The S&P 500 and the Nasdaq fell sharply on Monday as shares of chipmaker Nvidia and other companies investing heavily in AI were knocked following the surging popularity of a low-cost Chinese artificial intelligence startup DeepSeek. The Chinese AI model is believed to be as good as the much more expensive US versions but uses cheaper chips and less data.
There were signs of ongoing investor rotation going on within the US market away from the tech sector and into other corners of the market. The equal-weighted S&P500 (which is an index based on price and not weighted according to market cap) was flattish, highlighting the broader market is much more compellingly priced. Meanwhile, the tech sector and Mag 7 names are “still a crowded house” in terms of positioning. I expect this trend to continue over the coming months.
The S&P500 Equal weighted index remains within a well-defined uptrend. This year the S&P500 equal-weighted index has outperformed the Nasdaq Comp and Nasdaq 100 indices – which is a trend I expect to continue over the coming months due to valuation and crowded positioning.
Investors made a quick exit from a host of technology stocks from Tokyo to New York as the emergence of a low-cost Chinese artificial intelligence model challenged the dominance of current AI leaders such as Nvidia. Questions have been raised this week over the amount being invested in the US on AI after it was reported that DeepSeek uses less data at a fraction of the cost of key competitors, including ChatGPT.
The concern on Monday was that DeepSeek is challenging a widespread assumption that US technology companies have an unrivalled lead in AI. If true, then this could mean less demand for chips, less need for a massive build-out of power production to fuel the models, and less need for large-scale data centres.
However, it could also mean that AI becomes more accessible and helps kickstart the development of a wide array of useful applications. The risk-off day saw the VIX spike 25% to 18.5, with selling concentrated on anything AI-related, including nuclear power. Bonds rallied while the Dow Jones outperformed with an investor flight to industrials.
Despite the big selloff in the Nasdaq on Monday, the worst day in four years – the primary uptrend (in place since 2022) continues to be respected. There is no evidence yet on the five-year weekly chart that points to the primary uptrend being threatened. However, the correction in the Nasdaq might have further to run over the coming weeks and months to work off overbought conditions.
The Dow Jones rose 0.65%, while the S&P 500 lost 1.46% to 6,012, and the Nasdaq Composite declined a sharp 3.07%. The Russell 2000 fell 1%. AI chip leader Nvidia’s shares slumped 17%, while semiconductor stocks fell 8%, heading for the worst session since March 2020. Mag 7 names also were impacted, with Microsoft and Google-parent Alphabet falling 2.1% and 4% respectively.
The cost of developing DeepSeek to date has been reported at around $6 million, which runs counter to the billions being spent in the US. Whether DeepSeek disrupts the rollout in the US of AI and the key assumptions around the new technology remains to be seen. However, with valuations stretched for Nvidia and many other technology companies, a correction was always on the cards. The broader stock market fared much better, so at this stage, the selloff looks to be sector-specific.
DeepSeek’s AI app on Monday overtook rival ChatGPT to become the most downloaded and high-rated free application in the US, Canada and Australia. While this trend is clearly not good for ChatGPT, I have doubts that this will be enough to tank the demand for high-end new-generation chips. China, which has faced an import ban from the newer chips, has had to improvise and develop a workaround.
Consequently, on Monday, major Chinese tech companies outperformed with many ADRs rising between 3% and 4%. Companies we hold including Alibaba, Tencent Holdings, Tencent Music and Baidu could be big beneficiaries of the Chinese AI breakthrough. Following last year’s breakout above the big resistance level near 4000 and advance to 5500, the Hang Seng Tech Index has consolidated constructively. The recent breakout above near-term resistance is encouraging and points to a resumption of upward momentum over the coming months.
Carpe Diem!
Angus
Disclosure: Fat Prophets and its affiliates, officers, directors, and employees may hold an interest in the securities or other financial products relating to any company or issuer discussed in this report. Fat Prophet’s disclosure of interest related to Investment Recommendations can be provided upon request to members@fatprophets.com.au.
Chart Source: Thomson Reuters
