The Magnificent Seven's Loss Is the Broader Market's Gain
Ironically, DeepSeek has spurred even more investment in high-end chips, while secondary stocks are becoming technically extended but are still good values.
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Market action was mixed and quiet on Friday morning as investors digest a sub-par earnings report from Amazon AMZN and the January jobs report, which will likely impact interest rates.
The negative reaction to Amazon helps to cement the problems of the Magnificent Seven MAGS. The only Mag 7 stock that is acting well is Meta META, and that has become very overbought after 12 straight days of gains.
The primary issue that is weighing on the Mag 7 is capital spending. Both Amazon and Alphabet GOOGL indicated that they are facing capacity constraints in their cloud structures due to AI and are planning massive spending.
Ironically, DeepSeek initially spooked the market by appearing to indicate that AI development could be done at much lower prices. That isn't quite the case, and it has spurred even more investment in high-end chips. Many of the stocks that were hit on the DeepSeek news, such as Nvidia NVDA and Core Scientific CORZ, have failed to bounce back so far, although indications are that they are not going to suffer any shortfall in business in the near term.
If the Mag 7 continues to struggle, that may be a positive for the broader market as it spurs additional rotation. There has been some very good action in secondary stocks, but they are becoming a bit frothy as traders chase new highs. Some rest would be good, and it is likely that some folks will be spooked by increased volatility.
While the market has been rather sanguine about economic matters lately, the January jobs report will put the focus back on it for a while. Interest rates have been falling as concerns about tariffs and inflationary Trump policies have dropped. In addition, government hiring is going to slow substantially due to DOGE's efforts, which are likely to help keep inflationary pressures contained.
Market conditions are still quite positive outside the Mag 7, but watch for some profit taking in the most extended names.
At the time of publication, Rev Shark was long NVDA and CORZ.
