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Nvidia's tide is no longer lifting other boats

The chipmaker is pulling away from its peers and industry.

6/10/24 12:25PM

The AI boom is narrowing.

More and more, Nvidia stands alone in driving this particular theme within the stock market.

The chip designer’s operating results show that spending on AI clearly isn’t slowing down. But lately, investors seem to be treating this more and more as a winner-takes-all situation than one in which a rising tide lifts all boats. The post earnings report rally that pushed the stock into the $3 trillion market cap club has seemingly not produced many positive spillovers for other companies.

The different ways to slice and dice it:

The 21-day correlation between the daily percent change in Nvidia and its 10 closest peers (per Bloomberg’s filter) has collapsed to virtually zero – that is, there’s no longer any connection there.

The correlation between the daily change in Nvidia and the broader iShares Semiconductor ETF (SOXX) is much stronger (42%) than for the aforementioned smaller handful of its peers. But even so, this relationship has weakened to the 5th percentile relative to its history (going back to August 2001). That’s particularly striking given that Nvidia’s weight in this ETF has increased from less than 0.1% to more than 11% over this period.

And remember when utilities were an AI play thanks to the heightened demand for energy from data centers? Yeah, that was a fun month. As Bloomberg’s Joe Weisenthal notes, utilities rallied 15% from around the time the stock market bottomed in mid-April. More recently the sector ended last week as the worst performing S&P 500 sector for three straight sessions.

Nvidia’s no longer driving the performance of its peers, its industry group, or associated bank-shots in different sectors. The good news for investors, from an index level perspective, is that the stock continues to power higher — and there’s no way that Nvidia will stop driving Nvidia’s performance.

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DraftKings moves to counter prediction market threat

DraftKings rose after hours, following news that it is buying Railbird in an effort to address the competitive threat from prediction markets that has weighed on its share price — and that of FanDuel parent Flutter Entertainment — for weeks.

The deal is then latest example of the increasing linkages and overlap between worlds of financial markets, gambling, and prediction markets.

Earlier this month, ICE — the parent company of the New York Stock Exchange and the ICE futures markets, among others — announced it would invest up to $2 billion in prediction markets company Polymarket.

And Robinhood shares have recently gotten a lift from its ongoing partnership with prediction market platform Kalshi, which has seen growing uptake of its events contracts that allow buyers to take positions on football games.

(Robinhood Markets Inc. is the parent company of Sherwood Media, an independently operated media company subject to certain legal and regulatory restrictions.)

By and large investor excitement over prediction markets — which has picked up since the start of football season — has seemed to come at the expense of Flutter and DraftKings, the two companies that dominate US sports betting.

Over the last three months through the end of regular trading on Wednesday, DraftKings and Flutter were down 23% and 18%, respectively, while the S&P 500 is up about 7%.

DraftKings acquires predictions platform Railbird

The deal is then latest example of the increasing linkages and overlap between worlds of financial markets, gambling, and prediction markets.

(Robinhood Markets Inc. is the parent company of Sherwood Media, an independently operated media company subject to certain legal and regulatory restrictions.)

Over the last three months through the end of regular trading on Wednesday, DraftKings and Flutter were down 23% and 18%, respectively, while the S&P 500 is up about 7%.

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The calmest session for the S&P 500 in over a month.

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The no-fundamentals, high-volatility winning trades are reversing hard

The volatile, speculative momentum trades that have been on fire in recent months are getting smoked.

The SPDR Gold Shares ETF is on track for its biggest daily loss since April 2013, as of 10:28 a.m. ET.

And Goldman Sachs’ baskets of “high beta momentum longs” and “non-profitable tech” stocks, which have pretty much been the exact same line for two months, got dumped last Thursday and are down big again today.

D-Wave Quantum, Planet Labs, and Navitas Semiconductor are some of the stocks that feature in both of Goldman’s baskets and are down more than 2% as of 10:24 a.m. ET.

All of these groups have been handily outperforming the S&P 500 for an extended period of time despite by their very nature having more hype than actual track records — in terms of producing profits for shareholders — to speak of. Gold, obviously, generates no income. Nonprofitable tech stocks aren’t really in a position to spin off cash they don’t have to their owners. And, as mentioned, high-beta momentum and nonprofitable tech stocks have pretty much traded the same!

It’s difficult to pinpoint a fundamental catalyst for why speculative momentum trades suddenly turn on a dime, just as it’s often tricky to identify why they went on such a mammoth run in the first place. Perhaps the onset of earnings season — which gives us the opportunity to assess fundamental progress — means that right now, there’s more attention being paid to “line go up” when it comes to revenues and profits, and that’s taking away from the mindshare on “line go up” with respect to recent share price performance.

Nvidia's tide is no longer lifting other boats

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