NVIDIA’s Super-Sized Importance

With additional content provided by Brian Booe, Associate Analyst, Research.

Semiconductors, artificial intelligence, NVIDIA (NVDA) — it’s no secret these items have been a focal point for investors for quite a while now. But despite NVDA initially joining the S&P 500 in November 2001, the chipmaker only recently became a proverbial “household name.” In fact, it’s nearly impossible to imagine today’s market without NVDA, or the broader semiconductor and artificial intelligence (AI) theme for that matter. With the chipmaking giant set to report earnings after today’s close, we examine the astonishing importance of NVDA.

Capital markets have only temporarily turned their focus away from the AI theme in 2024 despite the start of the latest Federal Reserve (Fed) easing cycle, a U.S. presidential election, and continued resilience in economic data. This unwavering focus on AI resulted in the meteoric rise of NVDA, propelling the stock to become one of the largest companies in the S&P 500, currently in a dead heat for the top spot with fellow Magnificent Seven member Apple (AAPL). Using the Bloomberg 500 (B500) Index, made up of the largest U.S. companies as a proxy for the S&P 500, NVDA commands a 6.9% weight in the index. This is over 4.4% more than the fifth largest company, Meta (META), and just over 5.5% more than the 10^th largest company, JPMorgan Chase (JPM).

NVDA Weight in Bloomberg 500 Index Over Time

Source: LPL Research, Bloomberg 11/20/24
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. Any companies referenced are being presented as a proxy, not as a recommendation. and not an indication of trading intent or a solicitation of their products or services. The Bloomberg 500 index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Super-sized Importance

As a result of a hearty index weighting and continued outperformance, NVDA has contributed over 23.5% to the B500’s +24% year-to-date return. For reference, NVDA’s contribution to year-to-date gains is more than the next five strongest stocks combined – Apple (AAPL), Amazon (AMZN), Meta (META), Microsoft (MSFT), and Tesla (TSLA). From a different perspective, on average, NVDA moves the largest amount of money for a single stock in the world each day (in U.S. dollars), dwarfing every other name in both U.S. and international markets. Furthermore, the company’s earnings report has essentially reached the same level of importance as a major macroeconomic data release. Based on the forward implied volatility of the S&P 500, NVDA’s earnings report is priced as the largest event for markets from mid-November to mid-December, with a higher forward implied volatility percentage than both the November payrolls report on December 6, and the November Consumer Price Index (CPI) report on December 8. This implies the potential for a notable price swing in either direction on Thursday following NVDA’s Wednesday evening report, as has been the case with many prior reports.

S&P 500 Forward Implied Volatility

Source: LPL Research, Citi Global Markets, Bloomberg 11/13/24
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. Estimates may not materialize as predicted and are subject to change.

Index Concentration and Dominance Not Limited to the U.S.

While NVDA’s concentration is noteworthy, this phenomenon is not unheard of. Fellow chipmaker Taiwan Semiconductor (TSM) makes up over 33% of the Taiwan Stock Exchange Index, also known as the TAIEX, and is responsible for over 76% of the index’s year-to-date gains. Meanwhile, in Denmark, pharmaceutical giant Novo Nordisk (maker of diabetes/weight loss drugs Ozempic and Wegovy) makes up nearly all of the healthcare sector for the Danish index and over 71% of the entire index.

Conclusion

In a nearly exponential rise, NVDA has become a household name for all types of investors and market watchers. Capital markets are focused on this afternoon’s earnings report and guidance, sniffing for insights into the future of AI spending and the AI theme, in addition to the company itself. While NVDA has consistently topped earnings estimates, and the long-term trend for the chipmaking behemoth has been up and to the right, subsequent one-day price action has been mixed while investors parse results, and semiconductor names face increasing scrutiny in today’s market. The post-earnings one-week absolute move for NVDA over the past ten years has been slightly below 11%.

The LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) maintains a neutral stance towards equities, with a preference for U.S. stocks over international and emerging markets. The Committee also holds a neutral allocation towards the technology sector, as AI-driven earnings and outlook have been supportive, offsetting a lackluster technical analysis picture and stretched valuations.