Nvidia Was the Stock Market’s Biggest Strength. Now It Could Be Its Biggest Weakness.

Nvidia Was the Stock Market’s Biggest Strength. Now It Could Be Its Biggest Weakness.

The gap between what artificial intelligence wants to deliver and what it can deliver is still wide—and that could be an issue for investors as well.

The promises of artificial intelligence are many. We’ll never have to fill out a form, order takeout, or drive a car for ourselves again. Eventually, we’ll either end up like the human beings in Wall-E, reclining in deck chairs as robots do all the work, or those in The Terminator, where robots try to end humanity.

AI stocks have been the main driver of the

S&P 500 index

this year, whether it’s


whose chips make it go, or


which is benefiting from its relationship with ChatGPT and the use of the technology in its products.


has bounced after a tough start to the year, thanks, in part, to hopes that the technology will create demand for AI-enabled iPhones.

All we needed to know was that AI stocks were rising to know that the market would rise as well.

But there are signs that the risk-reward for AI stocks isn’t quite what it once was. For every


which surged 19% after reporting a smaller-than-expected loss, there was a


which tumbled 34% after offering below-consensus sales guidance and announcing the surprise resignation of its CEO. And for every


which jumped 17% after beating earnings forecasts and calling out its “innovative portfolio of solutions designed for the AI and hybrid era,” there was a

Dell Technologies

which was plunging 22% in Friday trading after beating earnings by a penny. Clearly, that wasn’t enough for a stock that had gained 80% over the past three months.

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Betting on individual AI stocks has been high-reward, high-risk all through earnings season. 22V Research’s Dennis DeBusschere notes that 86% of what he terms “AI Usage” companies have been beating earnings since ChatGPT4 was released in 2022, better than the 78% for the rest of the market. These stocks also gained more when they beat than the run-of-the-mill stock—averaging a 0.3% rise after a beat this past quarter against a 0.3% decline after a beat for other stocks. But when they fall short of expectations, watch out. AI stocks that miss dropped an average of 5.3% after the release, versus a 2.5% drop for other companies. “The bottom line is these names have higher beta to earnings surprises,” DeBusschere explains.

Still, when it comes to the overall market, only one AI stock truly matters—Nvidia. Heading into its earnings on May 22, its shares had a correlation of 0.95 with the S&P 500, according to Evercore ISI data. That’s a fancy way of saying that the two moved in almost perfect lockstep with each other over the past year. While correlation isn’t the same thing as causation, in this case it’s pretty darn close.

But something has changed in recent days. Shares of Nvidia gained 9.3% the trading day after its release, an astounding feat for a company valued at more than $2 trillion. Nvidia’s earnings also helped boost a select group of other stocks, according to 22V’s DeBusschere: chip stocks like

ASML Holding



Technology, and

Taiwan Semiconductor Manufacturing

; industrials like


TransDigm Group


Johnson Controls International

; and utilities like

Constellation Energy



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The S&P 500, however, finished lower the day after Nvidia’s release. “Momentum is VERY strong in the AI trades,” DeBusschere writes. “The AI trade off of NVDA’s earnings did not take the whole market with it.”

That’s concerning. While Nvidia stock gained 20% over the three days following its earnings, the S&P 500 dipped ever so slightly (less than one index point), notes Evercore ISI strategist Julian Emanuel. The fact that the third-largest stock in the S&P 500 could gain so much and the index move so little puzzled him, so he went looking for another example of a top-five holding in the S&P 500 gaining at least that much with the index finishing lower. He couldn’t find one.

“NVDA’s no longer being The Stock That Is The Market will likely end the market’s low volatility ‘hush’ of the past two weeks,” he writes.

The calm does seem to be breaking, if only a little. The

Cboe Volatility Index,

or VIX, was rising to 14.51 on Friday from 11.93 on Monday, as a little bit of noise crept into what had been a very dull market. With the rally losing steam, it might be time to consider moving out of what has worked into what hasn’t—the

Dow Jones Industrial Average.

Nothing has been more the antithesis of the AI-driven market than the Dow. Nvidia isn’t in the benchmark, and because it’s a price-weighted index, its largest holdings are

UnitedHealth Group


Goldman Sachs Group

Microsoft comes in third, but Apple is someplace in the middle, sandwiched between


Chase and


No wonder the blue-chip benchmark has risen just 1.2% this year, far less than the S&P 500’s 9.3% rise and the Nasdaq Composite’s 10.3% gain. It’s also taken a beating of late thanks to a dismal update from UnitedHealth and disappointing earnings from


which, let’s face it, never should have been swapped in for

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Exxon Mobil

Still, after dropping 4.7% since crossing 40,000 on May 17, the Dow was at its most-oversold since September 2022 at Thursday’s close, according to the Bear Traps Report’s Larry McDonald.

It might not be the robot’s choice, but if the AI trade has run its course, you could do worse than the Dow.

Write to Ben Levisohn at Ben.Levisohn@barrons.com

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