It’s no exaggeration to say that the near-term direction of the stock market, particularly technology-focused exchange-traded funds, will be determined by today’s earnings report from Nvidia Corporation (NVDA), the world’s leading artificial intelligence company.
Nvidia, a $1.8 trillion multinational technology company headquartered in Santa Clara, Calif., beat top and bottom estimates in its Feb. 21 earnings report and revised upwards in anticipation of future revenue growth. led. NVDA stock rose more than 5% immediately after the news.
NVDA, tech stocks face high hurdles
Furthermore, growth stocks, which are under intense scrutiny from investors due to their high valuations and are more sensitive to interest rates than value stocks, will face bigger hurdles in 2024 than in 2023. Now, NVDA and other mega-growth stocks are facing the Fed’s outlook for interest rates, which says stocks will be “higher for an extended period of time” following a better-than-expected January Consumer Price Index (CPI) report, and the S&P 500. The index recently exceeded the 5,000 level for the first time in history.
Mag7 tech stocks have met the high expectations, beating earnings estimates in 19 of the past 20 quarters, according to Nasdaq.
AI, Tech, Mag 7 ETF has the highest exposure to NVDA
The ETFs most affected after Nvidia’s earnings announcement are those with the highest exposure to NVDA; VanEck Semiconductor ETF (SMH) With an allocation weight of almost 25%, Global X Robotics and Artificial Intelligence ETF (BOTZ) At 20%.
As of February 16, 2024, the price of SMH has increased by 67% in the past year, while BOTZ has increased by 27%. The lion’s share of these gains came from NVDA, which rose more than 200% over the past 12 months. . A less-than-stellar earnings report from Nvidia this week will put downward pressure on these ETFs, and if they don’t make gains, they’re likely to drop significantly.
Measuring the impact of NVDA: cap weights and equal weights
To demonstrate the impact of NVDA on ETFs, compare the cap-weighted 25% increase in one year. SPDR S&P 500 ETF Trust (SPY) 8% profit Invesco S&P 500 Equal Weight ETF (RSP), each component of the index is given the same assignment.cap weight Invesco QQQ Trust (QQQ)The company, which allocates about 40% of its portfolio to NVDA and seven other Magnificent stocks, is up 44% over the past year.
In other words, higher exposure to NVDA-led Mag 7 stocks would have yielded much higher returns over the past year, but reducing exposure to NVDA and other Mag 7 stocks would have reduced returns by a third. Decrease by 2 or more.
As the market progresses through 2024, broader market indexes like the S&P 500 index, especially the AI ETF and the broader technology sector, will continue to trade with Nvidia and other Magnifi companies to sustain the broader bull run in stocks. The Cent7 stocks will need to continue to exceed investor expectations. These stocks and ETFs will also need help from a soft economic landing, which is a combination of lower inflation and slower but modest growth in the U.S. economy.
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