Expect Nvidia's impact on the market to decrease: Strategist

The first week of September trading took a toll on Nvidia (NVDA) shares, which is currently trying to recover losses, and weighing on the major averages (^DJI, ^GSPC, ^IXIC) as the chip giant struggles to live up to its sky-high expectations.

Citigroup head of US equity strategy Scott Chronert joins Morning Brief to discuss Nvidia's outlook and how investors can prepare for a pullback.

Chronert notes that while Nvidia is expected to see 40% earnings growth in 2025, its impact on the tech-heavy indexes, particularly the S&P 500, will start to decrease. "What we're looking at is the pattern over the past 15 months, going back to May of '23, when they first gave us a significant upside surprise and guidance raise. What's happened since then is that they've continued to raise guidance with each quarter, but that stair-step function is decelerating," he explains.

As Nvidia's guidance lifts continue to decelerate, Chronert argues, "what this tells us is that it's still a really important stock for index direction. At 6% plus of the index, it's going to be. But in terms of the more significant upside that it's contributed to the S&P, we think that certainly lessens from here."

He adds that when Big Tech and the Magnificent Seven dipped to about in mid-July, he encouraged investors to "play 'growth' as defensive around concerns of economic weakening." He calls this strategy "a pretty good playbook" as his year-end target for the S&P 500 sits at 5,600. He notes that if the index falls closer to 5,200, "your risk reward begins to get much more attractive going into the year-end."

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Melanie Riehl

Video transcript

Let's take a look here more specifically on tech and what it means for the broader market because we do have tech leading the way this morning.

But the sector that's been the out performer so far this year has actually come under pressure.

In recent weeks, the down more move led by NVIDIA, the stock has fallen more than 10% in just the last five days weighing on major averages as the company struggles to live up to lofty expectations.

But looking ahead sentiment, it may be shifting just a bit.

NVIDIA may not have the outsized influence on the broader market joining us.

Now, we want to bring in Scott Croner.

He's a Citigroup's head of us Equity strategy, Scott, it's great to have you here and, and I loved your note that you put out earlier this week and we wanted to talk to you about it because there has been so much focus on Nvidia's out outside influence on the market and the fact that NVIDIA has really been driving the gains, walk us through your current thesis and why you see the sentiment starting to shift just a bit.

Hey, Shanna, thanks for being here on.

Ok.

So, uh regarding NVIDIA, what our focus here is not that they're not in a really good position to grow consensus expectations for 2025 or for 40% earnings growth.

We don't doubt that.

But what we're looking at is the pattern over the past 15 months, going back to May of 23 when they first gave us a significant upside, surprise and guidance, raise.

What's happened since then is that they've continued to raise guidance with each quarter.

But that stair step function is decelerating.

So what we're looking at here is a lessening rate of incremental increase on the heels of the performance that the stock has had over the past year and even year to date.

We suspect that what this tells us is that it's still a really important stock for index direction at 6% plus of the index, it's going to be.

But in terms of the, the more significant upside that it's contributed to the S and P, we think that certainly lessens from here.

Ok. And so if it does lessen from here, then where some of the other, especially as a lot of investors are trying to chart out where the dip buying opportunities are, where would they be asked to perhaps look at some of the repositioning and look at those buying opportunities.

If there was more of that dip, that certainly does occur as we're in September where everybody's thinking about the September effect.

Right.

Well, I think from point of reference would be what happened from the middle part of July to the early part of August where you saw tech, uh and this mag seven cohort come under pressure when we got down towards those 5200 levels.

Brad, what we suggested at that point was that the setup was that you could begin to play quote growth as defensive around concerns of economic weakening.

So you give us, you know, sort of AAA another version of what we've just been through, we think that's a pretty good playbook for how we're seeing it set up right now.

It, that kind of plays to our broader S and P call that we're not aggressive at 5600, that's our year end target.

But as you get down to 5200, your risk reward begins to get much more attractive going into the year end.