The Artificial Intelligence-Powered Rally in US Stocks Has Further to Run
Despite the "Wake-Up Call" from Chinese Start-Up DeepSeek
The artificial intelligence-powered rally in US stocks has further to run, say equity investors, although the "wake-up call" from Chinese start-up DeepSeek is likely to reorder the winners and losers from the rapidly evolving technology.
DeepSeek’s Breakthrough
DeepSeek last week unveiled a cutting-edge reasoning model capable of competing with those designed in the US — but apparently for a fraction of the cost — sending shockwaves through equities markets and reigniting fears among some investors of a repeat of the dotcom crash at the start of this century.
Impact on US Stocks
By the end of Monday, chipmaker and stock market darling Nvidia had shed almost $600bn — the biggest one-day loss in US history. A ferocious US tech sell-off spread to energy stocks and utilities that had been expected to benefit from demand for power to fuel AI data centers. However, since then, the sell-off has run out of steam. US indices ended the week lower, with Nvidia close to its Monday lows. The S&P 500 and tech-heavy Nasdaq Composite lost 1% and 1.6% over the past five sessions.
Expectations of Healthcare Stocks
Alicia Levine, head of investment strategy and equities at BNY Wealth, expects healthcare stocks and other companies with access to massive amounts of data to reap the rewards as investors move into less richly priced areas of the market. "If AI becomes cheaper and faster, it makes sense that those companies would see a boost in value," Levine said. "The picks and shovels" companies in the energy and infrastructure sectors, which have been among the main beneficiaries of Big Tech’s huge capital expenditure on AI, may suffer most, she added.
Megacap Tech Stocks
Megacap tech stocks, and excitement around the potential of AI, have been the main driver of the US stock market’s strong performance in recent years. Last year the so-called Magnificent Seven tech stocks were responsible for more than half of the S&P 500’s gain. However, bears fear that DeepSeek’s breakthrough could have huge implications for the spending plans and valuations of some of the Silicon Valley giants that have driven that rally, and for the wider, top-heavy US market, where the largest 10 stocks now account for almost two-fifths of the S&P 500.
Conclusion
Despite the sell-off, many investors and analysts think the impact of DeepSeek’s breakthrough will be subtle, and that the overall market will continue to perform well. Some even see the turmoil as a healthy rebalancing for the wider market, with a potential rotation into relative "laggards" like Apple.
FAQs
Q: What is DeepSeek’s breakthrough?
A: DeepSeek unveiled a cutting-edge reasoning model capable of competing with those designed in the US — but apparently for a fraction of the cost.
Q: What was the impact on US stocks?
A: The sell-off spread to energy stocks and utilities, with Nvidia shedding almost $600bn, the biggest one-day loss in US history.
Q: Who expects healthcare stocks to benefit?
A: Alicia Levine, head of investment strategy and equities at BNY Wealth, expects healthcare stocks and other companies with access to massive amounts of data to reap the rewards.
Q: What are the implications for megacap tech stocks?
A: Bears fear that DeepSeek’s breakthrough could have huge implications for the spending plans and valuations of some of the Silicon Valley giants that have driven the rally.
Q: What is the outlook for the overall market?
A: Many investors and analysts think the impact of DeepSeek’s breakthrough will be subtle, and that the overall market will continue to perform well.
