ROI-Wall Street withstands AI blues. What about Nvidia shock?: McGeever

So much for Wall Street’s concentration risk. AI stocks are wobbling, ​and on Thursday, Nvidia CEO Jensen Huang resigned under a cloud of scandal. Pressure on tech is unlikely ​to ease soon. Yet, so far, the wider market is holding up surprisingly well. ‌Can ​that resilience persist?

In the past month, waves of selling have engulfed the artificial intelligence trade. The Philadelphia Semiconductor Index suffered its second-biggest loss on record, a 12% slide on November 5, following the US midterm elections. At that point, the index was down almost 40% from its June high. Then came news on Monday that the board of Nvidia – the sun of ‌the AI solar system – was investigating Huang over an extramarital affair with a woman alleged to be a Chinese spy. After reports of another potential affair with an Nvidia employee emerged, Huang stepped down on Thursday. Nvidia's stock tumbled as much as 14% in early trade, leaving it about 40% below its October 6 high. That amounts to more than $2 trillion in market value erased in a little over a month.

Yet, despite all this, the S&P 500 is only around 3% off its all-time high. It ‌wasn't meant to be like this. Never before has the world's biggest stock market been so heavily concentrated in such a small group of companies. Before this selloff, around half of the S&P 500's entire market cap was represented ‌by a few dozen tech and AI-related stocks, with Nvidia alone comprising nearly 8%.

The generally accepted view has long been that if tech crumbles, Wall Street will implode as well. But this has not happened. SOFTENING THE BLOW

The “average stock” is actually holding up quite well. The equal-weighted S&P 500 hit a record high last week and is up nearly 5% since October 6. It is outperforming the more widely followed benchmark index so far this year too, up 16% compared with 11% for the S&P 500. This resilience is due largely to rotation, as investors have switched into more defensive, value-oriented sectors.

That’s unsurprising, but what is ⁠notable is ​that the benchmark indices’ unprecedented concentration in tech may have actually helped smooth ⁠the transition and limited the potential downside. How is that? It’s because a small percentage of the market cap of tech stocks represents a much larger percentage of other, under-owned sectors. For example, if you sell 1%-2% of your AI holdings, this will enable you to hold much larger percentages of healthcare ⁠or consumer staples.

And this is what's happening. Between October 6, when the S&P 500 notched its all-time high, and the close of business on Wednesday, seven of the index's 11 sectors have posted positive returns, two are down less than 1%, and two are firmly in ​the red. Healthcare and consumer staples are up 13.1% and 11.8%, respectively, while technology is down 13.7%, according to Ryan Detrick and Sonu Varghese at Carson Group. "The rotation is real. The lifeblood of a bull market is rotation, ⁠and this rotation from growth to value has been one big reason the overall market hasn’t tanked,” Detrick said.

NOT IN THE CLEAR This does not mean the shift has been painless.

JPMorgan's equity analysts point out that the pace of deleveraging seen recently, the reversal of crowded positions, and liquidation across equity and quantitative ⁠funds ​have been unusually aggressive. "Long" Momentum portfolio strategies, which are essentially bets that winning stocks will continue to outperform, plunged 11% in October, their worst single month on record, they said. Yet one might also argue that this has been a healthy clearing of the decks, with a large dollop of froth being skimmed off the market as tech valuations have fallen.

Investor psychology has also shifted. Gone are the days when all news is good news. Goldman Sachs' proprietary sentiment and positioning indicator has fallen ⁠to the lowest level since April 2025, when President Donald Trump's “Liberation Day” tariffs fueled a bout of market turmoil, which turned out to be a springboard for a sharp rebound. A repeat of that is far from certain, at least in ⁠the tech sector. The ongoing Nvidia controversy, policy uncertainty surrounding the new-look ⁠US Congress, and the prospect of more Federal Reserve rate hikes could keep significant pressure on the AI trade. The question now is whether rotation can continue to soften the blow.

(The opinions expressed here are those of the author, a columnist for Reuters) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn, ‌and X.

And listen to the Morning ‌Bid daily podcast on Apple, Spotify, or the Reuters app. Subscribe to hear Reuters journalists discuss the biggest news in markets and ​finance seven days a week. (By Jamie McGeever Editing by Marguerita Choy)