NVIDIA’s Super-Sized Importance
With additional content provided by Brian Booe, Associate Analyst, Research.
Semiconductors, artificial intelligence, NVIDIA (NVDA) — it’s no secret these items have been a focal point for investors for quite a while now. But despite NVDA initially joining the S&P 500 in November 2001, the chipmaker only recently became a proverbial “household name.” In fact, it’s nearly impossible to imagine today’s market without NVDA, or the broader semiconductor and artificial intelligence (AI) theme for that matter. With the chipmaking giant set to report earnings after today’s close, we examine the astonishing importance of NVDA.
Capital markets have only temporarily turned their focus away from the AI theme in 2024 despite the start of the latest Federal Reserve (Fed) easing cycle, a U.S. presidential election, and continued resilience in economic data. This unwavering focus on AI resulted in the meteoric rise of NVDA, propelling the stock to become one of the largest companies in the S&P 500, currently in a dead heat for the top spot with fellow Magnificent Seven member Apple (AAPL). Using the Bloomberg 500 (B500) Index, made up of the largest U.S. companies as a proxy for the S&P 500, NVDA commands a 6.9% weight in the index. This is over 4.4% more than the fifth largest company, Meta (META), and just over 5.5% more than the 10thlargest company, JPMorgan Chase (JPM).
NVDA Weight in Bloomberg 500 Index Over Time
Source: LPL Research, Bloomberg 11/20/24
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. Any companies referenced are being presented as a proxy, not as a recommendation. and not an indication of trading intent or a solicitation of their products or services. The Bloomberg 500 index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
Super-sized Importance
As a result of a hearty index weighting and continued outperformance, NVDA has contributed over 23.5% to the B500’s +24% year-to-date return. For reference, NVDA’s contribution to year-to-date gains is more than the next five strongest stocks combined – Apple (AAPL), Amazon (AMZN), Meta (META), Microsoft (MSFT), and Tesla (TSLA). From a different perspective, on average, NVDA moves the largest amount of money for a single stock in the world each day (in U.S. dollars), dwarfing every other name in both U.S. and international markets. Furthermore, the company’s earnings report has essentially reached the same level of importance as a major macroeconomic data release. Based on the forward implied volatility of the S&P 500, NVDA’s earnings report is priced as the largest event for markets from mid-November to mid-December, with a higher forward implied volatility percentage than both the November payrolls report on December 6, and the November Consumer Price Index (CPI) report on December 8. This implies the potential for a notable price swing in either direction on Thursday following NVDA’s Wednesday evening report, as has been the case with many prior reports.
S&P 500 Forward Implied Volatility
Source: LPL Research, Citi Global Markets, Bloomberg 11/13/24
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. Estimates may not materialize as predicted and are subject to change.
Index Concentration and Dominance Not Limited to the U.S.
While NVDA’s concentration is noteworthy, this phenomenon is not unheard of. Fellow chipmaker Taiwan Semiconductor (TSM) makes up over 33% of the Taiwan Stock Exchange Index, also known as the TAIEX, and is responsible for over 76% of the index’s year-to-date gains. Meanwhile, in Denmark, pharmaceutical giant Novo Nordisk (maker of diabetes/weight loss drugs Ozempic and Wegovy) makes up nearly all of the healthcare sector for the Danish index and over 71% of the entire index.
Conclusion
In a nearly exponential rise, NVDA has become a household name for all types of investors and market watchers. Capital markets are focused on this afternoon’s earnings report and guidance, sniffing for insights into the future of AI spending and the AI theme, in addition to the company itself. While NVDA has consistently topped earnings estimates, and the long-term trend for the chipmaking behemoth has been up and to the right, subsequent one-day price action has been mixed while investors parse results, and semiconductor names face increasing scrutiny in today’s market. The post-earnings one-week absolute move for NVDA over the past ten years has been slightly below 11%.
The LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) maintains a neutral stance towards equities, with a preference for U.S. stocks over international and emerging markets. The Committee also holds a neutral allocation towards the technology sector, as AI-driven earnings and outlook have been supportive, offsetting a lackluster technical analysis picture and stretched valuations.
Important Disclosures
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
Asset Class Disclosures –
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Bonds are subject to market and interest rate risk if sold prior to maturity.
Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.
Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.
Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.
High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings of commodities will result in significant volatility in an investor's holdings.
This research material has been prepared by LPL Financial LLC.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
For Public Use – Tracking: #661147