Why Nvidia’s Monster $3T Valuation Poses a Threat to S&P 500

24 ביוני

Too fast Nvidia climbed the ladder of success and now the broad-based S&P 500 is at risk of getting sucked into a crisis if the chip giant were to trigger it.


Nvidia Value Takes Up 7% of S&P 500

Is Nvidia (ticker: NVDA), the massive chip company, too big to fail? Shares of the juggernaut in the AI space have soared more than 160% this year and they show no signs of slowing down. That’s all great news for traders who enjoy the daily volatility and love watching billions of dollars slosh around as markets try to figure out Nvidia’s worth.

What markets have agreed on so far is that Nvidia is worth more than $3.2 trillion. The lofty price tag, however, comes with certain dangers. One such danger is that Nvidia makes up about 7% of the S&P 500. The broad-based Wall Street darling, packaged with 500 public companies, is valued at $46 trillion.

The danger isn’t too obvious now for obvious reasons. Nvidia is yet to give back (if it ever does, right?) some of its formidable gains. But there are signs already. Last Friday, this ratio of 93:7 tipped the S&P 500 into a loss just because the hulking size of Nvidia was too much weight on the stock index.

And because the markets aren’t allowing any breathing room and shares are always on fire, we can’t know the impact a crash in Nvidia could have on the S&P 500. But since the pendulum swings both ways, it pays to be prepared.

The Big Three’s Massive Weight

The tech-focused concentration of the S&P 500 doesn’t end with Nvidia. The two other companies that are also worth over $3 trillion each have the same weight on the equity benchmark.

Add Apple (ticker: AAPL) and Microsoft (ticker: MSFT) next to the AI chip maker and you’ve got a nice 21% chunk of the S&P 500 concentrated in three companies. In other words, that’s more than $10 trillion of valuation in total and it dominates the large-cap rankings.

What’s the common ground between all three? AI, more or less, with Apple playing catch up pretty fast.

“Why not pick on Apple then, if it’s the same market value?” Apple brings home more than $380 billion in revenue a year while Nvidia can only do $60 billion. Moreover, the iPhone maker has 2.5 times Nvidia’s trailing 12-month free cash flow.

Doomsday Scenario

A possible doomsday scenario in the artificial intelligence corner, every permabear will tell you, can trigger a rude awakening for investors and strip those giants off their record high valuations.

They actually had a moment of victory, although a brief one. In April, Nvidia endured its biggest drop since its recognition as the purest AI play out there. Shares erased more than 10% in the span of a few days. But before permabears had a chance to sip at their mezcal espresso martini and call it a day, Nvidia had bolted past the losses and into fresh record territory.

These days, it’s largely the same few stocks pumping and driving the gains across the indexes. That doesn’t sound like much of a diversification — the narrative pushed by passive investors who choose to shove some money into an index and do nothing. If the S&P 500 served as a diversification vehicle in the past, it certainly doesn’t look like it today.

Your Thoughts?

Will we see the AI bubble burst like the dot-com bubble of the 2000s? Or will Nvidia continue lifting the sea of stocks? Leave your thoughts below.