Monday's Tech Sell-Off: A Reminder of the Market's Reliance on Big Tech Earnings
The recent market sell-off highlights the crucial role that Big Tech earnings play in the ongoing bull market. News of advancements from Chinese AI company DeepSeek ignited investor concerns about increased competition for Nvidia (NVDA) and other Big Tech firms, leading to a pause in trading.
Major tech stocks took a hit, with Nvidia dropping over 16%. Microsoft (MSFT), Alphabet (GOOGL, GOOG), Tesla (TSLA), and Broadcom (AVGO) all declined by 2% or more. This volatility underscores the vulnerability of the market to negative sentiment surrounding these high-growth companies.
Analysts have long warned of the risks posed by a slowdown in Big Tech earnings, given their significant weight in market indices. With index valuations near record highs and the 10 largest stocks comprising nearly 40% of the S&P 500, a disruption in earnings could have far-reaching consequences.
The emergence of DeepSeek's AI model has provided a tangible reason for investors to question the sustainability of high earnings expectations. While factors like interest rates and inflation are often top of mind, hidden risks can also have significant impact.
Data from Goldman Sachs shows that the "Magnificent Seven" tech stocks outperformed the rest of the S&P 500 by 30 percentage points in 2024. While growth is expected to moderate in the coming year, tech earnings remain a key pillar of the current market rally.
The sell-off serves as a reminder that tech is at the forefront of market returns this year and that investors should remain attentive to factors that could disrupt earnings momentum.