Why Nvidia may not trigger a broader market sell-off

Nvidia’s stock selloff has focused attention on the prospects for U.S. stocks in the second half of this year. This also sheds lithe on volatility indicators, which have remained at a reduced level for several months. The Vix index, which measures volatility in the S&P 500, has risen in recent sessions. It currently stands at 13.4, still below the past 12-month average of 14.5. So this sell-off isn’t particularly volatile so far, which explains why the sell-off in Nvidia and Super Micro Computer hasn’t led to a broader sell-off in other asset classes or other regions.

US large-cap stocks facilitate stabilize the index

Some may wonder why the piercing 11% drop in Nvidia’s share price over the last 5 days hasn’t resulted in a deeper selloff, since it is one of the most influential stocks on the US blue-chip stock market. This is because the correlation between the 50 highest-valued companies on the S&P 500 is low.

The chart below shows the 3-month CBOE Implied Correlation Index for the 50 largest companies in the S&P 500 Index. It shows how correlated the 50 largest companies in the S&P 500 Index are to each other. While this is not a measure of volatility, it shows how the largest U.S. stocks are moving index. Last week, the implied correlation dropped to an 18-year low. This suggests that large-cap stocks in the S&P 500 do not move in sync with each other, and when one stock falls, another rises, keeping the index balanced and volatility low.

Since then, the 3-month correlation has increased to 11, but remains well below the annual average of 19.

Three-month implied CBOE correlation of the 50 largest stocks in the S&P 500 index

Source: XTB and Bloomberg

This suggests two things:

1, The correlation between the 50 largest companies in the S&P 500 index is increasing, but is not at an elevated level.

2, This means that the Nvidia sell-off cannot drag the rest of the S&P 500 down. If the rest of the index’s massive stocks continue to fluctuate regardless of Nvidia, the AI stock selloff may not have a major impact on the S&P 500.

We will continue to monitor this correlation indicator as it is a good measure of risk attitude. If it starts to grow, it may be a signal that a broader decline in the stock market is expected.