Written by Saqib Iqbal Ahmed
NEW YORK (Reuters) – Nvidia’s massive stock price rally remains a major drag on the S&P 500 index, raising concerns that the broader market could be hurt if the chip manufacturing giant’s fortunes turn around. is getting stronger.
Shares of Nvidia, whose chip is considered the gold standard for artificial intelligence applications, have risen 140% this year, accounting for about a quarter of the S&P 500’s 17% rise.
Nvidia demonstrated its strong grip on Wall Street on Wednesday, with an 8.2% rise in its stock price that led the S&P 500 to its first intraday gain in nearly two years. The index reversed a 1.6% decline and ended the day up 1.1%.
Nvidia soared after CEO Jensen Huang warned of strong demand for its chips, pushing its market capitalization by more than $200 billion and topping the S&P 500 for the day, according to Nomura data. This accounted for 44% of the increase in species.
Nvidia’s rally “moved the entire market,” said Chris Murphy, co-head of derivatives strategy at Susquehanna Financial Group.
The S&P 500 has struggled to make headway during Nvidia’s downturn this year, rising just 13% in the period that ended with the company’s stock lower, according to a Reuters analysis.
On a day this year when Nvidia stock ended lower, the index never gained more than 1%. There were 13 such cases in 2020.
For many investors, recent developments have reignited concerns about the small number of stocks that dictate the direction of the market.
Microsoft, Apple and Nvidia have a combined weight of nearly 20% in the S&P 500 index, but the stock prices of the first two companies have risen far less than Nvidia’s stock this year.
Analysts are raising expectations that the bull market will extend after recent strength in non-tech sectors, but continued declines in any large tech stocks would still be a big blow to the overall market. He said it was possible.
“If Nvidia is weak because demand for its products goes down, the entire market will suffer,” Susquehanna’s Murphy said.
optional boost
Traders are focusing on Nvidia options, which have played a big role in driving the recent move.
Nvidia recently accounted for about 22% of the total volume of individual stock options traded daily, up from about 5% at the beginning of the year, and is the most actively traded stock in the options market on most days, according to Trade Alert data. It has become.
Nvidia’s profits are further amplified as traders rush to buy higher-priced call options. As the purchases of these options surge, the market makers selling these contracts are desperate to buy and take delivery of even more Nvidia stock at the agreed upon price, leaving them “short gamma” in option parlance. It will be.
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Additional purchases to cover the risk will cause the stock price to rise further.
“When the market is doing well, you certainly want to buy upside calls,” said Chris Weston, head of research at online brokerage Pepperstone. “When it’s hot, this flow absolutely makes a difference.”
Nvidia isn’t the first stock to have such strong influence over other markets.
Nomura strategist Charlie McElligott said Tesla, another favorite of casual traders, exhibited similar characteristics a few years ago when options markets amplified the electric car maker’s stock price volatility.
But AI seems to be capturing investors’ imaginations even more than EVs.
“The excitement, the real paradigm shift that AI represents across the enterprise, is just making it a bigger theme,” he said. “Tesla was never close to that.”
“AI is just its own animal,” McElligott said.
(Reporting by Saqib Iqbal Ahmed; Editing by Ayla Iosebashvili and Richard Chan)
