Stocks Are Gripped by Volatility as NVIDIA's Route Accelerates

A new wave of volatility hit the stock market as a significant drop in Nvidia Corp. sparked concerns that the recent rally in major tech stocks—and the broader market—might be due for a pause.

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Nvidia, central to the artificial intelligence (AI) boom, saw its shares plummet by 12% over three days, losing over $300 billion in market value. This drop followed a surge in demand for AI chips that briefly made Nvidia the world’s largest company. Currently, Nvidia is the most expensive stock in the S&P 500 Index, with shares trading at about 23 times the company’s projected sales over the next year.

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Deutsche Bank AG strategists, led by Binky Chadha, suggest that after a tech-driven rally, US equities are poised for a pause. Lori Calvasina at RBC Capital Markets echoed this sentiment, warning that the market's current optimism might not be justified, potentially leading to downside risks. She noted that while the market attempts to broaden its gains, it continues to struggle.

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Jonathan Krinsky at BTIG observed, “Last week saw some of the biggest inflows on record into large-cap tech/growth funds, which feels like a sign of froth after the run we have had. We remain concerned about a near-term unwind of many year-to-date leaders. If the S&P 500 is going to avoid a bigger pullback into July, bulls need to see continued rotation below the surface.”

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The S&P 500 hovered near 5,480, and the Nasdaq 100 underperformed other major benchmarks after approaching the 20,000 mark last week. Nvidia’s shares dropped around 6% on Monday. Meanwhile, Treasury 10-year yields remained steady at 4.26%, and Bitcoin fell to about $61,000.

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Matt Maley at Miller Tabak cautioned that if the recent weakness in several big-cap tech names extends to the broader sector, it could create issues for the overall market in the near term. He stated, “A decline in the tech sector is certainly possible, even if the tech sector is going to do well during the summer months overall. Even if you agree with the most bullish scenario for the AI phenomenon for the second half of 2024, no group moves in a straight line.”

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Maley pointed to the upcoming results from Micron Technology Inc. as a potentially crucial indicator.

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John Stoltzfus at Oppenheimer suggested that some near-term profit-taking is to be expected, especially in segments that have seen exceptional gains. However, he believes the bull market in the US is sustainable as investors continue to increase their exposure to stocks, viewing near-term volatility as an opportunity.

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“The stock market is not in a bubble,” said Emily Bowersock Hill at Bowersock Capital Partners. “While megacap growth stock valuations are stretched, stock prices have not decoupled from fundamentals as they did during the tech bubble of 2000. Right now, the market is rewarding companies for delivering strong earnings and punishing those that do not deliver.”

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In summary, while the recent drop in Nvidia and other major tech stocks has raised concerns about a market pullback, many strategists believe that the bull market remains intact. They advise caution and note that near-term volatility could present buying opportunities, particularly if the market continues to reward companies with strong earnings. The tech sector’s performance in the coming months will be critical, with upcoming corporate results likely playing a significant role in shaping market sentiment.

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