Stock Bulls Get AI Wake-Up Call in Bruising Plunge: Markets Wrap

“The sudden, adverse market reaction to DeepSeek indicates that some of the key assumptions that have been driving the AI trade, and hence major indices, are getting reassessed today,” said Steve Sosnick at Interactive Brokers. “Part of the today’s sudden adverse market reaction was a direct result of a ‘wave of complacency’ that overtook the equity market.”

A gauge of the “Magnificent Seven” megacaps slid 2.7%. The Philadelphia Stock Exchange Semiconductor Index fell 9.15%. The Russell 2000 slipped 1%. Wall Street’s favorite volatility gauge — the VIX — soared the most since about mid-December. The Dow Jones Industrial Average of blue chips rose 0.7%.

The yield on 10-year Treasuries declined nine basis points to 4.53%. The Bloomberg Dollar Spot Index rose 0.1%. Bitcoin slid 2.9% to $101,481.84.

To Seema Shah at Principal Asset Management, valuations remain extended, and while vulnerabilities were expected this year, developments like DeepSeek highlight the need for diversification beyond the Magnificent Seven.

“I’m hoping this moment encourages everyone to look beyond tech stocks,” said Callie Cox at Ritholtz Wealth Management. “Not because the AI story is doomed, but because there are so many opportunities in unloved sectors that have been ignored for so long. The guts of the market’s foundation are still good, so it’s likely that the dip will be bought here.”

At G Squared Private Wealth, Victoria Greene says that she’s “not convinced the bubble has burst,” but would be “silly” not to evaluate the potential risks.

“We are looking carefully at how the market progresses from here and if action needs to be taken to protect and shift portfolio allocations,” she noted. “We are not panickers, so tend to be buyers of big dislocations that are happening in tech, energy, and infrastructure today.”

Jim Thorne at Wellington-Altus Private Wealth says this is a natural evolutionary process to “work off the overbought.”

“It’s always going to be something that is going to pull back the market to the moving average,” he said. “In the 1990s the ‘it’ trade was Cisco. Every six months, there would’ve been something that would’ve corrected for it come back down.”

Paul Marino at Themes ETFs, says he likes the fact that people are skeptical.

“Anything that goes straight up to the sky parabolic, that’s when I get worried as a long-term investor,” he said.

The next leg lower for the biggest US tech stocks may come from the retail crowd, according to Tony Pasquariello at Goldman Sachs Group Inc.

“Tactically speaking, I suspect the next few days bring a hurried reduction of length by the retail community,” Pasquariello wrote in a note to clients Monday, adding that hedge funds have been aggressively reducing exposure for months, so this is really about the response of households.

However, he’s a true believer in the structural supremacy of US tech companies, which “arguably have only more incentive to spend.”

“We don’t know whether this is the ‘Sputnik Moment’ for stocks, but this is certainly a wake-up call that we are not the only game in town,” said Paul Nolte at Murphy & Sylvest Wealth Management. “To put these very high valuations in the stocks thinking they have cornered the market is a huge mistake and that is being re-rated.”

To Matt Maley at Miller Tabak + Co., the idea that DeepSeek’s latest AI model is much more cost effective, and runs on much less-advanced chips, is raising some serious questions about what kind of earnings can be drawn from the AI phenomenon.

“If these companies look like they’re going to have a tough time maintaining their earnings growth (chip stocks) or a tough time reaching their earnings growth goals (the “picks and shovels” companies), it’s going to create some serious headwinds for today’s expensive stock market, he noted.

In fact, the slide in tech came at a time when the Nasdaq 100 is trading significantly above its 10-year average.

All focus will be on earnings announcements from the likes of Microsoft and Apple this week to restore confidence in the so-called Magnificent Seven group of companies.

Investors are heading into yet another pivotal Big Tech earnings cycle with the companies’ shares near record highs and valuations stretched. A key distinction this time: The group’s profit growth is projected to come in at the slowest pace in almost two years.

“This should be a fairly good earnings season, but the bar has been raised and they may not be able to live up to high expectations,” said Dan Taylor, chief investment officer at Man Numeric. “It will be very difficult for the group to perform the way it did last year, especially as valuations have increased.”

“We think big tech can keep delivering on earnings, but misses could revive concerns that big capital spending on AI won’t pay off – one of three triggers to dial down our pro-risk view,” BlackRock Investment Institute strategists including Jean Boivin and Wei Li.

Metrics like capex-to-sales ratios and free cash flows suggest that, for now, megacap tech firms are not overextended, they said. Overinvestment should be assessed in aggregate, in our view, given AI’s potential to unlock new revenue streams across the economy, they concluded.

So what exactly is DeepSeek?

DeepSeek was founded in 2023 by Liang Wenfeng, the chief of AI-driven quant hedge fund High-Flyer. The company develops AI models that are open-source, meaning the developer community at large can inspect and improve the software. Its mobile app surged to the top of the iPhone download charts in the US after its release in early January.

The app distinguishes itself from other chatbots like OpenAI’s ChatGPT by articulating its reasoning before delivering a response to a prompt. The company claims its R1 release offers performance on par with OpenAI’s latest and has granted license for individuals interested in developing chatbots using the technology to build on it.

“A key theme in our outlook has been to stick with the primary uptrend — but expect disruptions along the way,” said Keith Lerner at Truist Advisory Services. “The disruption caused by DeepSeek was from a less obvious corner of the market. It’s doubtful that a Chinese startup will dominate globally given the current geopolitical tensions between China and the US.”

Corporate Highlights:

• UBS Group AG has begun a wave of job cuts in its home market Switzerland, with hundreds of employees receiving notice in recent weeks, according to people familiar with the matter.

• Estée Lauder Cos is reviewing its portfolio of beauty brands, people with knowledge of the matter said, as the cosmetics company transitions to new leadership and looks to boost its share price.

• AT&T Inc. posted fourth-quarter results that beat Wall Street projections, including better-than-expected increases in mobile-phone customers and fiber-based internet subscribers, driven by seasonal promotions and bundled product offerings.

• Activist investor Ancora Holdings Group has nominated nine candidates for United States Steel Corp.’s board and is pushing for the company to abandon a takeover by Nippon Steel Corp.

• SoFi Technologies Inc., a fintech lender, published a forecast for profit that missed analysts’ estimates.

• MicroStrategy Inc. bought Bitcoin for a 12th consecutive week and unveiled details for the sale of perpetual preferred stock to help finance additional purchases of the cryptocurrency.

Key events this week:

• US consumer confidence, durable goods, Tuesday

• Fed rate decision followed by news conference by Chair Jerome Powell, Wednesday

• Canada rate decision, Wednesday

• Tesla, Microsoft, Meta, ASML earnings, Wednesday

• Eurozone ECB rate decision, consumer confidence, unemployment, GDP, Thursday

• US GDP, jobless claims, Thursday

• Apple, Deutsche Bank, Thursday

• ECB rate decision followed by news conference by President Christine Lagarde, Thursday

• US personal income & spending, PCE inflation, employment cost index, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1.5% as of 4 p.m. New York time

• The Nasdaq 100 fell 3%

• The Dow Jones Industrial Average rose 0.7%

• The MSCI World Index fell 1.1%

• Bloomberg Magnificent 7 Total Return Index fell 2.7%

• Philadelphia Stock Exchange Semiconductor Index fell 9.1%

• The Russell 2000 Index fell 1%

Currencies

• The Bloomberg Dollar Spot Index rose 0.1%

• The euro was little changed at $1.0488

• The British pound was little changed at $1.2491

• The Japanese yen rose 0.9% to 154.59 per dollar

Cryptocurrencies

• Bitcoin fell 2.9% to $101,481.84

• Ether fell 4.5% to $3,149

Bonds

• The yield on 10-year Treasuries declined nine basis points to 4.53%

• Germany’s 10-year yield declined four basis points to 2.53%

• Britain’s 10-year yield declined four basis points to 4.59%

Commodities

• West Texas Intermediate crude fell 2.1% to $73.07 a barrel

• Spot gold fell 1.1% to $2,741.48 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Isabelle Lee, Vildana Hajric, Margaryta Kirakosian, Allegra Catelli and Catherine Bosley.

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