Less than 24 hours after topping the US stock market capitalization list, Nvidia's stock price fell by over 10% in three trading days, entering a correction phase, with a market value evaporation of over $400 billion. Meanwhile, cyclical stocks took over the rise, leading the previously underperforming Dow Jones Industrial Average to make a strong push upwards.

Did last week's US public holiday become a turning point for Nvidia? How long will the new round of market rotation last, and when will Nvidia adjust properly? These have become the current focus of investor attention.

Nvidia's continuous adjustments

Since May, the new round of rebound in the US stock market has once again concentrated on tech giants. Dow Jones Market Statistics show that about 60% of the S&P 500's annual increase is contributed by Nvidia, Microsoft, Meta Platforms (Facebook's parent company), Alphabet (Google's parent company), and Amazon.

However, Nvidia began to fall amidst a chorus of praise, with its total market value returning to below $3 trillion. Kevin Dempter, an analyst at Renaissance Macro Research, explained in a report that from a technical perspective, a bearish engulfing pattern has been formed, "which may put investors' sentiment on a roller coaster. They don't have to look back too far to find the most recent example: the bearish news on March 8 led to a temporary 20% pullback in Nvidia's stock price. We suspect that the stock price will further give back profits, returning to the trading level of around $110 at the beginning of the month."

Advertisement

The high level of optimism among retail and institutional investors may be a contrarian indicator, as this means the threshold for positive surprises has been raised. According to the American Association of Individual Investors (AAII) sentiment survey for the week ending June 19, the proportion of those optimistic about the short-term market reached 44%, which is 8 percentage points higher than the historical average. Bank of America's Global Institutional Survey reported that the proportion of fund managers who are bullish is at its highest level since the end of 2021, with institutions further reducing cash positions and increasing stock allocations.

However, many investors believe that, given strong earnings and the revolutionary potential of artificial intelligence, the long-term prospects for growth technology stocks are still worth looking forward to.

"The story of artificial intelligence is still in its infancy and will continue," said Thierry Wizman, Global Interest Rate and Currency Strategist at Macquarie. The revenue growth of companies in the artificial intelligence field is "resilient," as there will be investment in this field even if the overall US economy declines in the next three years. "This is why, from a profit perspective, they (artificial intelligence stocks) look very secure," he analyzed.

At the same time, the outperformance of technology stocks is also supported by the recent decline in US Treasury yields. Wizman believes that lower yields are still very important for maintaining the upward momentum of technology stocks, but to some extent, even if the economy is sluggish, artificial intelligence stocks may not rise, but they will be the first to be sold.

Ivana Delevska, founder and Chief Investment Officer of Spear Invest, also has confidence in Nvidia based on its performance prospects, "If (stock) prices rise like they are now, but earnings do not really change, yes, we would be very worried. However, in the current situation, Nvidia has quite solid earnings support."According to relevant data from the London Stock Exchange, NVIDIA's forward price-to-earnings ratio is approximately 45 times, only slightly higher than its five-year average of 41 times. This valuation has significantly decreased from about 84 times a year ago.

Cyclical Value Stocks Make a Comeback

As tech stocks come under pressure, the Dow Jones has risen for five consecutive days, and the small-cap Russell 2000 Index has reached a new high in a week. This indicates a market rotation, with cyclical value stocks appearing to be quite undervalued.

Goldman Sachs' Chief Global Equity Strategist, Peter Oppenheimer, recently released a report stating that the trend of increasing concentration in the stock market is now fading, and diversification is once again playing a role.

Goldman Sachs believes that after U.S. tech/growth stocks have led the global market in recent years, value sectors such as European banks and U.S. utilities have become new market hotspots and are catching up. The Stoxx Europe 600 Banks Index has risen by 21% this year, and the S&P Utilities Select Sector SPDR Fund has increased by 14% year-to-date. As the valuation frenzy gradually subsides, industries that have long avoided the "value trap," such as energy and finance, are now benefiting from a recovery in profits.

Michael Purves, CEO of Tallbacken Capital Advisors, a consulting firm, stated, "NVIDIA is like a rocket; when things are moving this fast, you definitely don't want to be the last one to exit. If they sell NVIDIA's stock, the most likely stocks they would buy are value and cyclical stocks."

This week, investors should pay attention to Micron Technology's earnings report, as the demand for high-bandwidth memory (HBM DRAM) is expected to become the latest indicator of the development of artificial intelligence. At the same time, the latest inflation indicators to be released on the 28th local time may also affect market risk appetite, as investors are closely monitoring the Federal Reserve's monetary policy prospects.

Larry Tentarelli, Chief Technical Strategist at Blue Chip Daily Trend Report, believes that the Philadelphia Semiconductor Index rose by more than 13% in June, indicating that the artificial intelligence boom may have gone too far. "In the short term, there may be a pullback in tech stocks, and a healthy rotation in other parts of the market will keep the bull market going."

Goldman Sachs advises investors to adopt a "barbell" approach, combining a portfolio of high-quality growth companies with deep-value individual stocks that offer dividends and buybacks. The institution expects that the two key forces shaping the market in the coming years will be the rise of artificial intelligence and the energy transition. While artificial intelligence may boost tech stocks, the increased demand for electricity and capital expenditure should also revive opportunities in some value industries.