Nvidia’s (NVDA) highly anticipated earnings release has been released. The company’s financials exceeded Wall Street expectations, sending its shares up nearly 20% in the three days after its earnings release.
But the widespread stock market rally that many thought would follow did not happen. The S&P 500 (^GSPC) is now down more than 0.5% since the chipmaker’s earnings release after the closing bell on May 22. For Evercore ISI’s Julian Emanuel, this marks an end to a years-long trend of Nvidia’s stock moves driving the market higher.
“NVDA is no longer ‘the stock that is the market’ and will likely reverse the low market volatility of the past two weeks,” Emanuel warned in a letter to clients on Wednesday.
The S&P 500 has fallen from record highs since the Nvidia earnings release, as investor focus has shifted elsewhere. Shares fell despite a 10% rise in Nvidia shares the day after the company’s earnings release, as better-than-expected economic output caused investors to scale back their expectations for rate cuts this year. That trend has continued this week, as a rise in 10-year Treasury yields (^TNX) to their highest level since early May has contributed to a decline in the S&P 500 over the same period.
Emanuel, who has one of the lowest closing targets for the S&P 500 on Wall Street at 4,750, noted that a stock with a top-five weighting in the S&P 500 is never up 20% in the three days following its index gain. increased. that period will not end higher. So the latest divergence in directions is very different from Nvidia’s near-perfect correlation with the S&P 500 over the past year, Emanuel said, and could mean the market is primed for a pullback.
“There is no precedent for the stock price being ‘ignored’ by the broader S&P 500 after the earnings beat,” Emanuel wrote. “This difference is a catalyst for more movement at the S&P 500 level versus other event catalysts.”
Emanuel cited upcoming inflation figures such as Friday’s Personal Consumption Expenditures index and the June Federal Reserve meeting as examples.
Emanuel pointed out that Nvidia’s decoupling from the market comes because large-cap stocks as a whole have become less correlated with each other lately. At around 12 on Tuesday in the CBOE Implied Correlation Index (^COR3M), Emanuel noted that the correlation among large-cap stocks is among the “lowest observations ever.”
Previous correlation declines like this have corresponded with stock pullbacks, such as the three-month pullback that began in August 2023. In most cases, a 10% stock correction followed, Emanuel said. His base case remains a mid-year pullback, “consistent with the aftermath of correlation declines.”
More broadly, other strategists have pointed to the end of a positive earnings season as a reason market action could be bumpy in the coming weeks as investor focus shifts to economic data amid an uncertain interest rate path for the Federal Reserve.
Truist co-CIO Keith Lerner told Yahoo Finance that this shift in investor focus makes for a “more volatile market.”
“Our underlying message is that we still think the primary trend is higher,” Lerner said. “In the short term, the market will be looking for a catalyst, which probably means we are in a more turbulent period.”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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