Nvidia gains a record in a single day

On 22 February 2024, after reporting results, Nvidia added the most market value ever gained by a company in a single session. US and European indices hit record highs that same day. The news drew attention not only for the figure but for what it revealed: the influence of a few companies, linked to artificial intelligence, on the behaviour of markets. It is a phenomenon that had already been observed, but one that took on a special dimension that day.

For those who invest in index funds, or hold part of their wealth in shares, the episode is a good occasion to ask what is really in their portfolio. This note is general information and not investment advice; its purpose is to explain how indices are built, why some stocks weigh more than others and what consequences that has for diversification.

What happened

Nvidia, whose chips power artificial intelligence, reported results and its share price jumped. Adding so much value in a single session was unprecedented for a listed company, and the effect spread to the main stock indices on both sides of the Atlantic. The results confirmed that demand for these processors continued to grow strongly. Investors took it to mean that the technology was not just a promise but a real source of income.

A share price that rises that fast reflects an abrupt change in investors’ expectations of the company’s future profits. It does not mean the company earned that money in a day, but that the market now values its prospects more highly. That valuation can change as quickly if results or the environment shift, and it is worth remembering when reading a headline of this kind.

The weight of the giants

Gains were increasingly concentrated in a few technology companies. Indices are weighted by size, so the largest companies count for more. When the biggest rise, the index rises with them even if most of the companies that make it up move more modestly, so the aggregate result can hide very different situations. An index can rise in a day because five companies do, while most of the rest hold steady or fall.

A portfolio tracking an index was, without realising it, increasingly a bet on artificial intelligence. An investor who thinks they are spread across hundreds of companies may in practice have a considerable part of their money concentrated in a handful of names. It is not necessarily bad, but it is something worth knowing and deciding consciously, not discovering when the market corrects. The same is true of someone who holds several different funds that, deep down, share the same large companies.

What to review

It is worth knowing what is actually inside the index funds one holds, how much the largest companies weigh and whether the portfolio as a whole is balanced across sectors and regions, in line with each person’s profile and goals. The fund’s documentation usually lists its largest positions, and it is simple information to consult that many investors never look at. Spending a few minutes consulting it usually brings more clarity than following the price every day.

Then it is worth asking whether that make-up is the one wanted. If the answer is that more balance is desired, there are ways of achieving it, each with its costs and tax implications, which are worth assessing with the adviser. If the answer is that the concentration is accepted, it is important to do so knowing what is expected of it and what would happen if the large companies corrected sharply. In any case, it is a decision best taken with information and not out of inertia.

Diversifying is not owning many funds, but owning different things.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.