In just one week we went from AI to ay-ay-ay.
Not so long ago AI was riding high. AI-chip colossus Nvidia (NVDA) was the second most valuable company in creation with a market cap of $3.28 trillion, second only to computer kingpin Apple (AAPL) .
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And then the Chinese AI-powered chatbot DeepSeek rode into town, dragged the tech sector into some very deep waters and surpassed OpenAI’s ChatGPT as the No. 1 downloaded free app.
Nvidia gave up nearly 17% on Jan. 27 and closed the week down 15.8%. Broadcom (AVGO) and Micron (MU) also tumbled, as the new app promised to deliver the goods at a fraction of the current-tech costs.
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Share prices for U.S. independent power producers, natural gas producers and gas pipeline companies fell sharply. That’s because investors feared DeepSeek’s achievement implied significantly less electricity might ultimately be needed to run and train AI models than had been expected, Argus reported.
DeepSeek sparked comparisons to Russia’s Sputnik satellite from the early days of space exploration and stoked fears about America’s tech dominance.
On the other hand some analysts have raised doubts about DeepSeek’s claim that its total training costs amounted to about $6 million.
Semiconductor research and consulting firm SemiAnalysis estimated that DeepSeek’s hardware spend is “well higher than $500 million over the company history,” and noted that R&D costs and total cost of ownership are significant.
Chinese artificial intelligence startup DeepSeek rocked global technology stocks. Photographer: Andrey Rudakov/Bloomberg via Getty Images
Firm cites Mag Seven impact on market
Still, the stock slide in the tech sector does indicate the risks of putting too much capital in one area.
The so-called Magnificent Seven — the gargantuan tech names Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla — account for a third of the weight of the benchmark S&P 500 and roughly 45% of the Nasdaq 100.
“You run the risk when you have concentration that you have selloffs like this,” Chuck Carlson, chief executive at Horizon Investment Services, told Reuters. “It’s certainly going to raise questions in terms of how investors are positioning portfolios.”
Vanguard Global Chief Economist Joe Davis recently discussed the need for diversity in the Age of AI and suggested that investors should avoid overweighting tech stocks.
“If an investor is looking to take advantage of the growth predicted by the evolution of AI, the first order of business is to overweight the broad equity market — the U.S. equity market,” he said.
“I say the U.S. equity market because that’s where the strength of the growth will likely be given the vibrant source of innovation that the U.S. economy has been and seems likely to continue to be.”
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Davis said that diversifying investments across the entire U.S. equity market would better capture potential growth and productivity increases beyond just technology.
“First, you have to consider that tech stocks in general are very highly valued currently — much of that potential upside is already priced in,” he said.
“Secondly, the tech sector, as a whole, does not outperform during these periods of technological transformation, historically.”
While future stars are expected to emerge, Davis said, a larger percentage of tech-sector names will flop.
“For every Amazon that emerged from the internet bubble, there were dozens of startups that failed,” he said.
Economist describes investment strategy
Davis said that if the firm’s thesis is correct, and AI is a transformative technology with positive economic outcomes, he would expect to see AI’s influence emerge in sectors outside tech, for example, in health care, finance and manufacturing. That would drive increases in growth and productivity broadly across the economy.
“For example, electricity was a transformational technology, and it influenced sectors of our economy well beyond energy,” Davis said.
“For that reason, we’d suggest that if you want to bet on this outcome, the preferred way to do so is by increasing your equity exposure, not by overweighting the tech sector.”
Davis also sees a meaningful chance that AI’s impact might be minimal.
If AI advancements are slower than the firm projects and productivity growth and economic expansion end up disappointing, Davis said, it would be more sensible for investors to adopt a strategy that tilts to fixed-income securities and value stocks.
He advised investors to pay less attention to headline-grabbing statements around concentration in just a handful stocks, such as the Magnificent 7, or a particular sector, like tech.
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“When it comes to the stock market, two seemingly contradictory statements can both be true,” he said.
On one hand, the staying power of large-cap equities, generally growth stocks, is longer than some might think, so the concentration could continue.
But he also said these enterprises generally don’t hold onto their positions and growth mode for more than a few decades.
“Look at a list of the largest S&P 500 members from a few decades ago and compare that to today,” he said. “Similarly, where were most of the Magnificent 7 stocks just 20 years ago?”
Davis said that a simple but effective way for investors to navigate is to own the total stock market, with a broadly diversified index fund.
“Another way is for the investors with active risk tolerance to work with active managers who can spot the decadal sea change and identify spectacular winners for the coming decade early on,” he said.
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