Market Volatility: A Wake-Up Call for Investors
The sudden market downturn on Monday served as a stark reminder of the driving forces behind the current bull market and what investors can expect in 2025. At the heart of the matter lies the performance of big tech earnings, which have been the primary catalyst for the market’s upward trend.
The AI Factor
Recent developments from Chinese artificial intelligence company DeepSeek sparked investor concerns about growing competition in the AI space, particularly for Nvidia and other big tech names. This led to a significant sell-off, with Nvidia’s stock plummeting over 11%. Fellow tech giants Microsoft, Alphabet, Meta, and Tesla also saw their stocks decline by 2% or more in early trading, while Broadcom, another major player in the AI space, dropped over 12%.
High Expectations, Thin Ice
According to Callie Cox, chief investment strategist at Ritholtz Wealth Management, “when expectations are high, one skeptical headline can knock the market off its axis.” This is precisely what happened on Monday. The rapid earnings growth of big tech companies has been a key factor in the market’s rally, but strategists have been warning about the risks of a slowdown for over a year. With index valuations near multi-decade highs and the 10 largest stocks comprising nearly 40% of the S&P 500, the market’s rapid growth is increasingly fragile.
A Tangible Reason for Concern
The launch of DeepSeek’s AI model over the weekend appears to be a tangible reason for investors to question whether high earnings expectations will be met. In 2024, the “Magnificent Seven” tech stocks outperformed the rest of the S&P 500 index by 30 percentage points, according to Goldman Sachs research. While this margin is expected to slow in the year ahead, big tech earnings growth remains a crucial pillar of the bull market thesis.
Earnings Growth Projections
The “Magnificent Seven” stocks are expected to grow earnings by 21.7% in the fourth quarter, compared to the 9.7% earnings growth projected for the other 493 tech stocks. While the year-over-year growth rate for these stocks is expected to slow in the first quarter, it is projected to accelerate once more to year-over-year earnings growth of over 24% in the third quarter. As Venu Krishna, head of US equity strategy at Barclays, noted in his 2025 outlook, big tech earnings growth is likely to remain a critical driver of EPS growth for the S&P 500 throughout the year.
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