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For the better part of 18 months, the stock market rally has been defined by the rise of artificial intelligence and its impact on a few large tech stocks.
But an increasing number of Wall Street strategists don't believe that thesis is what will drive the S&P 500's (^GSPC) next leg higher.
"Our sense is that NVDA is becoming just another Large Cap Growth stock," Citi's equity strategy team, led by Scott Chronert, wrote in a note to clients on Monday.
Nvidia's (NVDA) recent earnings release did little to impress investors. The stock fell about 6% the day after its earnings release. But that sour sentiment didn't permeate through the market as the S&P 500 closed flat on that same day. This marked the second straight quarter that the broader S&P 500 didn't move with Nvidia following its earnings release.
And, as Chronert's team highlights, after a more than 2,000% gain in the past five years, including gaining more than 110% this year alone, Nvidia stock appears to be coming back down to earth.
With that cooling off, the current moment may come to mark the end of the first AI-based chapter in this bull market.
"A simple look at the deceleration in rate of forward guidance increases suggests that [Nvidia's] most profound performance and fundamental impacts on index price action may be behind," Chronert's team wrote.
As top holding in the index, what Nvidia does on any given day will remain in focus as it can hold back or bolster the broader market's returns. But recent market action has shown a clear shift in what's driving investors to buy stocks. Instead of wondering how many generative AI chips one company is selling to a few others, developments in the macroeconomy are back to being top of mind for investors, especially the severity of the labor market's cooling.
Take what's driving the market. Since the start of the quarter on July 1, the S&P 500 is nearly flat. Nvidia, down nearly 15%, and the Magnificent Seven as a whole, off more than 5%, have both lagged the benchmark index.
Meanwhile, non-tech areas like Utilities, up about 12%, and Financials, up nearly 10%, have been leading the market rally, benefitting from investors positioning for interest rate cuts.
For now, it's a macro-driven market and every economic data release seems to matter more than an Nvidia earnings release or a headline about AI chip shipment delays.
Perhaps the best illustration came last week. The worst weekly performance for both the S&P 500 and Nasdaq for all of 2024 came when the August jobs report failed to provide clarity on the health of the labor market and what the Federal Reserve will do with interest rates on Sept. 18.
On the one hand, of course Nvidia's health and trajectory are still critical to the current bull market. On the other, big as Nvidia is, it's not more important than the US economy. And, perhaps, that's the way it should be. It is after all "just another Large Cap Growth stock."
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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