Nvidia shares are on a tear this year. Why Wall Street is bracing for a near-term pullback

Published Wed, May 31 202312:10 PM EDTUpdated Wed, May 31 20231:40 PM EDT

Nvidia shares are on a tear this year as the chipmaker asserts it dominance and cements itself as the one to beat in the artificial intelligence arms race. But don't be surprised if Nvidia gives back some of its gains in the near term. Shares are up more than 167% in 2023 and have surged double-digits since Wednesday's close, when its blowout earnings report revealed strong and persisting AI tailwinds. The news pushed up shares more than 24% during Thursday's session alone. The gains mounted Friday and Tuesday to briefly push the stock into the $1 trillion market cap club . NVDA YTD mountain Nvidia shares in 2023 Wall Street analysts and investors remain confident in the long-term trajectory of the stock, but say its latest jaw-dropping surge sets Nvidia up for a short-term pullback. "If any stock deserves the big run up, it's Nvidia because its revenues are now so much faster and stronger than we originally thought," said Paul Meeks, portfolio manager at Independent Solutions Wealth Management. It's "definitely overbought, definitely would not buy here fresh, but I definitely am not selling it into strength either. I'm just holding it." Overbought conditions and a short-term pullback Despite Nvidia's jaw-dropping print, most near-term momentum indicators show the stock is overbought. That includes the relative strength index, a momentum indicator measuring the speed and size of a securities price change, said Ari Wald, technical analyst at Oppenheimer. This creates a "reasonable" setup for consolidation. Even so, Wald suggests investors consider buying on any pullback and using market dips to sell relatively weaker positions and buy Nvidia. Price momentum remains strong and could break the Street-high $600 price target in the near future, he added. Janney Montgomery Scott technical strategist Dan Wantrobski highlights market breadth and the lack of broad-based participation among the reasons for a likely near-term dip. Most of the market's gains this year have been tied to AI , with only three sectors in positive territory for the year. "Leadership this thin cannot last indefinitely, it cannot last in perpetuity," he said. "At some point — I think it's going to be relatively soon — Nvidia is going to come under profit taking." That consolidation and profit-taking could come as soon as the next week, he said. Similar to many Wall Street strategists, Fairlead Strategies' Katie Stockton views the long-term setup for Nvidia as attractive, although the risk/reward appears unfavorable from a technical perspective in the near term. She continues to monitoring key resistance and support levels, highlighting roughly $366 — the low print of the day in the session following Nvidia's earnings release — as one of those to watch. Consolidation in megacaps Nvidia isn't the only technology giant Wall Street is cooling on at least in the near term. Technology stocks are crushing it so far in 2023 after a disappointing 2022, with $1 trillion club members Amazon , Alphabet , Apple and Microsoft up at least 37% year to date. The sector got a lift this year as bond yields eased, AI tailwinds commenced and investors hoped for a Federal Reserve tide change. Wall Street estimates call for a 1.3% upside for Apple from Tuesday's close, while consensus estimates see a slim 3.7% upside for Microsoft. Elsewhere, popular valuation metrics such as price-to-earnings, show many of these names trading at steep premiums to the S & P 500 on a trailing basis. The benchmark index's PE sits at about 21 times, while that of Apple, Microsoft and Amazon hover around 30, 36 and 295, respectively. Price-to-sales ratios, a metric accounting for market cap and revenue to value a stock, also remain elevated. A higher P/S often indicates a stock may be overvalued. Nvidia's and Microsoft's P/S ratios sit at 19 and 10, respectively. While many of these stocks may push higher near term, or hold onto recent gains, investors may want to brace for consolidation across the board, Meeks said. "The last time we had this kind of outperformance of growth versus value was a very scary time because it was right before the internet bubble burst," he said. "I hope that doesn't happen this time. I don't think that it will. But it gives me a little bit of concern." — CNBC's Michael Bloom contributed reporting.