As Nvidia Crosses $5 Trillion, 5 Charts on the Unstoppable

As Nvidia Crosses $5 Trillion, 5 Charts on the Unstoppable Tech Rally

Key Takeaways

Nvidia crossed a $5 trillion market cap on Wednesday, a new record for a publicly traded company.

Investors insatiable appetite for AI has helped tech stocks double the return of the broader market over the past three years.

The relentless momentum in tech is leading some to caution investors about overly stretched valuations and a potential bubble in the AI space.

Semiconductor giant Nvidia NVDA made Wall Street history yet again this week, surpassing a market capitalization of $5 trillion in intraday trading on Wednesday. Its only been a few months since the firm blew past the $4 trillion milestone, which itself was a first for any publicly traded company.

Nvidia manufactures the semiconductor chips that power a wide range of artificial intelligence processes. Shares have soared on investor enthusiasm for the new technology, boosted in recent weeks by a slew of development deals with OpenAI, Intel INTC, Oracle ORCL, and more. Fresh insight into Nvidias revenue prospects at its GPU Technology Conference this week added fuel to the fire.

AI demand doesnt appear to be slowing at all, Morningstar senior equity analyst Brian Colello writes, adding that the [revenue] disclosure implies that the AI supply chain is expanding at an even faster pace than we envisioned.

Morningstar chief US market strategist Dave Sekera describes Nvidias moves this week as mind-bogglingly large. On Tuesday, the stock gained 5%, lifting its market cap by a staggering $250 billionmore than the entire market capitalization of all but 31 publicly traded companies in the United States.

Nvidia isnt the only company soaringhigher on lofty AI hopes. With earnings season in full swing, Sekera points out the growing gap between the haves and have-nots in the space. Stocks tied to the AI buildout boom continue to soar higher, whereas those without the AI growth story stagnate, at best, he says.

In the background, worries are simmering that the meteoric rise in tech stocks is masking weakness and leaving the market vulnerable to a pullback. Here are five charts to help investors make sense of the blistering rally.

Big Tech Gets Bigger

The same week Nvidia became a $5 trillion company, two other tech firms saw major milestones of their own. Both Microsoft MSFT and Apple AAPL surpassed a $4 trillion market capitalization on Tuesday, with Microsoft climbing on the announcement of a new partnership with ChatGPT maker OpenAI.

A Three-Year Bull Run

That action is just the latest development in a years-long rally for the sector. Technology stocks overall have rocketed higher since the bull market began three years ago, with the Morningstar US Technology Index rising 167%, double the gains of the broader Morningstar US Market Index.

Stretched Valuations
One major side effect of the tech rally has been lofty valuations. Investors are paying a hefty premium for the buzziest stocks in the market.

After this springs market selloff, the US Technology Index was trading at a discount of as much as 22%. Tech took the brunt of the losses as trade developments and geopolitical uncertainty sent investors searching for safety. But when the dust cleared, tech stocks led the recovery from that trough. Now the sector is trading at a premium of 5%.

That elevated valuation puts investors in a tough spot. Many AI mega-cap stocks already trade near or exceed our fair value estimates, offering no cushion should AI growth slow, Sekera explained in his fourth-quarter outlook.

Overconcentration in Tech

Another side effect of techs historic run is that the sector accounts for an increasingly heavy weighting in major market indexes. For instance, of the 557 stocks in the Morningstar US Large-Mid Index, the top five are major players in tech and AI (though Amazon AMZN and Meta Platforms META fall into the consumer cyclical and communication services sectors, respectively). Together, those five account for more than a quarter of the index by weight, meaning they have a disproportionally large impact on the indexs returns.

In the third quarter, for instance, Nvidia was responsible for 1.2 percentage points of the Large-Mid Indexs 8.1% return, while Apple accounted for 1.4 points. In the second quarter, four of the five largest companies in the index accounted for 5.6 points, nearly half of the indexs total 11.4% return.

This kind of concentration can boost returns for investors, but it also poses risks. The concern would be if the market tone shifts and technology stocks start to lag the broader market, investors will experience an outsize downturn as well, Dominic Pappalardo, chief multi-asset strategist for Morningstar Wealth, recently explained.