NVIDIA Corp (NASDAQ:NVDA, ETR:NVD) has driven such a large part the stock market's gains this year than analysts are warning investors about the risk of a highly concentrated market and investment portfolio.
The S&P 500 index is having its longest winning streak since November, though the headline index has outperformed the equal-weighted S&P 500 by 10%, which is the widest margin since the 1990s, notes Kathleen Brooks, research director at XTB.
Moreover, Brooks points out that the Dow Jones, comprised of just 30 stocks, is also underperforming the S&P 500, and the divergence between the two indices has widened significantly since June.
"The sectors powering the S&P 500 to fresh record highs are semiconductors and semiconductor parts, which are massively outperforming other sectors," Brooks noted, with the semiconductor index up 87% in 2024, compared with a 30% gain for the broadline retail index.
Nvidia is also massively outperforming the other 'Magnificent 7' tech stocks, up 219% in the past 12 months, while Apple and Microsoft are up 22% and 39% and the best of the seven is Meta Platforms at 83%.
"This isn’t a tech rally, this is an Nvidia rally," Brooks declared.
Peter Garnry, Saxo's chief investment strategist, said the concentration level in the market is "unprecedented in over 30 years and poses significant risks to equity markets and portfolios".
Data shows the US equity market is twice as concentrated as it was during the peak of the dot-com bubble in 2000, while Goldman Sachs wrote a note on US equity market concentration showing that the market has not been this concentrated since 1932.
But despite the rising concentration, the US equity market has shown unusual calmness, Garnry notes, which he said is partly due to a popular options strategy called the 'dispersion trade'.
"This trade exploits the contrast between low index volatility and high individual stock volatility. The market's current low correlation environment is at an extreme, increasing the risk of a sudden broad-based selloff that could trigger significant market disruption," he said.
Today, Nvidia’s is up more than 1.7%, approaching the record high from June 18 after nearly a 10% rise this week, despite not having announced earnings or any new product developments.
"Some argue that the surge in Nvidia’s share price is part of the FOMO trend, the fear of missing out," said Brooks.
The rise in Nvidia’s share price this week suggests that the biggest tech stocks are "immune to political instability" in the US and around the world, Brooks said, with a slowing but positive growth outlook for the US economy, the prospect of rate cuts in September and not boosting the broader market, which she says, "suggests that the tech giants are a bigger driving force for financial markets right now, even more so than the Fed".
"The key drivers of the S&P 500 are earnings revisions and momentum. Nvidia has seen earnings upgrades in the past month, and has a history of beating earnings forecasts, thus as we embark on the start of earnings season, Nvidia is in focus."
Garnry said the concentration in the market "should make every individual investor pause for a second and think about portfolio risks and diversification: Am I having too much exposure to magnificent seven, Nvidia, or AI stocks in general?"