Nvidia beware - the top spot in S&P 500 valuations is often a slippery slope

By Louis Goss

Nvidia, for a single day in June 2024, surpassed Microsoft to become the company with the largest market capitalization on the S&P 500 index, but looking at the companies that have previously held the same position, that might not be a good thing.

In recent decades, almost all of the firms that have become the most valuable companies listed on the S&P 500 have hit an inflection point which marked the start of sharp declines in their market capitalizations, analysts at JPMorgan Asset Management said.

Led by Michael Cembalest, their analysts noted market leaders of recent decades including General Motors (GM), International Business Machines Corp (IBM), Altria Group (MO), Cisco Systems (CSCO), General Electric (GE), and Exxon Mobil (XOM) all experienced this same fate.

Microsoft (MSFT) and Apple (AAPL) are the only market leaders so far that seem to have avoided the same declines after achieving the status of most valuable S&P 500 listed company, JP Morgan's analysts said in a note.

Nvidia (NVDA) itself has achieved a spectacular rise that has seen it take the fastest road to become the S&P 500's largest stock of any company in the post-war era. This surge has been driven by huge excitement around artificial intelligence technologies following the launch of ChatGPT in late 2022.

For investors, the question is now whether Nvidia will follow the same path taken by companies that have previously taken the top spot or whether the Silicon Valley chipmaker will instead be able to sustain its upwards trajectory.

JPMorgan's analysts said this question will likely be answered over the next 12 to 18 months, when it becomes clear whether investments in AI are able to generate adequate returns from corporate customers adopting AI driven 'inference models.'

"Within the next two years, corporate AI adoption trends... need to move higher (i.e., a lot more inference activity) to avoid a 'metaverse' outcome for all the capital deployed," JPMorgan's analysts said. "There needs to be several hundred billion dollars a year of AI-related demand from the corporate sector to pay for AI infrastructure."

The analysts noted that current levels of spending on AI infrastructure now match the levels of investment in technology seen during the 'mainframe era' of the 1960s - which saw the buildout of huge room-sized computers - and during the deployment of fiber optics infrastructure in the 1990s.

Yet in contrast to 'dot com bubble' companies like Cisco, Nvidia is actually posting sharp increases in its sales and earnings which align with the increases in the chipmaker's share price. Technology company Cisco, which sells hardware, software and networking products and services surpassed Microsoft to take the top spot on the S&P 500 in March 2000, while failing to generate sufficient earnings to justify its surging stock price.

Still, Nvidia could see its valuation suffer in future as a result of mounting geopolitical tensions and increased levels of competition from rivals also able to create high tech microchips. Nvidia currently controls 90% of the market for the most-advanced AI chips.

Taiwan Semiconductor Manufacturing Co (TW:2330) (TSM), as the sole supplier of advanced chips to Nvidia, could play a vital part in the Silicon Valley company's decline, if markets start to price in risks related to worsening relations between China and the U.S., JPMorgan's analysts said.

At the same time, competitors including Intel (INTC), AMD (AMD) and ARM Holdings (ARM) are all working to develop advanced chips that could see them edge into the market that is currently dominated by Nvidia, the analysts said.

-Louis Goss

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09-04-24 0540ET

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