Will the Market Smarten Up on AI and Its Top-Heavy Risks?
My take on the whipsaw action in the artificial intelligence space this week.
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It has been quite a while since investors saw a thumping that descended on the entire artificial intelligence-related ecosystem as it did on Monday. Faced with a Chinese company's potentially cheaper and more effective way to build AI models, everything connected to the AI narrative fell sharply. This was led by a 17% selloff on Nvidia Corp. NVDA, that whacked nearly $600 billion worth of market cap off this chip juggernaut in one day. The Magnificent Seven tech stars also fell across the board, but to a lesser extent. The tech-heavy Nasdaq declined just over 3% on the day.
It was not surprising to see chip names like Broadcom Inc. AVGO and Advanced Micro Devices, Inc. AMD sell off in sympathy on Monday. However, any company that has been riding the AI build-out wave saw sentiment shift on a dime. Constellation Energy Corporation CEG, a utility company hoping to supply energy to massive AI data centers, fell 20% on Monday. Sterling Infrastructure, Inc. STRL, which is helping build out AI infrastructure, dropped over 23% on the day.
The non-AI related parts of the market held up quite well. The Dow Jones industrial average was up nearly 300 points on Monday. Consumer Staples had their biggest one-day outperformance against the technology sector since 2002. Biotech, usually a high beta part of the market, managed to end the day barely in the black. Now, equities did stage a rebound on Tuesday with the Nasdaq rising 2% and NVDA clawing back nearly half of Monday’s deep losses it should be noted.
I have no idea whether DeepSeek represents an existential paradigm shift. But AI industry titans and pundits seemed to have been completely blindsided by the news on Monday from a completely off-the-radar event. In addition, the rally in AI stocks and everything related to them has felt like it has gotten long in the tooth prior to Monday’s debacle.
My hope is that the market becomes less top heavy in 2025, as the gains of the past two years have been generated by just a few mega-cap companies, largely riding the AI revolutionary wave. If those tech giants consolidated those gains this year, and the rally moved on to non-AI related sectors, I think that would be healthy for the market.
Was Monday’s news an inflection point for the AI industry? Impossible to know at this point, given any data points out of China have to be taken with a grain of salt. But the trading Monday certainly showed how vulnerable large parts of the market are to anything that upsets the apple cart around the AI revolution narrative. It will be fascinating to see how all this plays out in the weeks and months ahead. In my column Friday, I will explore some good growth names far removed from the core AI theme that has driven the majority of the gains across the market over the past couple of years.
At the time of publication, Jensen had no position in any security mentioned.
