By Teresa Rivas
This leap year, it seems only a matter of time before someone suggests renaming Feb. 29 as Nvidia Day.
At this point, Nvidia is a name inescapable to investors. Yet however important the artificial intelligence poster child is, the stock’s gains also reflect the state of investor sentiment more broadly. If that shifts, it could affect Nvidia’s ability to power a continuing rally in stocks.
That isn’t to belittle Nvidia’s achievements and financial gains. It is a huge winner as the source of the graphics processing units other companies use for their artificial intelligence software.
“It’s Nvidia’s world, and we’re just living in it,” wrote PennMutual Asset Management investment analyst Jackie Rogowicz in a research note. With a market capitalization that rivals the size of Canada’s economy — one that doubled from $1 trillion to $2 trillion in eight months — Nvidia has shown that the biggest of big tech don’t just move the needle for the market, “they have become the needle,” he said.
The company’s blowout fourth-quarter was the latest in a string of earnings successes for the company, with sales more than tripling from the year-ago period. As Rosenberg Research founder and President David Rosenberg put it, “We are basically down to the Magnificent One — the company clearly is in a league of itsel f .”
That — and the performance of the Magnificent Seven tech stocks more broadly — has made plenty of investors nervous that the gains in the S&P 500 are too dependent on a handful of stocks. Nvidia, Meta Platforms, and the weight-loss drug darling Eli Lilly are responsible for half of the S&P 500’s 2024 gains.
But Nicholas Colas, co-founder of DataTrek Research, argues that this is neither unusual nor a reason for concern. “This is not an anomaly, let alone a reason to be bearish,” Colas wrote. “Rather, it is exactly how markets work. The wisdom of crowds usually gets things ‘right enough,’ so most stocks struggle to outperform over even a few consecutive years. Just a few are chronically undervalued, and those drive market returns.”
He has previously argued that investors have long had tech to thank for their long-term gains. Just five big tech names — Apple, Microsoft, Amazon.com, Alphabet, and Tencent — have generated 10% of all equity gains worldwide over the past three decades, according to DataTrek.
Of course, picking those long-term winners is easier said than done, which is why index investing is so popular, as Colas has noted.
In fact, while Apple has fallen behind recently — it is the second-worst performer in the Magnificent Seven this year — Colas argues that is likely due to investors’ overwhelming bullishness in general. And that is subject to change.
While Nvidia has pulled ahead of Apple this year and last, the stock significantly underperformed the iPhone maker during 2022’s bear market. That isn’t surprising, given that Apple is a relatively steady performer among big tech, counting Warren Buffett’s Berkshire Hathaway among its investors. It is more attractive during turbulent times, whereas the increased confidence of a risk-embracing bull market favors Nvidia.
It makes sense that the divergence between the two names has widened recently, as last year’s rally has continued. It seems likely that Nvidia and stock market bulls will continue to have the upper hand, at least in the near term.
“The performance spread between Nvidia and Apple does a great job of capturing investor confidence since 2020,” Colas concluded. “By this measure, investor confidence is running very high indeed. In fairness, Nvidia’s fundamentals are truly fantastic. But…Its recent performance spread versus Apple says everyone knows that.”
Write to Teresa Rivas at teresa.rivas@barrons.com