Nvidia's stock market dominance fuels big swings in the S&P 500

Nvidia's stock surge fuels S&P 500 rally, raising market concerns

Nvidia’s huge stock rally is still exerting an outsized influence over the S&P 500 index , reinforcing concerns that broader markets could be hurt if the chipmaking giant’s fortunes turn.

This year’s 140% surge in shares of Nvidia, whose chips are seen as the gold standard in artificial intelligence applications, has accounted for about a quarter of the S&P 500’s 17% gain.

Nvidia showed its powerful hold over Wall Street on Wednesday, when the stock’s 8.2% rally helped drive the S&P 500 to its biggest intraday upswing in nearly two years. The index reversed a 1.6% loss to end the day up 1.1%.

Nvidia jumped after CEO Jensen Huang flagged strong demand for the company’s chips, boosting its market value by more than $200 billion and accounting for 44% of the S&P 500’s surge that day, data from Nomura showed.

Nvidia’s rally ”got the whole market moving,” said Chris Murphy, co-head of derivative strategy at Susquehanna Financial Group.

The S&P 500 has struggled to make headway this year on Nvidia’s down days, eking out gains only 13% of the time when the chipmaker’s shares have closed weaker, a Reuters analysis showed.

This year, the index has failed to rise more than 1% on any day when Nvidia’s shares ended lower. In 2020, there were 13 such instances.

For many investors, the recent moves revived worries over a small cohort of stocks dictating the market’s direction.

Microsoft, Apple and Nvidia have a combined weighting of nearly 20% in the S&P 500, though shares of the first two have gained far less this year than Nvidia’s.

While recent strength in non-tech sectors has stirred hopes of a broadening rally, a sustained sell-off in any of the tech megacaps could still badly hurt broader markets, analysts said.

"If Nvidia is weak because demand for their product goes down then that’s going to tank the whole market,” said Susquehanna’s Murphy.

OPTIONS BOOST

Traders are keeping a close eye on Nvidia’s options, which have played a major role in boosting recent moves.

Nvidia recently accounted for about 22% of the overall volume of individual stock options traded daily, up from around 5% at the start of the year, making it the most actively traded stock in the options market on most days, Trade Alert data showed.

Nvidia’s gains are amplified when traders rush into upside call options. When buying of these options surges, market makers who sell these contracts are on the hook to buy and deliver more Nvidia shares at the agreed price, leaving them ”short gamma,” in options parlance.

The additional purchases to cover risk lift the stock even higher.

"You do see the market keen to buy upside calls when it’s working,” said Chris Weston, head of research at online broker Pepperstone. ”When it’s hot, these flows absolutely make a difference.”

Nvidia is not the first stock to have such a powerful sway over the rest of the market.

Tesla, another favorite of nonprofessional traders, displayed similar characteristics a few years ago when the options market amplified the electric vehicle maker’s stock swings, Nomura strategist Charlie McElligott said.

But AI seems to have stirred the imagination of investors even more than EVs.

"The mania that is the actual paradigm shift which AI represents across the corporate landscape, is just making it a magnitudes-larger theme,” he said. ”Tesla was never close to that.”

"AI is just its own animal,” McElligott said.