A Shift in the Market: Can Big Tech’s Dominance Be Challenged?
The recent emergence of a cheaper AI model from Chinese company DeepSeek has sent shockwaves through the market, sparking a sell-off in the S&P 500 and Nasdaq Composite. This development has raised concerns about the future of AI chip sales and the dominance of US hyperscalers in the industry.
A Threat to Nvidia and Broadcom?
DeepSeek’s technology uses cheaper chips and less data, which could potentially hurt future AI chip sales for companies like Nvidia and bring into question the dominance of US hyperscalers in AI. This has investors worried, as Big Tech’s earnings beats have been driving stocks higher over the past two years.
The Pillar of the Bull Market
Truist co-chief investment officer Keith Lerner notes that the key pillar of this bull market is earning estimates moving higher. Tech is at the forefront of the overall return for the market this year, and any challenge to this dominance could have significant implications.
Earnings Estimates: A Key Indicator
Barclays head of US equity strategy Venu Krishna points out that Big Tech earnings from giants like Nvidia, Alphabet, Apple, Meta, and Microsoft have seen earnings estimates rise more than the rest of the S&P 500 and the MSCI Europe index over the past 12 months. A reversal of this trend could have a significant impact on the market.
A Market Ripe for Change
Richard Bernstein, CEO of Richard Bernstein Advisors, believes that the market is ripe for change. He notes that just 29% of stocks in the S&P 500 outperformed the index in 2024 and 30% outperformed in 2023, marking the lowest number of outperformers since the late 1990s.
A Return to Normalcy?
Bernstein predicts that 2025 will be a year of returning to normal broader markets, where speculation meets reduced liquidity and fundamental investing again outperforms. This matches the takeaway from a chart shared by Nicole Inui, HSBC’s head of equity research for the Americas, which shows that the gap between Magnificent Seven earnings and the rest of the index is expected to narrow in 2025.
A New Era for Stock Pickers?
If Big Tech’s dominance wanes, it could become a better environment for stock pickers to find names that could outperform the S&P 500. However, it also means that the massive gains seen for the broader indexes over the past two years won’t come as swiftly if the largest companies in the index aren’t leading the charge.
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