No Nvidia in your portfolio? “You’re just a piece of crap”

Interest in the chipmaker, whose products are seen as crucial to powering AI technology, continued to grow in the second quarter. Nvidia in May reported sales and profits that beat Wall Street expectations for the fifth consecutive quarter. The company’s shares rose 37% in the second quarter and are up 149% so far this year.

Many of the rest of the index has struggled. The S&P 500 is up 4.1% this year, while the index as a whole has risen 14.5%, its biggest underperformance since at least 1990, according to Dow Jones Market Data. Six of the index’s 11 sectors fell in the second quarter, including financials, energy and industrials.

This divergence has some value investors giving up.

“You can’t keep up because you don’t own Nvidia,” said Max Wasserman, co-founder and senior portfolio manager at Miramar Capital. “If you don’t own one of their stocks, it really hurts you. Every day feels like a root canal without the Novocaine.”

Investors are bracing for volatility later this year. Investors continue to expect the Federal Reserve to move to cut interest rates by the end of 2024, and stocks could fall if that expectation proves premature. The presidential election means government policy is uncertain in key areas such as taxes and energy. President Biden’s lackluster performance in last week’s debate could further muddy the waters. Wall Street analysts are also forecasting solid corporate earnings growth, which may not materialize.

Nvidia was the S&P 500’s biggest gainer last year and has more than tripled its market capitalization over the past 12 months. The company’s market capitalization hit $3 trillion in June, just four months after hitting the $2 trillion mark.

According to S&P Dow Jones Indices, a group of big technology stocks known as the “Magnificent Seven” — Nvidia, Microsoft, Apple, Amazon.com, Meta Platforms, Alphabet and Tesla — accounted for 60% of the index’s total return this year through Wednesday.

One reason investors have flocked to big tech stocks is that they are growing profits faster than the rest of the market.

“I think it makes sense that we’re heavily invested in these AI stocks because that’s an area where we see long-term growth,” said Julie Biel, chief market strategist at Kayne Anderson Rudnick & Co. “Even if the rest of the portfolio does great, if you’re not overweight in that area, you’re just screwed.”

Wall Street analysts expect S&P 500 companies in the information technology sector to grow profits 16% in the second quarter from a year ago, according to FactSet, while profits at the communications services group, home to Alphabet Inc., Meta Inc. and others, are expected to rise 19%. Analysts are forecasting growth of less than 9% for the S&P 500 as a whole.

Beal said the uncertain economic outlook is one reason most stocks are struggling.

The blue-chip Dow Jones Industrial Average has risen 3.8% this year. The Dow Transportation Average, which tracks the 20 largest U.S. companies in industries like trucking and railroads, has fallen 3%. The Russell 2000 index of smaller companies is little changed.

Inflation has been more persistent than most investors had hoped for so far this year. The Federal Reserve has kept interest rates steady so far this year. Many on Wall Street had expected the central bank to cut interest rates as many as six times at the start of the year.

But price growth has slowed recently, raising hopes on Wall Street that a rate cut might finally be on the way. The Commerce Department said on Friday that the Fed’s most important measure of inflation was unchanged in May from the previous month.

Nvidia’s surge is reminiscent of the dot-com era, but some investors say there’s no market bubble forming this time.

“Investors are becoming more discriminated against,” said James Haggerty, CEO of Bartlett Wealth Management. “Earnings were very strong but fell short of expectations, and some stocks were hit hard.”

Apparel maker Nike Inc. saw its shares fall 20% on Friday after it cut its earnings outlook, while chipmaker Micron Inc. slumped 7.2% on Thursday after it issued a sales outlook that disappointed investors.

The Magnificent Seven stocks trade at an average of 37 times expected earnings over the next 12 months, compared with 21 times for the S&P 500, according to FactSet.

Investors say Nvidia could keep rising as long as its sales and profits keep beating expectations, but its high valuation gives the chipmaker little room for error.

“I expect that will come back quickly when Nvidia gets back to reality,” said Brian James, managing partner and investment director at Ullman Wealth Partners.

Write to Charley Grant at charles.grant@wsj.com