Nvidia (NASDAQ: NVDA) has achieved a 174% return in 2024 and its market capitalization has increased from $1.2 trillion to $3.3 trillion. Meanwhile, the S&P500 (SNPINDEX: ^GSPC) has delivered a 15% return and increased its market cap from $40 trillion to $46 trillion. Put another way: Nvidia is responsible for more than a third of the S&P 500’s profits this year.
As a result, the average S&P 500 stock lags the index by 10.7%, its worst underperformance since 1990, according to The Wall Street Journal. That means investors without exposure to Nvidia have found it exceptionally difficult to beat the market this year.
Investors can learn some important lessons from the situation and take steps to prevent a similar problem in the future. Read on for more information.
Nvidia shares have become cheaper over the past five quarters
Some investors may have sold or avoided Nvidia due to valuation concerns. Shares are up 608% since the chipmaker reported financial results for the fourth quarter of fiscal 2023 (ending January 29, 2023), and that much price gain compressed into such a short period usually means the price-to-earnings ratio has increased. But that is not the case with Nvidia.
Nvidia’s earnings per share rose 882% between the fourth quarter of fiscal 2023 and the first quarter of fiscal 2025 (ending April 30, 2024), outpacing the share price gain. As a result, Nvidia stock is actually trading at a cheaper price-to-earnings ratio today than when the company reported financial results five quarters ago.
Moreover, while the current valuation of 79.3 times earnings seems expensive, valuations should be viewed alongside growth. Wall Street expects Nvidia to grow earnings per share 33% annually to $4.95 per diluted share in fiscal 2028 (ends January 30, 2028). If that number is divided into the current price-to-earnings ratio, the result is a PEG ratio of 2.4.
That’s not necessarily cheap, but it is cheaper than some mega-cap stocks. Using the same methodology, Apple has a PEG ratio of 3.1 and Microsoft has a PEG ratio of 2.8.
The S&P 500 may be richly valued, but artificial intelligence hasn’t created a stock market bubble
Another argument against Nvidia (and the broader stock market) is that artificial intelligence (AI) is overhyped, and irrational euphoria around the technology has created a stock market bubble. Some pessimists even compare the current market environment to the Internet crash. But that comparison is incorrect.
In January 2000, the five largest technology companies traded at an average valuation of 59 times forward earnings. Today, the five largest tech companies trade at an average valuation of 37 times forward earnings. Furthermore, today’s five largest technology companies are expected to grow their profits by 42% this year, while the five largest technology companies in 2000 are expected to grow their profits by 30% that year, according to JPMorgan Chase.
To be fair, the S&P 500 trades at 21 times forward earnings, a premium to its five-year average of 19.2 times forward earnings, and enthusiasm about AI has undoubtedly played a role. But that doesn’t mean AI is an overhyped technology destined to disappoint. It simply means that the market is going through the normal phases of the market Gartner Hype Cycle: Stocks go too high, then too low, before finally entering a gradual upward slope.
The Internet is an example of a technology that has gone through the cycle. Opponents labeled the Internet a fad, and some experts expected it to fail. Economist Paul Krugman predicted that it would have no more economic impact than the fax machine. In retrospect, those opinions are laughable. The digital economy accounted for 10% of US GDP, or $2.6 trillion, in 2022, growing three times faster than the economy as a whole.
I believe that AI will be largely the same in twenty years. The naysayers will seem woefully out of reach in retrospect, and patient investors who bought good stocks (at reasonable prices) will be well rewarded. That doesn’t necessarily mean Nvidia is worth buying, but I think it is Morgan Stanley analysts have the right idea. “The bottom line is that we think the background justifies AI exposure, even amid extreme enthusiasm – and Nvidia remains the clearest way to get that exposure.”
For context, Morgan Stanley has set Nvidia a split price target of $116 per share. The analysts have also outlined a bear case target of $51 per share and a bull case target of $136 per share.
How investors can avoid the Nvidia problem in the future
Investors who never owned (or sold) Nvidia before 2024 have had a hard time beating the market. As mentioned, the average S&P 500 stock has underperformed the index by 10.7% year to date, the largest underperformance since 1990.
One way investors can avoid a similar problem in the future is to own an S&P 500 index fund. This strategy will not help investors beat the market, but it will help them match its returns. Personally, I keep a relatively large portion of my portfolio in the Vanguard S&P 500 ETF, and I keep the rest in individual stocks. By doing this, my portfolio will beat the market when my stocks outperform, but not lag the market too much when my stocks underperform.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennevine has positions in Nvidia and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Apple, JPMorgan Chase, Microsoft, Nvidia and Vanguard S&P 500 ETF. The Motley Fool recommends Gartner and recommends the following options: long calls in January 2026 for $395 at Microsoft and short calls in January 2026 for $405 at Microsoft. The Motley Fool has a disclosure policy.
Nvidia shares are up 174% this year. That’s a big problem for the average S&P 500 stock (and some investors). was originally published by The Motley Fool
