Nvidia Soars While Hedge Funds Shift to Small-Cap Stocks

Nvidia excels in AI market with record sales growth, yet hedge fund managers shift focus to small-cap stocks, indicating potential market trends. Investors should evaluate interest rates and ETF potential in light of these moves.

Date: 08-09-2024

AI Rating: 6

Nvidia has demonstrated outstanding performance with triple-digit sales growth reported over the last five quarters, indicating robust revenue growth. The stock has surged more than sevenfold since January 2023, indicating strong investor confidence and potentially high profit margins in the AI sector.

However, prominent hedge fund managers such as Ken Griffin and David Shaw sold large portions of their Nvidia shares, preferring to invest in the iShares Russell 2000 ETF instead. This shift might indicate a broader trend towards small-cap stocks, which could affect the stock prices of Nvidia and other large-cap tech companies. While neither Griffin nor Shaw has completely divested from Nvidia, their significant sell-offs raise questions about future growth expectations.

Small-cap stocks, as represented by the Russell 2000, are currently viewed as undervalued relative to their large-cap counterparts, as J.P. Morgan's Michael Cembalest notes. With small-cap stocks potentially positioned for gains due to expected cuts in interest rates by the Federal Reserve, investors might favor the iShares Russell 2000 ETF for exposure to these small-cap firms.

The anticipation of Federal Reserve interest rate cuts could benefit small-cap companies more than large-cap companies, given that small caps often have more floating-rate debt. This financial sensitivity may boost their valuations if interest rates decline.

While the analysis points towards potential profitability in small-cap stocks, investors should still approach with caution, as the Russell 2000 has underperformed the S&P 500 historically.

Stocks: NVDA IWM