The U.S. stock market's reliance on NVIDIA is not as significant as imagined!
Deutsche Bank believes that although technology stocks are still the main driving force behind the market's rise, the impact of the rise and fall of a single super weight on the overall stock market is limited. The correlation between the performance of the US stock market and NVIDIA's trend has shown a weakening trend so far this year
How important is "the most important stock on Earth" NVIDIA?
In the first half of this year, the S&P 500 index rose by 14%, marking one of the strongest semi-annual performances since the millennium internet bubble. Nearly 60% of the gains in the U.S. stock market were contributed by just five tech giants - NVIDIA, Microsoft, Amazon, Meta, and Apple, with NVIDIA alone contributing a staggering 31% increase.
NVIDIA, known for selling shovels (GPUs), has made a fortune, but the downstream AI application layer has not yet found a clear and reliable path to profitability. This has raised concerns about whether NVIDIA can sustain its upward momentum in the future.
The following image accurately reflects the views of some market participants: Weak AI demand (two ants) supporting NVIDIA's record-high performance, along with the global stock market represented by the elephant. Especially with the recent decline in NVIDIA's stock price over the past few weeks, concerns about NVIDIA dragging down the overall U.S. stock market have been growing stronger.
However, analysts at Deutsche Bank, including Luke Templeman, stated in a report released this month that the U.S. stock market's dependence on NVIDIA is not as high as perceived. While the tech sector as a whole continues to be a major driver of the market's rise, the overall market shows strong resilience, and the performance of a single company is not as crucial as imagined.
The bank pointed out that in June, despite negative factors such as executive selling pressure, NVIDIA's stock fell by about 13%, but the S&P 500 index still rose by 3.5% during the same period. This demonstrates that the correlation between NVIDIA's performance and the overall market is weakening.
As shown in the chart below, the correlation between the performance of the U.S. stock market and NVIDIA's trend is continuously decreasing, especially in June, where this correlation saw a sharp decline.
Furthermore, analysts found that even the most volatile stocks in the S&P 500 are far more stable than the most volatile stocks in the Nasdaq 100. Therefore, the impact of the rise and fall of a single super-weighted stock on the overall stock market is limited.
Deutsche Bank also pointed out that while the S&P 500 index performed well among global benchmark indices in June, the differences in returns between equal-weighted and market-cap-weighted versions ranked first among major stock indices globally.
Analysts believe that large-cap stocks in the U.S. may continue to drive index performance, while small-cap stocks are influenced by negative sentiment and technical factors. If the large-cap stocks decline, small-cap stocks are usually more severely impacted, whereas if the large-cap stocks rise, their performance tends to be more outstanding
From the industry performance perspective, US technology stocks still lead by a wide margin in terms of corporate profitability and return on investment growth compared to other industries. As shown in the chart below, the growth expectations for the IT and communication sectors (both dominated by technology stocks) are ahead of the vast majority of industries.
Therefore, analysts believe that despite concerns about a technology bubble, US technology stocks may be in a favorable position in the medium term compared to most other industries