The recent turbulence in leading technology stocks highlights a significant risk to the US stock market’s record-setting rally: its dependence on a small group of mega-cap companies for growth. The emergence of a cost-effective Chinese AI model, DeepSeek, has sparked concerns about the future of the artificial intelligence (AI) investment theme, a key driver of market gains over the past two years.
The so-called “Magnificent Seven” – a group of seven dominant tech companies – have contributed significantly to the S&P 500’s 25% total return in 2024. Fueled by optimism surrounding AI, these companies now represent roughly one-third of the S&P 500’s weight and approximately 45% of the Nasdaq 100. This concentration means that any downturn in these megacaps can disproportionately impact the broader market.
“When you have this level of concentration, you’re exposed to the risk of sharp selloffs,” noted Chuck Carlson, CEO of Horizon Investment Services. “This situation will undoubtedly raise questions about investor portfolio positioning.” The S&P 500 experienced a 1.5% decline on Monday following the DeepSeek news, effectively halving its year-to-date gains. The tech-heavy Nasdaq 100 suffered an even steeper drop, falling 3%.
While the long-term impact of DeepSeek on the AI investment landscape remains uncertain, Phillip Wool, chief research officer at Rayliant Global Advisors, emphasizes the vulnerability of “correlated and crowded trades” when market sentiment shifts.
Nvidia, a leading AI chip manufacturer and a prominent member of the Magnificent Seven, saw its shares plummet 17% on Monday. The company’s remarkable stock price surge had previously propelled it to the top of the global market capitalization rankings.
Seth Hickle, managing partner at Mindset Wealth Management, revealed his move towards a more defensive position using Nvidia options in response to the volatility triggered by the DeepSeek announcement. He underscored the widespread ownership of Nvidia stock, highlighting its impact on “all Americans with retirement portfolios or passive equity investment strategies.”
Just last week, positive news regarding private sector investment in AI infrastructure, announced by President Donald Trump, had boosted tech stocks and the broader market. This underscores the sensitivity of the market to developments in the AI sector.
Capital Economics analysts caution that if AI models can be effectively trained with less high-end computing power than previously believed, “there would clearly be a risk of a further correction in the U.S. stock market.” This potential scenario further emphasizes the vulnerability of a market heavily reliant on a few dominant players in the AI space. The recent market reaction serves as a stark reminder of the potential consequences of concentrated market leadership and the importance of diversification for mitigating risk. The future performance of the Magnificent Seven and the broader market will likely hinge on developments within the AI sector and the evolving competitive landscape.
