The stock market, which has been largely driven by the artificial intelligence (AI) sector, experienced a significant shift on Friday, with NVIDIA Corp NVDA leading the way. The reversal in Nvidia’s stock has sparked concerns about a broader market downturn.
What Happened: On Friday, Nvidia, a major AI player, experienced a 5.5% drop, marking its worst session since late May. This decline, despite the stock reaching an all-time high earlier in the day, has raised concerns about a potential larger market pullback, reported CNBC.
Despite ending the week with a 6% gain, Nvidia’s reversal has left investors worried about the broader market’s reliance on AI stocks. Five of the “Magnificent Seven” tech stocks, excluding Nvidia and Meta Platforms Inc META, experienced a drop last week. This has led to concerns about a potential correction in the AI trade.
Jonathan Krinsky wrote in a Sunday note, "A consolidation in the AI trade has been overdue for a while now, so 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.
In a Sunday note, Lakos-Bujas wrote, "Given this relationship coupled with very bullish investor sentiment and positioning, we caution investors that this relationship is likely to work in reverse when the AI euphoria peaks. While the bull beta of the market to NVDA is significant (as well as for META and AMZN), the bear beta of the market to these stocks is even stronger … which could pose a higher tail risk for the market."
Why It Matters: 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 the ongoing apprehensions, the Magnificent Seven tech stocks, including Nvidia, have been deemed undervalued compared to the wider stock market by JPMorgan analysts.
However, the dominance of the Magnificent Seven in the stock market might be coming to an end, according to an analyst who popularized the label. The group’s fortunes have diverged this year, with their dominance over the stock market waning.
Goldman Sachs has also flagged an increasing concern 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.
Image Via Shutterstock
Engineered by Benzinga Neuro, Edited by Kaustubh Bagalkote
The GPT-4-based Benzinga Neuro content generation system exploits the extensive Benzinga Ecosystem, including native data, APIs, and more to create comprehensive and timely stories for you. Learn more.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Comments
Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.
