This year, Nvidia's shares have skyrocketed by 140%, with its chips regarded as the benchmark for artificial intelligence applications, contributing approximately 25% to the S&P 500's overall 17% increase.
On Wednesday, Nvidia demonstrated its substantial influence on Wall Street, as an 8.2% rise in its stock propelled the S&P 500 to its largest intraday gain in almost two years. The index rebounded from a 1.6% decline to finish the day up by 1.1%.
The stock surged after CEO Jensen Huang highlighted robust demand for Nvidia's chips, resulting in a market value increase of over $200 billion and representing 44% of the S&P 500's rise that day, according to Nomura data.
Chris Murphy, co-head of derivative strategy at Susquehanna Financial Group, noted that Nvidia's rally "got the whole market moving."
The S&P 500 has faced challenges in gaining traction this year during Nvidia's down days, managing to achieve gains only 13% of the time when the chipmaker's shares closed lower, as reported by Reuters.
This year, the index has not exceeded a 1% increase on any day when Nvidia's shares finished in the red, a stark contrast to 2020, which saw 13 such occurrences.
For many investors, these recent developments have reignited concerns about a limited number of stocks steering the market's trajectory.
Microsoft, Apple, and Nvidia collectively account for nearly 20% of the S&P 500, although the first two companies have seen significantly smaller gains this year compared to Nvidia.
Recent momentum in non-technology sectors has raised expectations for a wider market rally; however, analysts caution that a prolonged decline in any of the major tech companies could significantly impact the overall market.
"If Nvidia experiences a downturn due to decreased demand for its products, it could lead to a substantial market decline," stated Murphy from Susquehanna.
OPTIONS INFLUENCE
Traders are closely monitoring Nvidia's options, which have significantly contributed to recent market movements.
Currently, Nvidia represents approximately 22% of the total daily volume of individual stock options traded, a notable increase from around 5% at the beginning of the year, making it the most actively traded stock in the options market on most days, according to Trade Alert data.
The stock's upward momentum is intensified when traders flock to buy call options. A surge in demand for these options places market makers, who sell these contracts, in a position where they must purchase and deliver more Nvidia shares at the predetermined price, resulting in a "short gamma" situation.
These additional purchases to mitigate risk further elevate the stock price.
"The market is certainly inclined to buy upside calls when they are performing well," remarked Chris Weston, head of research at online brokerage Pepperstone. "When the momentum is strong, these trading flows can have a significant impact."
Nvidia is not the first stock to exert such a considerable influence on the broader market.
Tesla, a previous favorite among retail investors, exhibited similar behavior a few years back when the options market amplified the volatility of the electric vehicle manufacturer's stock, noted Nomura strategist Charlie McElligott.
However, the excitement surrounding AI appears to have captivated investors even more than electric vehicles.
"The enthusiasm surrounding AI, which signifies a fundamental shift across various industries, is creating a much larger theme," he explained. "Tesla never reached that level of impact."
"AI operates on a different level altogether," McElligott concluded.