Big Tech Earnings: Driving Force of Bull Market and a Market Risk
Monday's Sell-Off
Monday's market sell-off highlights the significance of Big Tech earnings in driving the current bull market and investor expectations for 2025. Developments at Chinese AI company DeepSeek sparked concerns about competition for Nvidia (NVDA) and other Big Tech players, leading to a pause in US AI trading.
Key Declines
* Nvidia stock dropped over 16%
* Microsoft (MSFT), Alphabet (GOOGL, GOOG), Tesla (TSLA) fell 2% or more
* Broadcom (AVGO), another AI player, declined over 17%
Market Risks
Strategists have been warning about the risk of a slowdown in Big Tech's rapid earnings growth for over a year. With index valuations at multi-decade highs and the 10 largest stocks accounting for nearly 40% of the S&P 500, the market's reliance on Big Tech has raised concerns.
DeepSeek's Impact
DeepSeek's new AI model has provided a tangible reason for investors to question whether the high earnings expectations will materialize. This demonstrates the risks that can arise from unexpected developments.
"Magnificent Seven" Performance
In 2024, the "Magnificent Seven" (Microsoft, Alphabet, Apple, Amazon, Meta, Nvidia, Tesla) outperformed the rest of the S&P 500 by 30 percentage points. While that margin is expected to shrink in 2025, Big Tech earnings growth remains a key pillar of the bull market thesis.
Fundamentals and Outlook
The sell-off brought investors back to fundamentals, emphasizing the broader factors that will drive market returns in 2025. Despite potential risks, tech is still expected to play a significant role in the overall market performance.