Why Nvidia’s Stock Rise Doesn’t Bode Good for the Market

Publication of highly anticipated results from Nvidia (NVDA). The company’s financial metrics beat Wall Street expectations, sending shares up nearly 20% in the three days following its earnings release.

But the broad-based stock market rally that many thought would follow did not occur. The S&P 500 (^GSPC) is now down more than 0.5% since the chipmaker’s earnings release after the May 22 closing bell. For Evercore ISI’s Julian Emanuel, this ends a year-long trend of Nvidia’s stock moves driving the market higher.

“NVDA no longer being ‘the stock that is the market’ will likely end the market’s ‘silence’ of low volatility over the past two weeks,” Emanuel warned in a note to clients Wednesday.

The S&P 500 has fallen from record highs since Nvidia’s earnings release, as investors’ attention has shifted elsewhere. Stocks fell despite a 10% rise in Nvidia shares the day after the company reported earnings, as stronger-than-expected economic results caused investors to lower their rate cut expectations of interest this year. This trend continued this week as the rise in the 10-year Treasury yield (^TNX) to its highest level since early May contributed to the decline in the S&P 500 over the same period.

Emanuel, who holds one of the lowest year-end targets for the S&P 500 on Wall Street, at 4,750, noted that a stock with a weighting in the top five of the S&P 500 has never surged by 20% in the three days following index earnings. neither ending this period higher. So the most recent directional divergence is very different from Nvidia’s near-perfect correlation with the S&P 500 over the past year, according to Emanuel, and could mean the market is ready for a pullback.

“There is no precedent for a stock the size of NVDA whose post-earnings stock rally is ‘ignored’ by the entire S&P 500,” Emanuel wrote. “This divergence is a catalyst for greater movement in the S&P 500 ahead of other event catalysts.”

Emanuel cited upcoming inflation figures, such as Friday’s Personal Consumption Expenditures Index release and the Federal Reserve’s June meeting, as examples.

Emanuel pointed out that Nvidia’s decoupling from the market comes as large-cap stocks as a whole have become less correlated to each other of late. On Tuesday, at a reading of around 12 in the CBOE Implied Correlation Index (^COR3M), Emanuel noted that the correlation between large-cap stocks was among “the lowest observations on record.”

The story continues

Previous correlation lows similar to this corresponded to stock market pullbacks like the three-month pullback that began in August 2023. In most cases, a 10% correction in stocks followed, according to Emanuel. Its base scenario remains a decline in the middle of the year “consistent with the consequences of correlation dips”.

More broadly, other strategists have pointed to the end of a season of positive earnings as a reason why market action could be bumpy in the coming weeks as investors’ attention turns to economic data in a context of uncertain interest rate developments…