Nvidia (NASDAQ: NVDA) it has returned 174% by 2024, and its market capitalization has grown from $1.2 trillion to $3.3 trillion. Meanwhile, the S&P 500 (SNPINDEX: ^GSPC) it has returned 15% and its market capitalization has increased from $40 trillion to $46 trillion. Put differently, Nvidia is responsible for more than one-third of the gains in the S&P 500 this year.
As a result, the average S&P 500 stock trailed the index by 10.7%, its worst performance since 1990, according to The Wall Street Journal. That means investors without exposure to Nvidia are finding it very difficult to beat the market this year.
Investors can learn some important lessons from this situation, and can take steps to prevent similar problems in the future. Read on to learn more.
Nvidia stock has been lower for the last five quarters
Some investors may sell or avoid Nvidia due to concerns about its valuation. Shares have risen 608% since the chipmaker reported financial results for fiscal Q4 2023 (ending January 29, 2023), and a large price appreciation compressed into a short period usually means that the price-to-earnings ratio has increased. But not like Nvidia.
Nvidia’s earnings per share rose 882% between Q4 fiscal 2023 and Q1 fiscal 2025 (ending April 30, 2024), outpacing stock price appreciation. As a result, Nvidia stock is actually trading at a lower price-to-earnings ratio today than when the company reported financial results five quarters ago.
In addition, while the current price of 79.3 times earnings seems expensive, the value should be considered along with the growth. Wall Street expects Nvidia to grow earnings per share at 33% annually to $4.95 per diluted share in fiscal 2028 (ending January 30, 2028). If that number is divided by the current price-to-earnings multiple, the result is a PEG ratio of 2.4.
That’s not necessarily cheap, but it’s cheaper than some mega-cap stocks. For example, using the same methodology, Apple has a PEG aspect of 3.1 and Microsoft has a PEG ratio of 2.8.
The S&P 500 may be overvalued, but artificial intelligence has yet to create a stock market bubble
Another argument against Nvidia (and the broader stock market) is that artificial intelligence (AI) is overhyped, and the irrational euphoria surrounding the technology has created a stock market bubble. Some pessimists have even compared the current market environment to the dot-com crash. But the comparison is inaccurate.
In January 2000, the five largest technology companies traded at an average valuation of 59 times forward earnings. Currently, the five largest technology companies trade at an average of 37 times forward valuation. In addition, the five largest technology companies today are expected to grow by 42% this year, while the five largest technology companies in 2000 are expected to grow by 30% that year, according to JPMorgan Chase.
To be fair, the S&P 500 trades at 21 times forward earnings, the average five-year premium is 19.2 times forward earnings, and enthusiasm about AI certainly plays a role. But that doesn’t mean AI is an overhyped technology that will disappoint. It just means that the market is going through its normal phase Gartner Hype Cycle: Stocks first move very high, then very low, before finally settling into a gradual upward slope.
The Internet is an example of a technology that has gone through cycles. Naysayers label the internet a fad, and some experts expect it to fail. Economist Paul Krugman predicts it will have no more economic impact than the fax machine. Those opinions are laughable behind the scenes. The digital economy will account for 10% of US GDP by 2022, or $2.6 trillion, and grow three times faster than the overall economy.
I believe AI will be almost the same two decades from now. The naysayers will look very sad, and the patient investor who buys a good stock (at a reasonable price) will be handsomely rewarded. That doesn’t mean Nvidia is worth buying, but I think so Morgan Stanley Analysts have the right idea. “Bottom line, we think the background warrants exposure to AI even if there is a lot of enthusiasm – and Nvidia remains the most obvious way to get that exposure.”
For context, Morgan Stanley has set Nvidia a split-adjusted price target of $116 per share. Analysts have also outlined a bear-case target of $51 per share and a bull-case target of $136 per share.
How investors can avoid Nvidia’s future problems
Investors who never own (or sell) Nvidia before 2024 have a tough time beating the market. As noted, the average S&P 500 stock has underperformed the index by 10.7% year-to-date, its worst performance since 1990.
One way investors can avoid similar problems in the future is to own an S&P 500 index fund. This strategy will not help investors beat the market, but it will help them match the results. People, I keep a relatively large part of the portfolio Vanguard S&P 500 ETF, and I keep the rest in individual stocks. That way, my portfolio will beat the market if my stocks outperform, but won’t lag the market if my stocks underperform.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has positions in Nvidia and the Vanguard S&P 500 ETF. The Motley Fool has positions and recommendations for the Apple, JPMorgan Chase, Microsoft, Nvidia, and Vanguard S&P 500 ETFs. The Motley Fool recommends Gartner and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Nvidia Shares Are Up 174% This Year. That’s a Big Problem for the Average S&P 500 Stock (and Some Investors). this was originally published by The Motley Fool
