Nvidia Goes Rogue: Chipmaker Breaks Ranks with S&P 500
Shares of Nvidia Corporation (NVDA) are increasingly marching to the beat of their own drum, diverging significantly from the performance of the average stock in the S&P 500 index. This trend has analysts pondering whether the chip designer is transforming into its own distinct asset class.
An analysis by MarketWatch of data from FactSet revealed a startlingly low correlation between Nvidia’s stock price and the Invesco S&P 500 Equal Weight ETF (RSP).
Megacap Dominance Reshaping the Market
“That tells you all you need to know about Nvidia,” remarked Nicholas Colas, co-founder of DataTrek Research. “It is becoming its own asset class,” he told MarketWatch. The RSP ETF tracks the S&P 500, but with all its holdings given equal weight, providing a clearer picture of how the average stock in the index is performing.
While Nvidia’s correlation with the market-capitalisation weighted S&P 500 remains near its 10-year average, this doesn’t diminish the significance of the weakening relationship with the equal-weighted version. According to Colas, this widening gap highlights a crucial aspect of the modern market: “Market leadership is a small club. Either you’re a member, and life is good, or you are on the outside looking in.”
Noah Hamman, CEO of AdvisorShares, echoed this sentiment. He pointed to the relentless rally in megacap stocks like Nvidia, Apple (AAPL), and Microsoft (MSFT) as a force amplifying the market’s division between winners and losers. “You really do have this disparity between haves and have nots that we haven’t seen in a while,” Hamman said to MarketWatch.
The outsized influence of megacap companies on the S&P 500 is evident in the shrinking ratio between the equal-weighted and capitalisation-weighted versions of the index. This ratio has contracted to its lowest level since November 2008, signifying the dominance of larger stocks.
Tech Disruption and Weakening Correlations
Furthermore, Nvidia’s weakening correlation isn’t an isolated phenomenon. The growing dominance of tech stocks is disrupting traditional correlations between tech and other sectors, such as consumer discretionary and financials. The correlation between the Technology Select Sector SPDR Fund (XLK) and the Consumer Discretionary Select Sector SPDR Fund (XLY) dipped to a multi-year low of 0.61 in June. A similar trend is observed between XLK and the Financial Select Sector SPDR ETF (XLF).
There’s a clear explanation for this. A team of strategists at John Hancock Investment Management found that just 10 companies, including Nvidia, Apple, and Microsoft, were responsible for the entirety of the S&P 500’s gains during the second quarter, effectively offsetting losses in the remaining 490 companies.
Diversification Risks
Understanding the correlation between various holdings within a portfolio is crucial for gauging its true diversification. The S&P 500’s heavy reliance on megacap stocks exposes investors in index-tracking funds to risks specific to those companies, undermining the core benefit of diversification.
While Nvidia isn’t the absolute leader in terms of percentage gains year-to-date, it remains a significant contributor to the S&P 500’s growth due to its massive size. As of Tuesday’s close, it ranked as the third-largest U.S. company by market capitalisation.
The third quarter seems to be picking up where the second left off, with the technology sector continuing to spearhead the market rally. The Nasdaq Composite closed at a record high on Tuesday, and both the S&P 500 and the Dow Jones Industrial Average also finished in record territory.
