Wall Street Tumbles on AI Threat
Synopsis
The equity markets experienced a significant decline on Monday due to concerns over a cost-effective artificial intelligence model from the Chinese startup DeepSeek. The selloff was particularly pronounced in tech stocks, led by big names like Nvidia and Microsoft.
Key Points
* The S&P 500 dropped 1.7%, while the Nasdaq 100 plummeted 3.2%.
* Chipmaker stocks plunged 9.5%, the most significant decline since March 2020.
* Nvidia sank 17%, marking the largest single-stock loss by market capitalization in history.
* The tech downturn overshadowed the gains made by defensive sectors such as consumer staples and healthcare.
* Haven currencies like the yen and Swiss franc strengthened, while cryptocurrencies came under pressure.
AI Impact
DeepSeek's low-cost AI model raised concerns about the viability of valuations in the tech sector, which has been a major driver of the bull market.
Market Concerns
The selloff highlights growing skepticism about the future of AI-driven earnings. If companies struggle to maintain growth or reach targets, valuations could come under pressure.
Analyst Perspectives
* Chris Larkin of E*Trade: "The disruption in the AI space makes this week's megacap tech earnings even more critical to market sentiment."
* Steve Sosnick of Interactive Brokers: "The sudden market reaction indicates that assumptions about the AI trade are being reassessed."
* Paul Nolte of Murphy & Sylvest Wealth Management: "Overvaluing stocks based on a cornered market is a mistake."
Earnings Outlook
* This week's earnings announcements from Microsoft, Apple, and other tech giants will be crucial for restoring investor confidence.
* However, analysts expect muted profit growth compared to previous quarters.
Long-Term Perspective
* Some analysts remain optimistic about the structural superiority of US tech companies and their potential to invest in AI.
* Metrics like capex-to-sales ratios and free cash flows suggest that megacap tech firms are not overextended.
DeepSeek's Profile
* DeepSeek is an open-source AI model developed by Liang Wenfeng.
* Its mobile app has gained popularity due to its reasoning capabilities.
* DeepSeek claims its R1 release is comparable to OpenAI's latest model.
Other Market News
* UBS Group AG initiated job cuts in Switzerland.
* Estée Lauder Cos is reviewing its beauty brands portfolio.
* AT&T exceeded expectations in its fourth-quarter earnings.
* Ancora Holdings nominated candidates for United States Steel's board, opposing a takeover by Nippon Steel.
* SoFi Technologies missed analysts' profit estimates.
* MicroStrategy continued its Bitcoin buying streak.
Key Events This Week
* US consumer confidence and durable goods data (Tuesday)
* Fed rate decision and press conference (Wednesday)
* Canada rate decision (Wednesday)
* Tesla, Microsoft, Meta, and ASML earnings (Wednesday)
* Eurozone ECB rate decision, consumer confidence, unemployment, and GDP (Thursday)
* US GDP, jobless claims, Apple, and Deutsche Bank earnings (Thursday)
* ECB rate decision and press conference (Thursday)
* US personal income, spending, PCE inflation, and employment cost index (Friday)