Never have so many depended so much on so few (just one company) – that was how we had termed the dependence of the global stock market rally hinged to the fortunes of Nvidia in our article ‘Nvidia and its parabolic growth’ published in February this year. Fast forward to today, this theme has only got stronger.
In the first week of September, the S&P 500 was down by 4 per cent and lost around $2 trillion in market capitalisation. In the second week, it was up 4 per cent and almost made up for the $2 trillion in wealth lost. See this as against the movements in the stock of Nvidia which was down 16 per cent in the first week losing around $400 billion in market cap in just five trading days. That’s almost the entire market cap of Reliance Industries and TCS combined. As such there was no significant new fundamental news that triggered this rout. One can speculate whether it was further unwinding of the yen carry trade, or some profit booking or anything else.
Nevertheless, following that rout, Nvidia was up 16 per cent last week adding back the $400 billion it had lost. The interesting thing to note here is what triggered the rally in Nvidia and US markets last week. The US markets had actually started the week on a cautious note and into early trading hours on Wednesday was down heavily following the release of August CPI inflation data that indicated core inflation was slightly above estimates, thereby dampening hopes of a 50 bps cut in the upcoming Fed policy meet. At lows of the day, the Dow Jones, S&P 500 and Nasdaq Composite were down by 1.8 per cent, 1.6 per cent and 1.4 per cent respectively. However, around mid-day, just a few comments by Jensen Huang, CEO of Nvidia at the Goldman Sachs Communacopia and Technology conference was enough to trigger a massive rally that continued through the week.
‘Demand is so great that delivery of our components, our technology, infrastructure, and software is really emotional for people’; ‘Everybody is counting on us’; ‘It directly affects their (Nvidia customers) revenues, it directly affects their competitiveness’ were the few comments from him that triggered the $2 trillion rally in the S&P 500 last week. On Wednesday alone, the Down Jones, S&P 500 and Nasdaq Composite rallied 2.17 per cent, 2.74 per cent and 3.62 per cent from lows of the day, while Nvidia was up by 9 per cent. The rally followed through to Asian markets too the next day, including in India, and most markets ended on a very positive note on Thursday.
Begging for GPUs
And if you had the slightest of doubts that Jensen Huang might be exaggerating, his comments are well corroborated by Nvdia’s recent performance and also comments from his customers. For example in Oracle’s financial analyst meet last week, founder and CEO Larry Ellison mentioned how he and Elon Musk recently went for dinner with Jensen Huang and ‘begged him’ for Nvidia GPUs! It does appear demand for Nvidia GPUs and Big Tech’s rush to invest in AI is quite strong.
Thus it is not for no reason that Goldman Sachs calls Nvidia ‘the most important stock’ of 2024, with its share performance driving market’s fortunes as well.
An analysis by bl.portfolio indicates how the correlation between Nvidia and S&P 500/Nasdaq Composite so far in 2024, at 0.96, is significantly higher than that of any of the other mega-cap Magnificent Seven company (see chart). Further, out of 177 trading sessions this year, Nvidia has had 24 sessions in which the stock has moved by 5 per cent and above, or -5 per cent and lower. Most of these sessions have had a significant bearing on the market performance with the S&P 500/Nasdaq Composite returning an average of 1.1/1.85 per cent when Nvidia was up by at least 5 per cent and losing an average of 1.2/2.02 per cent when Nvidia was down by at least 5 per cent.
So far so good as far as demand for Nvidia GPUs is concerned. However, the market gyrations linked to it, makes it essential for investors to be alert on risks to Nvidia’s business that can reverberate through global markets.