Nvidia's Rocket-Like Rally: Catalyst or Risk for the S&P 500?

The impressive surge of Nvidia, a key player in the field of artificial intelligence, continues to provide a significant upward momentum to the S&P 500 Index, fueling concerns that the broader market structure could falter if the chip giant's fortunes take a negative turn. This year, Nvidia saw a spectacular increase of 140% in its stock price. This rally contributed about a quarter to the S&P 500's 17% rise. A striking example of Nvidia's influence was visible on Wednesday when the company's 8.2% upward movement helped the S&P 500 achieve its largest intraday gain in nearly two years. Nvidia's strong performance was driven by CEO Jensen Huang's announcement of robust demand for the company's chips. These positive updates boosted the market capitalization by over $200 billion and accounted for 44% of the S&P 500's daily increase. "Nvidia's rally has propelled the entire market," noted Chris Murphy, co-head of Derivatives Strategy at Susquehanna Financial Group. The S&P 500's performance this year showed minimal progress on days when Nvidia lagged. The index managed to advance on only 13% of the days when Nvidia's stock declined. In comparison, there were 13 such days with gains over one percent in 2020. Many investors are concerned about the extent of the influence a few stocks have on market direction. Microsoft, Apple, and Nvidia hold a combined weighting of almost 20% in the S&P 500, with the first two having gained far less than Nvidia this year. Despite hopes for a broader market rally, analysts suggest that even minor corrections in these tech giants could significantly impact the overall market. "If Nvidia shows weakness due to declining demand for their products, it will weigh on the entire market," said Murphy of Susquehanna. Options on Nvidia are also being closely watched, as they have recently triggered strong movements. The stock has recently accounted for about 22% of the total volume of single-stock options traded daily, making it the most traded stock in the options market, according to Trade Alert data. Purchases of call options are driving the price further up, as market participants selling these options are forced to buy and deliver Nvidia shares at the agreed price, causing additional price gains. Nvidia is not the first stock with such strong market weight. Tesla exhibited similar patterns a few years ago when the options market amplified the electric vehicle manufacturer's fluctuations. However, according to Nomura strategist Charlie McElligott, the interest in AI stocks surpasses what was previously observed with EV stocks. "The AI mania, representing a paradigm shift for the corporate landscape, makes the topic significantly broader in scope," said McElligott. "Tesla never came close to this.