The massive rally in Nvidia shares continues to exert an outsized influence on the S&P 500 index .SPX, reinforcing concerns that broader markets could suffer if the chipmaking giant’s fortunes change.
The 140 percent surge this year in shares of Nvidia, whose chips are considered the gold standard in artificial intelligence applications, has accounted for about a quarter of the S&P 500’s 17 percent rise.
Nvidia flexed its muscles on Wall Street on Wednesday, with an 8.2 percent surge in its shares helping propel the S&P 500 to its biggest intraday gain in nearly two years. The index reversed a 1.6 percent loss and closed the day up 1.1 percent.
Nvidia rose after CEO Jensen Huang signaled strong demand for the company’s chips, boosting its market value by more than $200 billion and accounting for 44 percent of the S&P 500’s rise that day, Nomura data showed.
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 progress this year on down days for Nvidia, eking out gains just 13 percent of the time when the chipmaker’s shares closed weaker, a Reuters analysis showed.
This year, the index has failed to rise more than 1% on any day when Nvidia shares closed lower. In 2020, there were 13 such cases.
For many investors, the recent moves have revived concerns about a small group of stocks dictating the direction of the market.
Microsoft, Apple and Nvidia have a combined weighting of nearly 20 percent in the S&P 500, although the shares of the first two have gained much less this year than Nvidia’s.
While recent strength in non-tech sectors has raised hopes for a broader rally, a sustained sell-off in any of the tech megacaps could still severely hurt broader markets, analysts said.
“If Nvidia is weak because demand for its products is declining, that will drag down the entire market,” Susquehanna’s Murphy said.
Traders are closely watching Nvidia options, which have played a major role in driving recent moves.
Nvidia recently accounted for about 22 percent of total individual stock options volume traded daily, up from about 5 percent at the start of the year, making it the most-traded stock in the options market on most days, Trade Alert data showed.
Nvidia’s gains are amplified when traders rush to buy upside call options. When buying of these options increases, market makers selling these contracts are forced to buy and deliver more Nvidia shares at the agreed-upon price, leaving them “short gamma,” in options jargon.
Additional purchases to hedge risk push shares higher.
“You can see the market is willing to buy call options on the upside when it works,” said Chris Weston, head of research at online broker Pepperstone. “When it’s up, these flows make a difference.”
Nvidia is not the first stock to have such a powerful influence on the rest of the market.
Tesla Another favorite of non-professional traders, it displayed similar characteristics a few years ago when the options market amplified swings in the electric-vehicle maker’s shares, said Nomura strategist Charlie McElligott.
But AI appears to have captured investors’ imaginations even more than electric vehicles.
“The mania around the real paradigm shift that AI represents in the corporate landscape is just making it a much larger issue,” he said. Tesla I was never close to that.”
“AI is an animal unto itself,” McElligott said.
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