The Stock Market Is Ignoring Warning Signals. Nvidia May Be One More.

Nvidia, led by CEO Jensen Huang, is now worth more than twice as much as all the companies in the German DAX index. (Justin Sullivan/Getty Images))

Nvidia’s surge in market capitalization past the $4 trillion mark, extending an extraordinary rally for the world’s most valuable company, could highlight a shift that portends a reckoning for U.S. stocks and equities around the world.

Global equity markets are powering ahead, even as economic and political uncertainties mount, while traditional signals have yet to flash red. The surge in market cap for the artificial-intelligence chip maker, valued at less than $1 trillion two years ago, may not stop markets in their tracks, but it could be an amber light.

Stocks have powered through a host of risks over the past six months. They have surged to record highs despite conflicts in the Middle East that would normally prompt a retreat from riskier investments, not to mention the unveiling of tariffs that threaten to stoke inflation and blunt economic growth.

And there is plenty more to worry about. Growth in corporate earnings is poised for a sharp deceleration from its torrid first-quarter pace. LSEG estimates point to single-digit gains over the back half of the year, compared with around 14% for the first quarter.

The Federal Reserve’s most recent forecasts suggest tepid growth of 1.4% for gross domestic product this year, and 1.6% in 2026. Core inflation is likely to reach 3.1%, and remain north of the Fed’s 2% target for at least the next two years.

Looking even further ahead, Congressional Budget Office projections see U.S. debt rising by an extra $3.4 trillion over the next 10 years. That is likely to take the overall tally north of $50 trillion by 2034, a level that would exceed the combined total private wealth of Japan, Germany, and Italy.

But with all those risks piling up, the market’s traditional warning signals simply aren’t signaling concern. The S&P 500 is only a few points shy of the record closing high it reached late last week.

The Cboe Group’s benchmark volatility gauge, the VIX index, is trading south of the 16-point mark. That is the lowest since mid-February and suggests options traders are expecting swings of less than 1% for the S&P 500 on any given day.

Benchmark 10-year Treasury note yields, perhaps the most important interest rate in the world, were last marked south of 4.4%. They are down by around 0.3 percentage point since the start of the year.

Corporate credit spreads, a measure of the yield investors demand to compensate them for the risk of lending to companies, rather than the federal government, are also muted. The ICE BofA U.S. Corporate Index, a credit-spread benchmark, is down 8% from its early April peak and trading at levels similar to those seen in the summer of 2022.

Torsten Sløk, chief economist at Apollo Global Management, pointed out that investors in debt and equities seem to be taking opposite views of the outlook.

“The bond market continues to price the next Fed move to be a cut, with the expectation that growth is slowing down,” he said. “But the stock market is trading cyclicals higher relative to defensives, with the expectation that growth is about to accelerate.”

That confused picture brings us back to Nvidia’s surge past the $4 trillion mark, a level that is twice the size of Germany’s benchmark DAX index. Does it represent a “jump the shark” moment for U.S. stocks, where a consensus begins to form that valuations have gone far past companies’ fair value, or is it yet another example of investments in AI driving broader market gains?

Jean Boivin, who heads BlackRock’s Investment Institute, thinks it is the latter. He says the rules that normally apply to the market’s appetitive for risk aren’t as powerful as they once were.

Now, he said, investors should focus on what he describes as megaforces, such as AI. “They don’t provide a clear handle on the growth and inflation outlook, unlike macro anchors, and don’t map into broad return drivers,” he said. “Instead, we need to track their evolution across and within asset classes, get granular with themes and constantly adapt to what’s priced in.”

What is priced in at present is a lot of market value.

The biggest stocks—Nvidia, Microsoft, Apple, Alphabet, Meta Platforms, and Amazon.com —are closely linked to the AI trade. Those six names also comprise one-third of the S&P 500’s $52.4 trillion in total market value.

Put another way, global investors peg the value of 494 stocks in the S&P 500 at around $35 trillion, or roughly $71 billion each. The average value of the six megacap tech stocks is more than 40 times higher, at $2.9 trillion.

David Bahnsen, chief investment officer at The Bahnsen Group, isn’t convinced that tight credit spreads, a muted VIX reading, or placid bond markets are signals of investor complacency. But he thinks elevated valuations for riskier assets just might be.

“These valuations are, themselves, poor timing indicators, but when combined with high flows, a low VIX, and tight spreads, can lend credence to a ‘high complacency’ thesis,” he said.

Write to Martin Baccardax at martin.baccardax@barrons.com