This year, Nvidia has outperformed the S&P 500 by a significant margin, making it challenging for investors without exposure to the stock to beat the market. As a result, the average S&P 500 stock is trailing the index by 10.7%, the worst underperformance since 1990. Nvidia’s shares have increased by 174% in 2024, contributing to over a third of the S&P 500’s gains this year.
Despite concerns about Nvidia’s valuation, its earnings per share have increased significantly, resulting in the stock actually trading at a cheaper price-to-earnings multiple than five quarters ago. While the current valuation may seem high, considering its growth potential, Nvidia’s valuation is not as pricey compared to other mega-cap stocks like Apple and Microsoft.
Some investors argue that artificial intelligence (AI) has created a stock bubble, but data shows that the valuation of tech companies today is lower than during the dot-com bubble. The current enthusiasm for AI is part of the normal market cycle, similar to the evolution of the Internet. Analysts believe that AI, including companies like Nvidia, will continue to grow and offer opportunities for patient investors.
To avoid missing out on opportunities like Nvidia in the future, investors can consider holding a S&P 500 Index Fund alongside individual stock picks. This strategy can help match market returns while potentially outperforming with individual stock selections. Overall, the analysis suggests that exposure to AI, even amid extreme enthusiasm, may be justified, with Nvidia being a notable player in the space.
Investors should be mindful of market cycles, potential growth opportunities, and prudent portfolio diversification strategies to navigate volatile market conditions successfully. The insights derived from Nvidia’s performance this year can serve as valuable lessons for investors seeking to optimize their investment strategies and avoid missing out on potential market-beating opportunities.
Article Source
https://www.fool.com/investing/2024/06/20/nvidia-stock-up-174-big-problem-sp-500-investors/
