The stock market took a significant turn on Friday, with NVIDIA Corp (NVDA) leading the way in a reversal that has sparked concerns about a broader market downturn. NVIDIA, a major player in the artificial intelligence (AI) sector, experienced a 5.5% drop, its worst session since late May, despite reaching an all-time high earlier in the day.
This decline in NVIDIA’s stock has raised concerns about the market’s reliance on AI stocks. The reversal has left investors worried about a potential correction in the AI trade, as five of the “Magnificent Seven” tech stocks, excluding NVIDIA and Meta Platforms Inc (META), experienced a drop last week.
Jonathan Krinsky noted in a Sunday note that a consolidation in the AI trade has been overdue and that Friday’s key reversal day could signal the start of that unwind. Other market observers have also cautioned against over-reliance on AI stocks, warning of potential dangers for the overall market.
Dubravko Lakos-Bujas, chief global equity strategist at JPMorgan, pointed out that investors flocking to a handful of top-quality mega-cap tech companies with robust balance sheets have caused concerning imbalances in the market. He warned that the bear beta of the market to stocks like NVIDIA, Meta Platforms, and Amazon is even stronger than the bull beta, posing a higher tail risk for the market.
The recent reversal in NVIDIA’s stock comes at a time when the market’s heavy reliance on AI stocks has been a topic of concern. Despite ongoing apprehensions, JPMorgan analysts have deemed the Magnificent Seven tech stocks, including NVIDIA, undervalued compared to the wider stock market.
However, there are signs that the dominance of the Magnificent Seven in the stock market may be coming to an end. The group’s fortunes have diverged this year, with their dominance over the stock market waning.
Goldman Sachs has also raised concerns over the U.S. stock market’s heavy concentration and the dominant sway of its largest tech stocks, urging investors to broaden their geographical diversification.
In conclusion, the recent reversal in NVIDIA’s stock has raised concerns about the market’s reliance on AI stocks and the potential for a broader market downturn. Investors are advised to be cautious and diversify their portfolios to mitigate risks associated with the concentration of tech stocks in the market.
