Nvidia's (NVDA) highly anticipated earnings release delivered. The company's financial metrics blew past Wall Street's expectations, sending shares soaring nearly 20% in the three days after its earnings release.
But the widespread stock market rally many thought would follow didn't happen. The S&P 500 (^GSPC) is now off more than 0.5% since the chipmaker's earnings release after the closing bell on May 22. To Evercore ISI's Julian Emanuel, this brings an end to a yearlong trend of Nvidia's stock moves driving the market higher.
"NVDA no longer being 'The Stock That Is The Market' will likely end the market’s low volatility 'hush' of the past two weeks," Emanuel warned in a note to clients on Wednesday.
The S&P 500 has slipped from record highs since the Nvidia earnings release as investor focus has shifted elsewhere. Stocks slid despite a 10% surge in Nvidia shares the day after the company's earnings release as a hotter-than-expected reading on economic output had investors scaling back their expectations for interest rate cuts this year. That trend has continued this week as a rise in the 10-year Treasury yield (^TNX) to its highest level since the start of May helped drive a decline in the S&P 500 over the same period.
Emanuel, who holds one of the lowest year-end targets for the S&P 500 on Wall Street at 4,750, noted that a stock with a top-five weighting in the S&P 500 has never surged 20% in the three days after earnings with the index not also ending that time period higher. So, the most recent divergence in directions is starkly different from Nvidia's near-perfect correlation with the S&P 500 over the past year, per Emanuel, and could mean the market is poised for a pullback.
"There is no precedent for a stock of NVDA’s size having its post-earnings share surge 'ignored' by the broader S&P 500," Emanuel wrote. "This divergence is a catalyst for greater movement at the S&P 500 level in front of other event catalysts."
Emanuel listed upcoming inflation prints such as Friday's Personal Consumption Expenditures index release and the June Federal Reserve meeting as examples.
Emanuel pointed out that Nvidia's decoupling from the market comes as large-cap stocks as a whole have become less correlated with each other as of late. At a reading of about 12 on Tuesday in the CBOE Implied Correlation Index (^COR3M), Emanuel noted that the correlation among large-cap stocks was among "the lowest observations ever."
Prior correlation troughs similar to this have corresponded with stock pullbacks like the three-month retreat that started in August 2023. In most cases, a 10% correction in stocks has followed, per Emanuel. His base case remains a mid-year pullback "consistent with the aftermath of correlation troughs."
More broadly, other strategists have pointed to the end of a positive earnings season as a reason market action could be bumpy in the coming weeks as investor focus shifts to economic data amid an uncertain interest rate path for the Federal Reserve.
Truist Co-CIO Keith Lerner told Yahoo Finance this shift in investor focus makes for a "more volatile market."
"Our underlying message is we still think the primary trend is higher," Lerner said. "Near-term the market will be searching for a catalyst, which likely means we're in more of a choppy period."
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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