Diverging Fortunes: Nvidia Propels S&P 500 While Smaller Companies Struggle

The S&P 500 is soaring to new heights, largely propelled by one company: Nvidia (NASDAQ:NVDA).

In contrast, smaller and less prominent companies are struggling, with their values significantly below previous highs.

The Russell 2000 index, representing smaller companies, has dropped 17% from its peak in November 2021 and has shown no progress this year.

Within the S&P 500, which consists of major corporations, the average stock's performance is stagnant compared to the beginning of 2022.

Surprisingly, more than half of the current constituents have experienced losses since then.

This stock market has raised concerns among technical analysts, who argue that broad-based gains across many stocks are crucial for a more sustainable bull market.

Interestingly, two distinct forces are driving stock movements.

First, there’s a strong demand for chips related to artificial intelligence (AI), pushing Nvidia and a few other stocks to record highs.

Nvidia has even become the world's most valuable company this week.

Second, economic and interest rate concerns are driving most other stocks downward.

The Federal Reserve remains focused on controlling inflation and has not cut the interest rates yet this year while other central banks have already done so.

The US stock market is heavily reliant on Nvidia, this single stock accounted for a third of the S&P 500’s gains this month.

Unfortunately, the rest of the market isn’t as strong so when Nvidia falls the direct consequence is that the S&P 500 also falls.

This is what happened yesterday, Nvidia's stock experienced a dramatic downturn, marking the largest single-day market cap loss on record.

Investors typically buy S&P 500 index ETFs to diversify across various companies.

However, the current trend involves significant exposure to Nvidia-specific and broader AI-related risks.

While this strategy has worked well so far, it leaves the market less diversified than before.

On a positive note, the market is unpredictable.

Sentiment could easily shift from concerns about a weak economy to optimism about growth.

Passive investors who hold the S&P 500 have largely ignored economic worries, thanks to Nvidia, Apple (NASDAQ:AAPL), and Microsoft (NASDAQ:MSFT).

These three giants have contributed more value this month than all other S&P members combined.