Nvidia's Stock Has Driven the S&P 500 Higher. Here Are Some Reasons Why Its Influence Might Decline.

Is Nvidia Corp. poised to become just another large tech stock?

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Over the past 18 months, Nvidia has been a dominant force in the stock market. It led the S&P 500 in performance last year, continues to lead this year, and has significantly contributed to the index’s overall earnings growth. Moreover, Nvidia has sparked widespread interest in artificial intelligence (AI) stocks, positioning itself at the forefront of the AI revolution.

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However, while analysts at Citi acknowledge that Nvidia has strong earnings growth ahead, they question whether the stock will continue to wield the same level of influence on the broader market in the future. According to a team of Citi strategists led by Scott Chronert, Nvidia’s status as one of the top-three weighted stocks in the S&P 500 makes it a crucial decision point for many portfolio managers, particularly those managing core and growth-focused portfolios.

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Despite this, the analysts noted that Nvidia’s most profound impact on market performance might be behind it. They point to a noticeable deceleration in forward earnings guidance increases, suggesting that Nvidia’s most significant performance contributions to the S&P 500 may have already peaked. In other words, while Nvidia remains important, its ability to shape market action as dramatically as it has in the past may be diminishing.

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If investors are skeptical of this, the Citi team highlighted that the slowdown in Nvidia’s influence was evident following its most recent earnings report. After the report, Nvidia’s stock saw less of an upward push, and this dynamic was compounded by what the analysts referred to as a "tech tantrum" last Tuesday, during which semiconductor stocks experienced a collective selloff, dropping by over 8%.

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Nvidia is still projected to deliver considerable earnings growth, but when examining Wall Street’s forecasts for this year and next, Citi pointed out that the magnitude of these estimate increases is slowing. As a result, Nvidia’s contribution to the broader S&P 500’s fundamentals is decelerating. This signals a shift in the stock’s influence, where it may no longer have as significant an impact on the index’s overall performance.

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Citi also analyzed the "Magnificent Seven" group of large technology stocks, which includes companies like Apple, Microsoft, and Tesla, in addition to Nvidia. The analysts observed a similar deceleration in earnings estimate growth for this group in 2024, although they expect to see more positive revisions for 2025. This slowdown in earnings revisions suggests that while these tech giants remain important to the S&P 500’s performance, their extraordinary outperformance might become more tempered going forward.

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In terms of individual companies, Apple has remained a positive contributor to the group’s performance. Meanwhile, Tesla, which had previously enjoyed lofty expectations for future growth, has seen those projections fade in recent months. Microsoft, another major player in the tech space, has shown signs of slowing as well, with analysts describing its recent deceleration as “somewhat concerning.”

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As these large tech stocks make up roughly 30% of the S&P 500’s total market capitalization, they are a key driver of the index’s returns. While their earnings estimates for 2024 and 2025 have been resilient, largely due to upward revisions for the "Magnificent Seven," this has offset typical downward revisions for most other stocks in the index. However, the slowing pace of earnings estimate revisions for these tech giants indicates that the extraordinary opportunity for generating outsized returns may be lessening.

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Nvidia, in particular, stands out for its massive role in the AI space, a sector that has attracted significant attention from both investors and companies. As AI becomes an increasingly important part of technology’s future, Nvidia is well-positioned to benefit from this trend. Nevertheless, its meteoric rise and the surge in earnings that propelled the stock’s recent performance may now face a more gradual growth trajectory.

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Citi’s analysis suggests that while Nvidia and other tech giants will continue to play a critical role in the market, the days of their extraordinary influence on the S&P 500 may be coming to an end. The slowing pace of upward revisions for earnings and the deceleration in their fundamental growth point to a more measured performance going forward. Investors should be mindful of this shift and adjust their expectations accordingly.

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In conclusion, while Nvidia is still expected to post strong earnings growth, its outsized influence on the market may start to wane. The stock has been a key driver of the S&P 500’s gains in recent years, but as the rate of earnings estimate increases slows, its impact on the broader index may become less pronounced. As with the broader "Magnificent Seven," Nvidia remains a vital component of the market, but its extraordinary alpha generation may now be in the rearview mirror. Investors may need to reassess their expectations as these tech behemoths transition into a phase of more measured growth.

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