Nvidia's eye-popping gains this year have helped propel the stock market to repeated record highs. But beneath the surface, the rally is looking uneven.
The S&P 500 index has jumped nearly 15% so far in 2024, notching 31 new peaks along the way. Much of those returns have been driven by the mega-cap Magnificent Seven stocks, which have seen explosive growth as investors pour cash into the burgeoning artificial intelligence boom.
But beyond that cohort of tech stocks, the market is looking less rosy. The S&P 500 equal-weighted index, which gives every stock the same weighting, has risen just 4% this year.
The information technology and communication services sectors of the benchmark index have gained roughly 29% and 24%. The S&P 500's other sectors have notched single-digit gains, excluding real estate, which is lower for the year.
At the forefront of the market's meteoric returns is Nvidia. The company briefly surpassed Microsoft this week as the largest public company the world. Nvidia shares are up 164% for the year.
The chipmaker's stock has been on a tear for the last year and a half. Nvidia's chips are unmatched in producing processors that power artificial intelligence systems, including for generative AI, the technology backing OpenAI's ChatGPT, which can create text, images and other media.
Can Nvidia's blockbuster gains continue, and what does its outsized market cap mean for the stock rally?
Before the Bell spoke with Christopher Barto, senior investment analyst at Fort Pitt Capital Group.
This interview has been edited for length and clarity.
Before the Bell: Are you worried that the stock market's gains aren't even across the board, and most of it is concentrated in the big tech Magnificent Seven stocks, especially Nvidia?
I don't know if it's necessarily worrisome. I think it's interesting.
Coming out of first-quarter earnings, when you exclude the (Magnificent Seven earnings) numbers, growth was actually down 2% year-over-year. So, the majority of the market is struggling.
There are some bright spots. There are a lot of other semiconductor equipment companies, and there are other companies that are doing well that just aren't at the market-cap weight that Nvidia is at, and we sort of look at those as presenting opportunities (to buy.)
Do you think investors are being too reliant on Nvidia and optimism that its stock will continue to climb?
We could kind of circle back to Apple a year or two ago. They were the largest company in the world. And every single day, it was, "oh, the market depends on Apple." And then you see the shift a year and a half later, maybe even less than a year, to Nvidia. Now everyone says, "the market is dependent on Nvidia's earnings." You're going to see a kind of a shift in market cap over the years.
You see the shift in market-cap weighted indices over time, and it's driven especially by their economic profit. So, in terms of, should investors worry that Nvidia is becoming concentrated? I don't believe so.
Do you think Nvidia's monster run will continue?
I do not have the answer to that. But I do think that if you want exposure to artificial intelligence and secular mega trends that you're seeing, you're going to want to own some of the mega-cap companies like the Googles and the Amazons and the Microsofts and the Metas, because if they're the ones that are spending on the (graphics processing units that Nvidia makes) and the servers and all the data centers, they have the ability to essentially pull that capital spending at any second to increase their free cash flow.
(Much) of Nvidia's revenue is coming from Meta, it's coming from Google, it's coming from Amazon. You're seeing this shift in these companies trying to basically get ahead of AI demand, and those are the kinds of companies that could essentially afford Nvidia's GPUs at scale like that.
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