Written by Saqib Iqbal Ahmed
NEW YORK (Reuters) – A massive rally in Nvidia's shares has had a major impact on the stock market, fueling concerns that broader markets could be hurt if the giant's fortunes turn.
This year's 140% increase in shares of Nvidia (NASDAQ: ), whose chips are seen as the gold standard in artificial intelligence applications, accounted for nearly a quarter of the S&P 500's 17% gain.
Nvidia showed its strong hold over Wall Street on Wednesday, when the stock's 8.2% rally helped drive the S&P 500 to its biggest daily gain in nearly two years. The index pared losses of 1.6% 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 move that day, data from Nomura showed.
Nvidia's rally “got the whole market going,” said Chris Murphy, head of exit strategy at Susquehanna Financial Group.
The S&P 500 has struggled to perform well this year on Nvidia's down days, gaining only 13% of the time when the chipmaker's shares closed weak, a Reuters analysis said.
This year, the index has failed to rise more than 1% on any day when Nvidia shares ended lower. In 2020, there were 13 such cases.
For many investors, the latest move has renewed worries about a small group of stocks setting the direction of the market.
Microsoft (NASDAQ:), Apple (NASDAQ:) and Nvidia have a combined weight of nearly 20% in the S&P 500, although the first two stocks have gained significantly less this year than Nvidia.
While recent strength in non-tech sectors has revived hopes for a rally, continued selling in any of the tech megacaps could still hurt broader markets, analysts said.
“If Nvidia isn't strong because demand for their product is going down, that's going to affect the entire market,” Susquehanna's Murphy said.
PROMOTION OPTIONS
Traders are keeping an eye on Nvidia options, which have played a major role in boosting recent moves.
Nvidia recently accounted for about 22% of the total number of stock options traded daily, up from about 5% at the beginning of the year, making it the most traded stock in the options market on most days, Trade Alert data showed.
Nvidia's profits are growing as vendors chase up top-of-the-line phone options. When these rising options are purchased, market makers who sell these contracts have the opportunity to buy and deliver more Nvidia shares at the agreed upon price, leaving them “short gamma,” in options parlance.
Buying more to cover the risk pushes the stock even higher.
“You see the market is willing to buy upside-down calls if it works,” said Chris Weston, head of research at online retailer Pepperstone. “When it's hot, this flow makes an absolute difference.”
Nvidia is not the first stock to have such a strong influence over the entire market.
Tesla (NASDAQ: ), another favorite of lay traders, has shown similar characteristics over the past few years when the options market boosted volatility in the electric car maker's stock, said Nomura strategist Charlie McElligott.
But AI seems to have stirred the imagination of investors even more than EVs.
“The mania that is the real paradigm shift that AI represents in every business environment, it just makes it a big theme,” he said. “Tesla has never come close to that.”
“AI is its own animal,” McElligott said.
