These two threats could topple Big Tech and erase U.S. stocks’ 2024 gains

These two threats could topple market-leading megacap tech stocks — potentially bringing the S&P 500 down with them. – Agence France-Presse/Getty Images

It’s a question that has been on the minds of many market strategists: What could cause this top-heavy stock market to topple over?

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One longtime equity-derivatives strategist has some thoughts. In his latest note to clients, Nomura’s Charlie McElligott discussed two things that could trigger a selloff in the megacap technology stocks that have driven most of the year-to-date advance in the S&P 500.

The most immediate concern for the market-leading tech names would be a potential Nvidia earnings miss, he said. The company is set to report quarterly results on  Feb. 21, according to FactSet.

Analysts polled by FactSet expect the chip maker and artificial-intelligence darling to post earnings per share of $4.53 for the final three months of 2023. That’s compared with 88 cents per share from the same quarter a year earlier.

Nvidia shares NVDA have gained 35% since the beginning of 2024, establishing the chip maker as the best-performing stock on the S&P 500, FactSet data show. The second-best performer on the index is Meta Platforms Inc. META, another member of the “Magnificent Seven” group of megacap tech stocks that has driven the bulk of the S&P 500’s advance of 3.7% so far this year, according to FactSet data.

Beyond that, the bigger threat to stocks in 2024 could arrive in the coming months, with economic data showing signs of reflation. According to McElligott, practically the entire investing community has left the prospect of a rebound in inflation for dead.

But as many investors learned last year when ubiquitous recession forecasts failed to materialize, just because few on Wall Street expect something to happen doesn’t mean it won’t.

Instead, McElligott thinks policymakers at the Federal Reserve could allow the U.S. economy to “run hot,” leading to a revival in “animal spirits” and, with them, inflation.

While McElligott doesn’t see much chance of this happening in the immediate future, he thinks it could occur during the coming months, once the favorable year-over-year comparisons for goods prices have faded — leaving economists and investors to contend with stickier services inflation.

Such a revival would likely kick off a “brutal equities thematic reversal,” causing crowded bets on the largest growth stocks to unwind as expectations for higher interest rates and Treasury yields cause a sharp contraction in valuation multiples.

McElligott noted that consumer-price inflation has fallen to 1.9%, according to the last six months’ annualized readings from the core personal-consumption expenditures price index. The PCE index is the Fed’s preferred inflation gauge, and the central bank’s official target calls for inflation to return to 2% on a year-over-year basis.

But there’s still plenty of room for things to “get weird” later, McElligott pointed out.

Nvidia shares were weighing on the S&P 500 and Nasdaq Composite Tuesday, as the chip maker saw its shares slide 3.5% — leaving the company’s shares on track for their largest drop since October, Dow Jones Market Data show. However, weakness in the chip maker’s stock was being offset by strong gains in materials, real-estate and healthcare stocks, FactSet data show.

The S&P 500 SPX was flat as a result, while the Nasdaq Composite COMP was down 0.3% at 15,556 points, and the Dow Jones Industrial Average DJIA was up 60 points, or 0.2%, at 38,445.

According to strategists at LPL Financial, just four stocks — Nvidia, Meta, Microsoft Corp. MSFT and Inc. AMZN — have driven nearly 75% of the S&P 500’s total return in 2024.

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