To The Moon

Last Thursday, $NVIDIA Corp(NVDA)$ , the US stock's AI leader, saw its share price plummet, dragging down the $S&P 500(.SPX)$ and $NASDAQ(.IXIC)$ .

Now, there are two crucial questions: Will Nvidia's stock price continue to slide? And if a handful of AI leaders tumble, can the US stock market withstand the pressure?

Will Nvidia continue to slide?

Melissa Brown, Managing Director of Applied Research at SimCorp, said:

Mathematically, it's unlikely that the largest stock in the US market will fall while all others remain sturdy. So if Nvidia's stock price drops, the market is likely to follow suit. But if there's a rotation in sectors and lagging sectors start to catch up, the indices might still stand firm.

Since last spring, Nvidia's revenue and profits have skyrocketed due to the explosion in demand for AI chips, and its share price has soared accordingly. The stock has jumped 155% in 2024, while the S&P 500 and Nasdaq have gained over 14% and nearly 18% respectively.

But here's the catch - the US stock market's concentration issue is becoming increasingly apparent. A few AI-benefiting stocks are contributing more and more to the index's gains.

Ross Yarrow, Managing Director of US Equity at Baird, said:

Nvidia alone contributed 5.28% to the S&P 500's gains this year through last Wednesday, a phenomenon unseen since 2020. Moreover, only 30% of stocks have outperformed the S&P 500 over the past five-day rolling returns, meaning 70% of index constituents lagged behind.

Nvidia's share price surged 3.8% intraday last Thursday but ultimately closed down 3.5%, while the S&P 500 dipped only 0.3% and the Nasdaq fell 0.8%. On Friday, Nvidia's stock continued to slide 3.2%, but the S&P 500 dipped just 0.1%, and the Nasdaq lost 0.2%. Still, the S&P 500 ended the week in positive territory, while the Nasdaq was flat.

Other AI stocks held firm

The reason? While Nvidia slumped, other AI stocks held firm. $Amazon.com(AMZN)$ 's share price rose 1.6% on Friday, boosting the S&P 500's discretionary consumer goods sector by 1%. Additionally, $Alphabet(GOOG)$ $Alphabet(GOOGL)$ gained 1.9%, and $Microsoft(MSFT)$ added 0.9%.

Mark Newton, Head of Technical Strategy at Fundstrat Advisors, pointed out:

While the tech sector is outperforming other US stock market sectors, it doesn't necessarily mean a significant market drop is imminent. In recent days, sectors like financials, healthcare, industrials, and energy, which have lagged behind, could drive a short-term rebound in the equal-weighted S&P 500.

The S&P 500, a market-cap-weighted index, has gained 14.6% this year, while the equal-weighted index has only risen 4.4%. But it gained 0.1% on Friday and 1% for the week.

On the daily chart, Nvidia's stock price showed a bearish engulfing pattern last Thursday, a strong sell signal that could trigger a stampede of investor sentiment. For instance, on March 8, the stock quickly retreated 20% after a bearish engulfing pattern.

Kevin Dempter from Renaissance Macro Research predicted last Friday that Nvidia's stock would see further profit-taking, and a 20% pullback would bring it back to around $110 at the beginning of the month.

Louis Navellier, the founder of Navellier & Associates, said last Friday:

If Nvidia's stock price falls 3.5%, it'll be tough for the S&P 500 or Nasdaq to maintain gains. However, the stock has already dropped 11.7% from its high, and underallocated buyers might see this as a buying opportunity. Besides, its impact on the indices hasn't been significant so far, and the $DJIA(.DJI)$ even rose.