This is the conclusion of today’s Morning Brief, which you can read Log in Delivered to your inbox every morning, along with:
Something strange happened in the stock market this week – aside from the surprise of a surprise Consumer Price Index (CPI) report.
Shares of market darling Nvidia (NVDA) fell into correction territory, defined as a 10% decline from its recent peak.
At its low of around $830 midway through Tuesday’s session, the stock was 12.6% below its March 25 peak. It has since recovered somewhat to $900, but is still 5% away from the highs.
“This is a breather for Nvidia as more investors embrace 2nd and 3rd derivatives of AI across the semi and software ecosystem,” Wedbush tech analyst Dan Ives told me. “We view this as a digestion period for Nvidia and nothing more.”
Maybe that turns out to be right. Who knows?
Bank of America analyst Vivek Arya notes that volatility is nothing new at Nvidia – the current selloff marks the ninth time the stock has fallen 10% or more since ChatGPT launched in late 2022.
“There are some market factors such as the recent rise in inflation, volatility (VIX), fatigue in AI stocks, rotation towards more cyclical sectors and perhaps some trimming ahead of the upcoming earnings season,” Arya said. “Fundamentally, we have also heard investor concerns about increasing competition and shortening lead times (indicating slowing demand) for Nvidia GPU accelerators (although this is expected as Blackwell demand grows).”
I happen to think that the sell-off in Nvidia shares is a near-term headwind for the broader markets that should be respected much more than it actually is. Arya goes into this a little in his note, but it needs further explanation.
This is where a stock that Wall Street and Main Street really love — for real, fundamental reasons like the AI explosion driving demand for superchips — is losing ground. This is one of the clearest signs that investors believe stock prices have risen too much and too quickly this year amid higher and longer-term interest rates.
Additionally, price action suggests that investors actively looking for new reasons to buy stocks at peak prices have no chance. Now they may simply be waiting to buy top names like Nvidia at cheaper prices.
This wait-and-see approach is what the pros are practicing with Nvidia stock and other stocks with high valuations but well-understood investment thesis.
And it’s not like Nvidia hasn’t led the broader market lower before – that happened last summer!
Evercore ISI strategist Julian Emanuel rightly pointed out that Nvidia stock changed next to nothing from July 2023 to October 2023 (chart below). It was ultimately the catalyst that pushed the S&P 500 lower.
Bottom line: For the broader market to get its mojo back, its favorite stock must also get its mojo back.
Brian Sozzi is Editor-in-Chief of Yahoo Finance. Follow Sozzi on Twitter/X @BrianSozzi and further LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email [email protected].
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