Nvidia shares look set for their third straight session decline Monday, following the stock's brief reign as the world's most valuable company, a move that some analysts suggest could signal a near-term correction for the broader market.
Nvidia (NVDA) , which has captured the financial world's attention as the world's most important provider of AI-powering technologies, has risen more than 155% this year, adding some $2 trillion in value and briefly nudging past Microsoft (MSFT) as the world's biggest company.
The stock has also powered the lion's share of the S&P 500's solid first-half gains and is responsible for around a third of its rebound from the late-April lows.
That has some analysts worried that a lack of market breadth — where only a handful of heavily weighted stocks drive an index's overall performance — could trigger a near-term correction in an otherwise healthy economy.
"Over a rolling one-month horizon, breadth is as narrow as it's been going back to 1965," Morgan Stanley analysts said in a note published Monday.
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Nvidia's year-to-date gain towers over the impressive advances of other so-called Magnificent 7 tech stocks, with Meta Platforms (META) rising nearly 40%, Google parent Alphabet (GOOGL) up 28.6% and retail and web-services giant Amazon (AMZN) gaining 24.4%.
The stock market's bad breadth
That's leaving the market vulnerable to correction, according to analysts at Yardeni Research, who see fewer stocks participating in the S&P 500's 15% year-to-date rally.
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"As the S&P 500 has been rising to new highs in recent days, the percent of S&P 500 companies trading above their 200-day moving averages has been falling," Yardeni said. "That could signal a looming correction, though false positives have occurred in the past."
Adam Turnquist, chief technical strategist for LPL Financial in Charlotte, also cites data showing a lack of broader market participation in the S&P 500's extraordinary advance, which has seen the benchmark print at least 30 record highs this year.
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Turnquist notes that the number of advancing stocks in the benchmark compared with the number of declining ones is starting to narrow.
In a healthy bull market, the number of advancing stocks should rise in concert with the broader benchmark, but that trend is starting to break down.
"This divergence does not imply the bull market is over, but it does point to elevated risk [that] the broader market could be due for a potential pause or pullback," Turnquist said.
Solid fundamentals in the market
Emily Bowersock Hill argues, however, that while megacap-growth-stock valuations are stretched, the broader market fundamentals haven't completely decoupled from sentiment as they did during the early-2000s tech bubble.
The CEO and founding partner of Bowersock Capital Partners in Lawrence, Kan., says that while market leadership is certainly narrower than it was earlier in the year, companies are still being rewarded for stronger earnings and punished when they don't deliver.
Improving corporate earnings, tied to a healthy economy, are likely to provide the bulk of the market's heavy lifting in the second half, according to Bank of America's benchmark fund managers' survey in June. A net 19% of respondents saw profit growth improving over the next 12 months.
LSEG data suggest collective second-quarter S&P 500 profits are set to rise around 10.7% from a year earlier to a share-weighted $495.7 billion, firmly ahead of the 8% growth recorded over the first three months of the year.
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This likely means stocks will sustain their rally over the near term, given both the resilience of the broader economy, the likelihood of Fed rate cuts and the potential profits that AI-related technologies will generate.
"On the one hand, Nvidia’s rich valuation is ludicrous — its market cap now exceeds that of the entire FTSE 100, yet its sales are less than 4% of that index," she said. "By this sort of measure, the other obvious AI beneficiaries seem similarly overpriced."
"On the other hand, the AI revolution promises to be real, and a bonanza for the companies at its forefront," she added.
Market-breadth concerns are 'misplaced': Tom Lee
Morgan Stanley analysts also argue that narrow market breadth doesn't always translate into weaker near-term returns,
"The average cap-weighted index return six months after narrow-breadth readings is 4%. ... [The] average equal-weighted index return is 5%," the bank noted.
Others argue that the market isn't suffering from a lack of breadth at all, including FundStrat's Tom Lee, who calls that description "misplaced."
Lee notes that around a third of S&P 500 stocks are up 10% so far this year, with nearly a quarter of constituents matching the benchmark's year-to-date gain.
"That means 40 S&P 500 stocks are up >30% year-to-date," FundStrat said. "That is hardly a narrow market. In fact, it is quite a broad-based rally. And counter to those arguing this is only seven stocks driving returns.”
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David Morrison, senior market analyst at Trade Nation, has some concerns about the imbalance in current market valuations, but says markets won't react without a near-term catalyst.
"These giant corporations can continue to lead and drive the rest of the market for longer than most of us can imagine," he said. He notes that the market's five biggest stocks trade at a price-to-earnings multiple of 31, well ahead of the S&P 500's overall multiple of 21.
"How these imbalances get rectified is also something that is unknowable," he added. "For now the bulls have the ball and they’re certainly running with it."
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