In the stock market, it’s Nvidia versus everything else

Investors wake up every morning and seemingly have one choice: Nvidia, or everything else?

What was briefly the world’s largest publicly traded company and the broader market have consciously uncoupled.

The 21-session correlation between the daily change in Nvidia and the S&P 500 Equal Weight Index is well in negative territory and recently hit its lowest level on record. The other members of the $3 trillion club have weak, but still positive, relationships with this basket of US stocks.

Nvidia and the equal-weight index have moved in the same direction in about 55% of sessions so far this year. On the surface, that might not sound like they’re behaving that differently. But the majority of the time when they’re moving together, neither is moving that much: by less than 0.5% in either direction.

What’s striking is how little they have shared big moves together. Even compared to 2023, a year when Nvidia certainly distinguished itself from the pack, the divergence is significant. 

Despite Nvidia being up 1% or more in 51 occasions so far this year, equal-weight and the chipmaker have gained more than 1% on the same day just twice. That leaves the two on track for 4 such occasions this year, versus 26 in 2023.

The good news is that they’re also suffering big drops in tandem less frequently: the pair is on track for just 11 days where both are down 1% or more this year, compared to 20 last year. A dearth of co-movement – particularly when the moves are large – is something that is critical to keeping overall volatility in the equity market compressed.

This lack of correlation is also telling us a story about investors’ most strongly held beliefs and the narratives that are driving the market at large. So far this year, investors haven’t suffered a coincident, meaningful loss of confidence in the durability of the US expansion or the power of the AI theme as a catalyst for Nvidia’s sustained operating outperformance.

The present backdrop – in which we’re seeing a moderation in economic activity and a very nascent pullback in momentum-centric stocks – appears to leave open the possibility that investors question both of these core beliefs in the near-term.

Momentum – betting that winners keep winning – has been the dominant quantitative factor in the stock market this year, even with a few gut-check moments here and there (early March, mid-April, and late May).

Even if you are a staunch believer in how much and how long AI will drive Nvidia’s bottom line results sharply higher, you have to concede at least a decent portion of its year-to-date advance is momentum-based – there’s really no “good reason” why the stock should be up 125% this year vs 175%.

Momentum can turn for any reason or no reason at all, so there’s always a danger that the nearly 2% decline in the iShares MSCI USA Momentum Factor ETF metastasizes from here.

So then, keeping a lid on equity market volatility from here comes down to investors’ perception of the sturdiness of the economic backdrop. To that end, two indexes bear close attention going forward:

The Citi Economic Data Change Index, which measures data versus its one-year average, and the Citi Economic Surprise Index, which tracks how data evolve relative to analysts’ forecasts. We haven’t had both series in negative territory since May 2023, when they were on their way up as investors shook off recession fears induced by central bank rate hikes and US regional bank failures.

But both series have been dipping sharply lately, which helps explain the underperformance of the S&P 500 equal weight index in relative and absolute terms. If we see some stabilization in either metric, this could go a long way in affirming that the “many” in the stock market – those whose fortunes are more tied to the business cycle than the AI theme – don’t face too much downside risk to earnings.