NEW YORK – The recent fluctuations among leading tech stocks are underscoring a significant concern for investors regarding the U.S. stock market’s impressive rally: an overreliance on a select few massive companies for growth.
Investors are grappling with the implications of a newly introduced, low-cost Chinese AI model, which has unsettled the markets and raised questions about the stability of the artificial intelligence (AI) investment trend that has been crucial for stock performance over the past two years.
The enthusiasm surrounding AI has notably boosted shares of chipmaker Nvidia and other members of the Magnificent Seven, which collectively contributed over half of the S&P 500’s 25% total return in 2024.
Due to their significant gains, the Magnificent Seven now represent one-third of the S&P 500’s weight and nearly 45% of the Nasdaq 100, indicating that their decline can heavily influence these key market indices.
The concentration risk means we can see sell-offs like the one we experienced, stated Chuck Carlson, CEO of Horizon Investment Services. This certainly raises concerns about how investors are adjusting their portfolio strategies.
On Monday, the S&P 500 dropped 1.5% following news of the DeepSeek AI model, reducing the index’s year-to-date gains by nearly half. Meanwhile, the tech-heavy Nasdaq 100 experienced a sharper decline of 3%.
While it remains uncertain how significant a challenge DeepSeek will pose to the AI narrative, Phillip Wool, Chief Research Officer and Lead Portfolio Manager at Rayliant Global Advisors, noted that it’s evident that numerous correlated and crowded trades are vulnerable when investor sentiment shifts.
Nvidia, often viewed as the flagship of the AI movement, saw its shares plummet 17% on Monday amid the volatility triggered by the DeepSeek news.
Seth Hickle, Managing Partner at Mindset Wealth Management, indicated he adjusted his strategy to adopt a more defensive posture with Nvidia options in response to the recent market upheaval.
Nvidia is widely held, Hickle remarked. This situation has broad implications for all Americans invested in retirement portfolios or passive equity strategies.
Just a week prior, President Donald Trump’s announcement regarding private sector investment in AI infrastructure had buoyed tech stocks and the overall market.
Capital Economics analysts warned that if AI models are, in fact, trainable with less advanced computing power than previously believed, this could pose a risk of further correction in the U.S. stock market.
This would potentially challenge the strong positions of the companies that have contributed to the rally, the analysts indicated in a recent note.
INFLECTION POINT?
Investing in broad market funds tracking the S&P 500 has proven successful over the past two years, with the index achieving consecutive annual gains exceeding 20%. However, many actively managed funds have been underweight in the major tech stocks, hindering their performance.
The rising concentration of megacap stocks in benchmarks suggests that passive investing may no longer be viable as it has been for the past decade, remarked Shams Afzal, Managing Director and Portfolio Manager at Carnegie Investment Counsel.
Amid the developments with DeepSeek, some tech sectors saw gains on Monday, with shares of cybersecurity firm Palo Alto Networks and software company ServiceNow both rising approximately 1%.
The news regarding DeepSeek may facilitate a shift in leadership within technology, moving beyond just Nvidia, suggested Tiffany Wade, Senior Portfolio Manager at Columbia Threadneedle Investments.
Carlson and others at Horizon speculated whether the recent AI developments might mark an inflection point, prompting a transition in market leadership or a rotation into other sectors of the U.S. market that have lagged in recent years.
However, many market participants expressed that the stock market selloff could be an overreaction, as investors shoot first and ask questions later while digesting the implications of the DeepSeek news.
Josh Pantony, co-founder and CEO of Boosted.ai, a firm providing AI deployment guidance to asset managers, shared that he is actively adding AI-related stocks to his personal portfolio across the board following the selloff.
The market will face additional scrutiny this week as several companies, including Apple, Microsoft, Meta Platforms, and Tesla—four of the Magnificent Seven—are set to announce their quarterly results.
David Wagner, Head of Equities and Portfolio Manager at Aptus Capital Advisors LLC, highlighted that megacap companies demonstrate operating leverage that can sustain operating margin growth.
In any case, the U.S. market depends heavily on these stocks, but that’s not necessarily a negative, Wagner concluded.
