A Low-Cost AI Challenger Roils the Tech Market
A competitive and cost-effective AI model from DeepSeek, a Chinese AI company, sparked a sell-off in the S&P 500 (^GSPC) and Nasdaq Composite (^IXIC) on Monday. This development challenges the dominance of US tech giants like Nvidia (NVDA) and Broadcom (AVGO), raising concerns about their earnings growth and the future of AI chip sales.
DeepSeek's AI model utilizes cheaper hardware and less data, posing a threat to Nvidia's dominance in this segment. Investors worry that this could undermine the growth of US hyperscalers in AI.
Big Tech companies like Nvidia, Amazon (AMZN), Alphabet (GOOGL, GOOG), Apple (AAPL), Meta (META), and Microsoft (MSFT) have been driving stock market gains over the past two years due to their strong earnings performance. However, DeepSeek's emergence has cast doubt on the sustainability of this trend.
Market volatility is expected to continue as tech companies face increased scrutiny over their earnings. Analyst Richard Bernstein predicts a shift towards broader markets with fewer stock outperforming the index, creating opportunities for stock pickers.
HSBC's Nicole Inui anticipates a narrowing of the earnings gap between the "Magnificent Seven" tech giants and the rest of the S&P 500 in 2025, suggesting a wider stock market rally.
The sell-off on Monday, where 70% of S&P 500 stocks closed in the green despite the index's 1.5% drop, demonstrated this market shift. Nvidia's losses weighed heavily on the index, highlighting the changing dynamics in the tech sector.
Investors should monitor the performance of tech giants and the broader market closely, as Big Tech's dominance may be waning, potentially leading to a more balanced stock market rally and new opportunities for stock pickers.