By Lewis Krauskopf
NEW YORK (Reuters) – A development in the field of artificial intelligence that staggered asset prices could help set the stage for broader stock strength beyond the narrow group of technology shares that has propelled the market higher.
Tech stocks, led by megacap companies, have been the driving force of the current bull market. The S&P 500 tech sector has gained some 90% in the past two years, nearly doubling the gain for the overall benchmark index.
But the sector stumbled badly on Monday as investors factored in implications from the low-cost Chinese AI model, with shares of high-profile tech names such as Nvidia (NVDA), Broadcom (AVGO) and Oracle (ORCL) getting pummeled.
Even as the group recouped some of those losses on Tuesday, investors were considering the changing character of the market, especially as they anticipate broader earnings improvement this year.
“It’s a catalyst for more balanced market leadership,” said Keith Lerner, co-chief investment officer at Truist Advisory Services. “Ultimately, that’s a positive because that means there are other areas for investors to make money.”
Market leadership has been particularly concentrated in a group of tech and tech-related megacap stocks known as the Magnificent Seven: Nvidia, (NVDA) Apple (AAPL), Microsoft (MSFT), Google parent Alphabet (GOOG, GOOGL), Amazon (AMZN), Facebook owner Meta Platforms (META) and Tesla (TSLA).
Those stocks combined accounted for 55% of the S&P 500’s total return since the end of 2022 as of Monday, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
This year, however, the Magnificent Seven overall had been a negative influence on S&P 500 performance as of Monday.
Signs of a nascent rotation were evident amid the DeepSeek fallout. Even as the S&P 500 fell 1.5% on Monday, dragged down by stocks that carry heavy weights in the index, about 70% of S&P 500 constituents rose, according to Barclays strategists.
“Sector performance differed from similar risk-off days of the past few years, showing a notable ‘broadening’ tilt away from tech,” the Barclays strategists said in a note.
The S&P 500 growth index, which is heavily populated by tech stocks, dropped about 3.6% on Monday, while the counterpart value stock index rose nearly 1%. That was the biggest one-day percentage point advantage for value stocks over growth in the roughly 30 years of data on record, according to LSEG data.
While Wall Street may take time to understand the implications from DeepSeek, Monday’s “price action was a slap in the face to a lot of people who thought these stocks were invincible and the end result may be to take some of the chips out of that sector and spread it around to other areas of the market,” said Peter Tuz, president of Chase Investment Counsel.