Big Tech Earnings Drive Market Rout as AI Competition Heats Up
Monday's market sell-off highlights the pivotal role of Big Tech earnings in the current bull market and raises concerns about the future of this key sector.
Developments in AI Competition Trigger Sell-Off
News of advancements from Chinese AI company DeepSeek sent shockwaves through the US AI sector, sparking fears of increased competition for Nvidia (NVDA) and other tech giants.
Big Tech Stocks Tumble
Nvidia stock plummeted over 16%, while Microsoft (MSFT), Alphabet (GOOGL), and Tesla (TSLA) all declined by 2% or more. Broadcom (AVGO), another major AI player, lost over 17%.
Expectations and Reality Clash
Callie Cox, chief markets strategist at Ritholtz Wealth Management, attributes the sell-off to high expectations. "When expectations are high, one skeptical headline can knock the market off its axis."
Risks to Big Tech Growth
Strategists have long cautioned about the risks to the market from a slowdown in Big Tech earnings growth. The sector's dominance has contributed to the market's rally, making it vulnerable to any disruptions.
DeepSeek Raises Uncertainty
DeepSeek's new AI model has emerged as a tangible reason for investors to question the sustainability of high earnings expectations. "The biggest risks are the ones we're not talking about," said Keith Lerner, co-chief investment officer at Truist.
Magnificent Seven Outlook
Despite projected slower growth in 2025, Big Tech earnings remain a critical driver of the market. The "Magnificent Seven" stocks, which include Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta, are expected to grow earnings by over 20% in the fourth quarter.
Return to Fundamentals
Lerner emphasizes that the sell-off serves as a reminder of the importance of fundamentals. "Washington matters, but there's other factors that will likely matter more. Tech is at the forefront of the overall return for the market this year."