Nvidia and the market dynamics for global stocks

The record stock market rally for Nvidia stocks makes us shudder to think what would have happened if the chip maker had delivered weak earnings or weaker forecasts. However, while we doubt that Nvidia is going to continue adding $200bn + to its market cap in a single day, AI is a key theme for markets right now.  

Since so much of market momentum is driven by tech and by Nvidia, we looked at correlations between Nvidia and a universe of global stocks in an attempt to determine 1, what stocks have the strongest positive and negative correlations with Nvidia and 2, identifying the stocks with the strongest positive correlation to Nvidia, as they could be at risk if the stock turns lower at some point.

We have calculated the long- and short-term correlations between Nvidia and a global universe of stocks including all companies on the S&P 500, MSCI World index, FTSE 100, Cac 40, Dax, AEX index, Eurostoxx 50 and the Philadelphia Semi-Conductors Index.

Below are the results.

Short term strongest positive correlations with Nvidia are:

Advanced Micro Devices

Broadcom Inc

Synopsis Inc

Quanta Services

Accenture PLC

SAP

LAM research

Cadence Design

Oracle

ASML

Longer term strongest positive correlations with Nvidia are:

Eaton Corp

Parker Hannafin

Cadence Design

Ingersoll- Rand

Bookings Holdings

CDW

Amazon

Marvell Technology

Synopsis Inc

NVR Inc

The stocks that are positively correlated with Nvidia move with the chip maker extremely closely. For example, Advanced Micro Devises has moved in the same direction as Nvidia 87% of the time over the last 3 months, while Amazon has moved with Nvidia 72% of the time over the last 5 months. This means that when Nvidia moves higher, these stocks have also tended to move higher, and when Nvidia moved lower then these stocks also tended to sell off.

Below we show the stocks with the highest negative correlation with Nvidia. This means that they move in the opposite direction to the chip maker.

Short term highest negative correlations with Nvidia:

Keurig Dr Pepper

Endeavour Mining

Newmont Corp

Teleflex Inc

WPP

Equity Residential

General Mills

Severn Trent

AvalonBay Communications

Centrepoint Energy

Longer term highest negative correlations with Nvidia:

Dollar General

Newmont Corp

Centrica PLC

Total Energies

APA Corp

As you can see, the stocks with the strongest negative correlations to Nvidia include miners, UK utilities providers, beverage manufacturers and American versions of poundland.

It is worth noting that correlations don’t always persist, and sometimes even strong correlations are merely coincidental. This universe of stocks is moving because of multiple factors: both idiosyncratic and economic, and not just because of Nvidia. However, it is an interesting lens to use to look at global stock market dynamics, especially when Nvidia is having such a big impact on global stock markets and is being called the ‘most important stock in the world’.

Does the AI boom signal the end of Big oil?

There is a herd behavior in financial markets right now, with Nvidia at the centre. The rally in Nvidia means that it is now the world’s 4^th most valuable company with a market cap of $1.96trn. It has a smaller market cap than Microsoft, Apple and Saudi Arabian Oil co, and its market cap is now larger than Amazon, Alphabet and Meta.

Nvidia is now significantly more valuable than several large oil companies, including Exxon Mobil, which has a market cap of $416bn, Chevron’s market cap is $293bn and ConocoPhillips stands at $132bn. Nvidia’s market cap increased by more than ConocoPhillips’ market cap in one day on Thursday!

We don’t know if Nvidia is in a bubble or not, and anyone who says they know the answer – don’t believe them. But when one stock dominates, questions should be asked. For example, is it justified that Nvidia’s market cap is many times that of Exxon Mobil, even though hydrocarbons are still essential to everyday life, and AI requires a huge amount of power at this stage of its evolution? And is the AI trade a bet on the speed of Big oil’s demise or is it merely collateral damage as investors pile in to get a slice of the AI pie? These are the questions that the market should ponder in the coming days and weeks.