story, which was based on the idea that inflation could start falling again toward the Federal Reserve’s 2% target without causing unemployment to rise sharply and the economy to fall into a deep recession.
He wrote, “Here’s the point: If inflation falls because growth is slowing, that’s not an automatic positive for stocks anymore.” He used the example of stocks that aren’t related to AI that did poorly after the May consumer price index reading was lower than expected and expectations rose for at least two Fed rate cuts this year.
An interesting thing happened with Nvidia’s stock on Thursday: it went from rising 3.8% at its high point to falling about 3.5% by the end of the day, a $246 billion change in market value. The S&P 500 was down 0.3% at the end of the day, while the Nasdaq was down 0.8%. On Friday, Nvidia fell 3.2% more, while the S&P 500 fell only 0.1% and the Nasdaq fell 0.2%. The S&P 500 and Nvidia both ended the week with gains, but the Nasdaq ended the week with no change.
Even though Nvidia lost, other companies that use AI did well. Shares of Amazon.com Inc. AMZN, +1.60% went up 1.6% on Friday, which helped the consumer discretionary sector of the S&P 500 go up 1%. Alphabet Inc. GOOGL, +1.89% GOOG, +1.43% stock went up 1.9%, and Microsoft stock went up 0.9%.
In a note released Thursday evening, Mark Newton, head of technical strategy at Fundstrat Advisors, said that just because the technology sector has done better than every other part of the U.S. stock market doesn’t mean that the market as a whole needs to go on a big selling spree.
He wrote that U.S. stocks have been doing better lately in financials, healthcare, industrials, and energy. This could cause the equal-weighted S&P [500] to bounce back quickly after falling far behind the market-cap-weighted index since March.
As its name suggests, the equal-weighted measure of the S&P 500 XX:SP500EW gives each part of the index the same amount of weight. The S&P 500 ranks companies by market capitalization, which means that the bigger the company, the more its price changes affect how the index does as a whole.
The equal-weighted index went up 0.1% on Friday and 1% for the week as other markets got better. It’s only up 4.4% so far this year, while the S&P 500 has gone up 14.6%.
How much could Nvidia fall?
Analysts use the stock’s change on Thursday to describe an outside reversal or bearish engulfing pattern on the daily charts.
Kevin Dempter of Renaissance Macro Research wrote in a Friday note, “The day starts higher as FOMO (fear of missing out) leads to panic buying, which drives prices above the previous day’s high.” As prices drop below the previous day’s low, however, buyers who were excited about the sale lose their money. This has been going on for two days.
He said that these kinds of days are especially important after a big run and can make investors feel all kinds of different things. They only have to go back a few years to find a simple example: When the market turned around from the outside on March 8, Nvidia stock went down 20% for a short time. This was the stock’s highest level in almost three months.
“Given the extremes in sentiment and the change in the outside, we think there will be more profit-taking in NVDA.” “NVDA would be back to where it was at the beginning of the month, around $110, after a similar 20% drop,” Dempter said.
For now, bulls can take comfort in the fact that the market as a whole hasn’t been hurt too badly.
When Nvidia is down 3.5%, it’s hard for the S&P 500 or the Nasdaq to be up. “Underweighted buyers will likely step in and see it as a chance to buy now that the price is 11.7% below its high,” Louis Navellier, founder of Navellier & Associates, said in a note on Friday.
In general, he said, “the damage has been light, and the Dow DJIA is up.” “If you believe the AI story, Nvidia is still the best bet for making money in the short term from the AI build-out.”
