If Nvidia stumbles, how far will the stock market fall?

By William Watts

'Overall damage has been light' as the AI kingpin has pulled back from an all-time high

Nvidia Corp. shares stalled at high altitude this week, leaving investors to ponder whether the S&P 500 and Nasdaq Composite are poised for a major setback if the ringleader of an increasingly concentrated cohort of market winners sees a sustained stumble.

"Mathematically, given that it's the largest stock in the U.S. market, if it goes down, the market kind of has to go down," said Melissa Brown, managing director of applied research at SimCorp, in a phone interview.

"It's hard to imagine you get a big downturn in one stock while everything else is looking great," she added.

But there's no guarantee that a slide for Nvidia (NVDA) would spell big-time pain for the broader indexes, particularly if it's met by rotation into left-behind sectors - a phenomenon that would be enhanced if those areas of the market begin to play catch-up when it comes to earnings, Brown said.

Nvidia shares have soared since the spring of last year, as its revenues and profits exploded as a result of the popularity of its artificial-intelligence-enabling semiconductors. Shares have rallied 155% so far in 2024 alone, accounting for a 4% pullback this week that was triggered shortly after Nvidia briefly surpassed Microsoft Corp. (MSFT) to become the world's most valuable company.

Along the way, Nvidia and a small cohort of other AI winners have been increasingly responsible for gains by the large-cap benchmark S&P 500 SPX and the tech-oriented Nasdaq Composite COMP, which have rallied more than 14% and nearly 18%, respectively, in 2024.

Ross Yarrow, managing director of U.S. equities at Baird, noted that Nvidia alone, as of Wednesday, had accounted for 5.28 percentage points of the S&P 500's year-to-date gains - the largest share of any company in any year going back to 2020.

As of the end of May, the top 10 stocks in the S&P 500 accounted for 34% of its market weight, according to S&P Dow Jones Indices, the most in at least three decades (see chart below).

But investor jitters ahead of Nvidia's setback had less to do with concentration than the observation that few stocks were rising at all. Brown noted that SimCorp's data showed that in the last few weeks, stocks in the S&P 500 that outperformed the index on a five-day rolling basis stood at just 30% - meaning that 70% of S&P 500 stocks were doing worse than the index at large.

Nvidia's Thursday stumble saw quite the intraday turnabout for the stock, which gained 3.8% at its high before turning south to end the day down by around 3.5% - marking a $246 billion swing in market cap. The S&P 500 ended the day down just 0.3%, while the Nasdaq lost 0.8%. Nvidia slid another 3.2% on Friday, while the S&P 500 shed just 0.1% and the Nasdaq fell 0.2%. Like Nvidia, the S&P 500 remained positive on the week, while the Nasdaq ended flat.

Though Nvidia suffered, other AI beneficiaries held their own. Amazon.com Inc. (AMZN) shares rose 1.6% Friday, helping lift the S&P 500's consumer-discretionary sector up 1%. Alphabet Inc. (GOOGL) (GOOG) shares rose 1.9%, while Microsoft advanced 0.9%.

While the degree to which the technology sector has outperformed all other parts of the U.S. stock market has become more pronounced, it doesn't necessarily mean there's an inevitable need for a big selloff in the broader market, said Mark Newton, head of technical strategy at Fundstrat Advisors, in a Thursday evening note.

"In recent days, U.S. equities have shown some improvement in financials, healthcare, industrials and energy, which could lead to a short-term bounce in the equal-weighted S&P [500] following some severe underperformance since March" compared to the market-cap-weighted index, he wrote.

The equal-weighted measure of the S&P 500 XX:SP500EW, as its name implies, weights all of the index's components equally. The S&P 500 itself weights companies by market cap - meaning the bigger the company, the more its price moves contribute to the performance of the overall index.

The equal-weighted index rose 0.1% Friday and managed a weekly gain of 1% as other sectors perked up. For the year to date, it's up just 4.4% versus the S&P 500's 14.6% advance.

So how far could Nvidia fall?

The stock's turnabout Thursday marked what technical analysts call an outside reversal or bearish engulfing pattern on the daily charts.

"The day opens higher as FOMO (fear of missing out) creates panic buying, pushing prices above the previous day's high," Kevin Dempter of Renaissance Macro Research explained in a Friday note. "But as bids fade, enthusiasm turns to pessimism as prices fall below the previous day's low, leaving any buyers over the last two days underwater."

Such days are particularly significant after a big run and can take investors on an emotional rollercoaster, he said. They don't have to look back too far to find a recent example: An outside reversal on March 8 led to a brief 20% correction for Nvidia that marked the stock's top for almost three months.

"Given the sentiment extremes and the outside reversal, we suspect there will be further profit-taking in NVDA. A similar 20% correction would put NVDA just back to where it traded at the beginning of the month at around $110," Dempter noted.

For now, bulls can take solace in the limited damage to the broader market.

"It's difficult for the S&P [500] or Nasdaq to be in the green if Nvidia is down 3.5%. It's likely underweighted buyers will fill in and see it as a buying opportunity down 11.7% from the high," said Louis Navellier, founder of Navellier & Associates, in a Friday note.

"The overall damage has been light, and the Dow DJIA is up," he added. "If you believe in the AI narrative, Nvidia remains the safe bet for generating profits from the AI build-out in the short term."

-William Watts

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06-22-24 0630ET

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