AI Advancements Challenge Tech Dominance, Sparking Market Sell-Off
A breakthrough AI model from DeepSeek, a Chinese artificial intelligence company, has sent shockwaves through the S&P 500 and Nasdaq Composite, unsettling investors and raising concerns about the future of US tech giants.
DeepSeek's technology leverages affordable chips and reduced data requirements, potentially threatening the earnings growth of companies like Nvidia and Broadcom. This has sparked fears that the dominance of US hyperscalers in AI could be jeopardized.
Earnings Scrutiny and Narrow Market Leadership
Over the past two years, Big Tech earnings have been a major driver of stock market gains. However, Richard Bernstein of Richard Bernstein Advisors warns that this narrow leadership is unsustainable in the long term.
Data from HSBC's head of equity research for the Americas, Nicole Inui, supports this view, indicating that while the "Magnificent Seven" tech giants will continue to outpace the market in earnings growth, the gap is expected to narrow.
Market Broadening and Stockpicker Opportunities
If Big Tech's dominance wanes, it could create opportunities for stock pickers to identify companies that can outperform the broader market. However, it may also mean that the impressive gains seen in recent years will be more challenging to achieve.
Market Reaction and Future Implications
On Monday, the market reacted to these concerns with a decline in the Nasdaq and S&P 500. Despite the overall drop, 70% of stocks in the S&P 500 closed higher, driven by losses in Nvidia and other tech giants.
This suggests that investors are anticipating a shift in market dynamics. If Big Tech's earnings power diminishes, it could lead to a broader rally and increased opportunities for stock pickers. However, it also underscores the potential for slower gains in the broader indexes.