The highly anticipated earnings report from Nvidia (NVDA) has been released. The company’s financial metrics beat Wall Street expectations, sending shares soaring nearly 20% in the three days after its earnings announcement.
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 chip maker’s earnings announcement after the closing bell on May 22. For Julian Emanuel of Evercore ISI, this puts an end to a year-long trend of Nvidia stock moves sending the market higher.
“NVDA’s pause on ‘stocks that are the market’ will likely end the ‘silence’ of low volatility in the market over the past two weeks,” Emanuel warned in a note to clients on Wednesday.
The S&P 500 has fallen from its record highs since Nvidia’s earnings announcement as investors’ focus turned elsewhere. Shares fell even though Nvidia shares rose 10% the day after the company’s earnings announcement as a hotter-than-expected reading of economic output led investors to scale back their expectations for interest rate cuts this year. That trend continued this week as a rise in the 10-year Treasury yield (^TNX) to its highest level since the beginning of May helped push the S&P 500 lower over the same period.
Emanuel, who holds one of the lowest year-end targets for the S&P 500 on Wall Street at 4,750, noted that the top-five-weighted stocks in the S&P 500 never rose more than 20% in the three days after the index’s earnings. That time period also doesn’t end higher. So, the recent divergence in trends is starkly different from Nvidia’s near-perfect correlation with the S&P 500 over the past year, according to Emanuel, and could mean the market is set for a pullback.
“There is no precedent for a stock the size of NVDA having its stock’s post-earnings rally ‘ignored’ by the broader S&P 500,” Emanuel wrote. “This divergence is a catalyst for a larger move across the S&P 500 versus other event catalysts.”
Emanuel listed upcoming inflation readings such as Friday’s personal consumption expenditures index release and the Federal Reserve’s June meeting as examples.
Emanuel noted that Nvidia’s decoupling from the market comes at a time when large-cap stocks as a whole have become less correlated with each other recently. At a reading of around 12 on Tuesday in the CBOE Implied Correlation Index (^COR3M), Emanuel noted that the correlation among large-cap stocks was among the “lowest observations ever.”
Similar previous correlation lows are consistent with stock pullbacks such as the three-month pullback that began in August 2023. In most cases, this was followed by a 10% correction in stocks, according to Emanuel. Its base case remains a mid-year pullback “consistent with the effects of correlation bottoms.”
More broadly, other strategists pointed to the end of the positive earnings season as a reason market action is likely to be bumpy in the coming weeks as investor focus turns to economic data amid an uncertain interest rate path for the Federal Reserve.
This shift in investor focus is leading to a “more volatile market,” Keith Lerner, associate CTO at Truist, told Yahoo Finance.
“Our key message is that we continue to believe the underlying trend is higher,” Lerner said. “In the near term, the market will be looking for a catalyst, which likely means we are in for a volatile period.”
Josh Schaeffer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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