The biggest U.S. tech stocks could shed as much as $900 billion in value Monday amid a global selloff tied to the launch of an AI-powered chatbot in China that could challenge the basis of capital-spending plans and profit forecasts heading into the fourth-quarter earnings season.
DeepSeek, a China-based tech startup formed in 2023, claims that in a bit more than two months at a cost of around $6 million, it developed a large-language-model system that equals or surpasses the performance of Microsoft (MSFT) -backed OpenAI’s ChatGPT.
The rapid development through open-sourced collaboration, at a fraction of the cost of the $500 million-plus spent by Meta Platforms (META) Llama 3 and OpenAI’s ChatGPT, has shaken the tech world and rattled investor confidence in the massive capital-spending plans of the world’s biggest hyperscalers.
Microsoft, Meta, Amazon (AMZN) and Google parent Alphabet (GOOGL) are likely to spend as much as $300 billion on AI projects this year alone, with estimates for overall spending on the world’s hottest technology over the next three years pegged at around $2 trillion.
Microsoft and Meta Platforms will kick off the Magnficient 7 earnings season later this week as investors question the massive capital spending plans of the world’s biggest tech companies.
Michael Nagle/Bloomberg via Getty Images
The U.S. government is also moving quickly to ensure that the U.S. remains the epicenter of AI development. President Donald Trump last week unveiled a three-way joint venture of Oracle (ORCL) , Japan-based SoftBank and OpenAI that he claims will invest as much as $500 billion in domestic AI infrastructure.
Microsoft and Meta earnings on deck
But with the biggest U.S. tech stocks set to update investors on their fourth-quarter profits over the next two weeks — starting Wednesday with reports from Microsoft and Meta — investors are questioning both their current market values and their massive spending plans.
“Monday’s tech selloff is being driven by a fundamental catalyst, which is worries that China’s DeepSeek AI tool is surpassing ChatGPT in usage and therefore requiring less complex chips from the likes of Nvidia,” said David Bahnsen, chief investment officer at Bahnsen Group in Newport Beach, Calif.
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“But the idea that this level of spending on AI may not be necessary or prudent to begin with — well, that could prove to be a fundamental game-changer” for the broader tech sector itself, he added.
And that has major implication for the market’s long bull rally, which entered its third year this month largely on the back of outsized gains in the tech space and the broader outperformance of the megacap leaders.
The Magnificent 7’s market dominance
The Magnificent 7, in fact, are likely to contribute around a fifth of the 10.5% profit growth forecast for the S&P 500 over the three months ended in December, even as their overall earnings are set to advance at the slowest pace in nearly two years.
The collective value of the seven largest stocks, meanwhile, accounts for around a third of the S&P 500’s overall market value, which explains the outsized reaction to the DeepSeek news in early Monday trading.
“U.S. tech companies are trading at premium valuations, with major AI players like Nvidia, Microsoft, and Alphabet commanding forward price-to-earnings multiples far above historical averages,” said Charu Chanana, chief investment strategist for Saxo Bank in Singapore.
“With these stocks priced for perfection, even minor disruptions, such as DeepSeek proving advanced AI can be built without top-tier chips, could weigh heavily on share prices,” she added.
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Brian Mulberry, client portfolio manager at Zacks Investment Management, sees the forthcoming Mag 7 earnings slate as a “key moment for the market, with the sector’s high valuations under scrutiny.”
“The Mag 7 accounts for about 33% of the S&P 500’s market cap and any signs of slowing growth or cautious guidance could push forward earnings multiples down from the current 21 times level,” he said. “A shift to 17 or 18 times earnings would imply a notable market pullback, highlighting the risk tied to this concentrated group.”
Tech capital-spending plans in sharp focus
Microsoft, which earlier this month said it was on track to spend around $80 billion in its current fiscal year “to build out AI-enabled data centers to train AI models and deploy AI and cloud-based applications around the world,” will report fiscal-second-quarter results after the close of trading Wednesday.
Analysts are looking for overall revenue of $68.84 billion and Intelligent cloud revenue, which includes its flagship cloud offering Azure, of around $28.1 billion.
“We still expect Azure growth to accelerate from H1 (in the second half of the financial year] as our capital investments create an increase in available AI capacity to serve more of the growing demand,” Microsoft’s finance chief, Amy Hood, told investors in late October.
Related: Goldman Sachs analyst tweaks Apple stock price target ahead of Q1 earnings
Overall revenue growth of around 11% will outpace the 6% gain expected in earnings per share, which are forecast to come in at $3.13, putting further pressures on Microsoft to monetize its massive capital spending plans.
Facebook parent Meta Platforms, which also is set to report December-quarter earnings on Wednesday, said last week it would spend around $65 billion this year on AI training, inferencing and broader product development.
CEO Mark Zuckerberg called that higher-than-expected tally a “massive effort that will drive our core products and business, unlock historic innovation and extend American technology leadership.”
Meta is expected to post a fourth-quarter bottom line of of $6.77 a share, up 27% from the year-earlier period, and revenue rising 17% to $47 billion.
U.S. AI leadership challenged?
Tesla also reports Wednesday, with investors likely to focus on CEO Elon Musk’s spending plans and broader AI ambitions.
Apple will report December-quarter earnings after trading closes Thursday, while Alphabet and Amazon are set to report next week. Nvidia rounds out the Mag 7 earnings season with an update scheduled for Feb. 26.
“We do not expect big tech earnings over the next two weeks will justify the sector’s elevated valuations,” Bahnsen at Bahnsen Group said.
“These companies may very well report a wonderful quarter, and they may guide higher for intended orders and revenue expectations. Current valuations do not factor in the risks of competition, which seems inevitable, and risks of diminished order books in the future, and all the other reasons that lofty valuations eventually revert to the mean,” he argued.
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Wedbush analyst Dan Ives, however, says the market is overestimating DeepSeek’s competitive threat to the U.S. tech giants. He sees the current selloff as a “golden opportunity” to enter the AI trade heading into 2025 and beyond.
“While the model is impressive and it will have a ripple impact, the reality is that Mag 7 and US tech is focused on the AGI endgame with all the infrastructure and ecosystem that China and especially DeepSeek cannot come close to in our view,” he said.
“The focus of AI right now is the enterprise use cases and broader infrastructure propelling this $2 trillion of [capital expenditures] over the next three years,” he added.
“Next will be physical AI around robotics and autonomous. DeepSeek is not stopping it [and] to some extent it might actually accelerate capex for the hyperscalers.”
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