NEW YORK (Reuters) — Nvidia’s extraordinary stock performance continues to exert significant influence over the S&P 500 index, amplifying concerns that any downturn in the tech giant’s fortunes could negatively impact broader markets.
The semiconductor company’s shares have surged 140% this year, contributing roughly a quarter of the S&P 500’s 17% gain. Nvidia’s dominance was particularly evident on Wednesday, when its 8.2% stock rally propelled the S&P 500 to its largest intraday gain in almost two years. The index, which had initially dropped 1.6%, ended the day up 1.1%.
The stock’s ascent followed Nvidia CEO Jensen Huang’s announcement of robust demand for its chips, which led to a market value increase of over $200 billion. According to Nomura data, Nvidia’s surge accounted for 44% of the S&P 500’s rise that day.
“The surge in Nvidia’s stock set the entire market in motion,” remarked Chris Murphy, co-head of derivative strategy at Susquehanna Financial Group.
The S&P 500 has faced challenges in gaining traction this year during periods when Nvidia’s stock has faltered, achieving gains only 13% of the time when the chipmaker’s shares ended lower, a Reuters analysis revealed.
The index has not managed to rise more than 1% on days when Nvidia’s stock closed lower. This contrasts with 2020, where there were 13 such instances.
The current scenario has reignited concerns among investors about a small group of stocks steering market movements. Microsoft, Apple, and Nvidia collectively represent nearly 20% of the S&P 500’s weight, though the latter has experienced significantly larger gains this year compared to the first two.
Despite recent strength in non-tech sectors, which has sparked hopes for a more widespread market rally, a sustained decline in any of the major tech stocks could severely impact broader markets, analysts warn.
“If Nvidia experiences a downturn due to reduced demand for its products, it could drag down the entire market,” cautioned Murphy.
Options Activity
Market participants are closely monitoring Nvidia’s options market, which has significantly influenced recent stock movements. Nvidia now represents about 22% of daily individual stock option volume, up from approximately 5% at the beginning of the year, making it the most actively traded stock in the options market on most days, according to Trade Alert data.
Nvidia’s stock gains are further intensified when traders flock to buy call options. A surge in demand for these options compels market makers, who sell the contracts, to acquire and deliver additional Nvidia shares at the predetermined price, creating a “short gamma” position.
This risk-mitigation buying can drive the stock price even higher.
“The market shows a strong inclination to buy upside calls when conditions are favorable,” said Chris Weston, head of research at online brokerage Pepperstone. “When it’s active, these flows can significantly impact stock prices.”
Nvidia is not the first stock to exert such powerful influence over market movements. Tesla, another favorite among retail investors, exhibited similar characteristics a few years ago when its stock volatility was amplified by options trading, noted Nomura strategist Charlie McElligott.
However, the current enthusiasm for AI appears to surpass the previous interest in electric vehicles.
“The excitement surrounding AI represents a substantial paradigm shift across the corporate sector, far exceeding the impact seen with Tesla,” McElligott said. “AI is a different league altogether.”
