NVIDIA Leads US Stocks Lower As Futures Expire

AI chip maker loses more than $200 billion in market value in two days

This time, the company played Nvidia Corp. An additional role. The value of contracts tied to the chipmaker, which expire on Friday, is the second-largest of any underlying asset, trailing only the S&P 500. The expiration coincides with S&P Dow Jones Indices’s revision of its regular index.

Steve Sosnick of Interactive Brokers sees the “major” rebalancing as due in the Technology Select Sector Index, the benchmark for the $80 billion XLK exchange-traded fund.

Nvidia’s weight rises at Apple’s expense

“Nvidia’s relative weighting will increase significantly, mostly at the expense of Apple,” he noted, and “given the outsized importance of large tech stocks in general — and Nvidia in particular — to broad market indices, it’s natural for traders to be concerned about big moves late in the day.”

As contracts disappear, investors adjust their positions, adding a wave of liquidity that can move individual stock prices. The S&P 500 fell to about 5,465 points amid a surge in trading volume. Nvidia barely recovered its roughly 5% drop before its price plunged again. The company lost more than $200 billion in market value in two days, and Apple’s stock price also tumbled.

The yield on 10-year Treasury bonds held steady at 4.25%. France’s risk premium over Germany’s closed at its highest since 2012.

Record investments in technology stocks

The ongoing artificial intelligence craze that briefly made Nvidia the world’s most valuable company this week also led to record investments in technology funds, which received about $8.7 billion in the week ended June 19, according to a note from the bank, citing EPFR Global data.

“The ‘all roads lead to Nvidia’ mantra has made a comeback as Europe stumbles amid political unrest in France,” said strategist Michael Hartnett. “However, while investors still feel they need more exposure to AI-related stocks, all asset allocation firms are concerned about concentration risks.”

In this context, Keith Lerner of Truist Advisory Services says his firm is downgrading the technology sector to “neutral” after the industry largely outperformed the S&P 500 since they called for increased weightings in November.

“While we still have a positive long-term view on technology, the sector appears stressed in the short term, and we would not recommend buying the sector,” Lerner noted. “However, the sector appears far from bubble territory, and we expect AI tailwinds to continue.”

Expected fluctuations

Friday’s options-related event came at a critical juncture for market positioning for the second half of 2024 and the Federal Reserve’s likely next steps. Data showed U.S. service business activity rebounded earlier this month at its fastest pace in more than two years. Separately, existing home sales fell for a third straight month.

“Investors should brace themselves for drama. The second half of 2024 looks like it will be a transitional and volatile period,” said Solita Marsili of UBS Global Wealth Management. “The decisions investors make now will be key to effectively navigate this period.”

John Stoltzfus of Oppenheimer Asset Management says he remains positive on the outlook for stocks, with the prospects for improved fundamentals this year looking possible.

“However, history shows us that stock prices and other asset classes do not rise in a straight line, but rather tend to climb the proverbial ‘wall of worry’, which requires wise diversification, patience, and managing risk and volatility for individual investors and discipline for professional investors,” he added.