US tech stocks were the success story of 2024 with the Magnificent Seven companies – Apple, Amazon, Google, Meta Platforms, Microsoft, Nvidia and Tesla – returning over 60 per cent last year and contributing to a more than 20 per cent increase in the S&P 500.
But what goes up must come down, and the emergence of DeepSeek R1 – a Chinese AI app offering all the tech bells and whistles of its US counterparts but for a fraction of the price – resulted in a significant decline in share price for US tech stocks.
Between 29 January and 3 February Nvidia’s share price fell 20 per cent, while Microsoft dropped by 5.16 per cent.
Yet such market shocks are widely seen as a short-term phenomenon, and market commentators have been quick to reassure investors that rather than representing the decline of the Magnificent Seven, DeepSeek gives the tech sector a much-needed dose of competition.
Garry White, Chief Investment Commentator at wealth manager Charles Stanley, says: “Clearly, investors in technology companies are sitting on potentially painful short-term losses and some of these will be significant. Nvidia, for example, recorded the largest-ever one-day valuation loss of any company in US industry.
“The good news for investors is that the falls last week were probably healthy, as it was a valuation issue not an existential crisis. The falls reflected a sector that traded on elevated valuations being confronted by the force of disruption innovation. It was not a fundamental reassessment of prospects for the AI industry. They remain as sound and exciting as they were the week before most people had heard the name DeepSeek.”
Meanwhile, Matt Tickle, Chief Investment Officer at independent consultancy Barnett Waddingham, reminds of the differences between the companies in the Magnificent Seven, and notes that diversification is key.
“In situations like these [short-term market volatility], investors should be reminded of the importance of diversification, both across their portfolios and below the headlines. While the Mag7 are often considered tech stocks, their reach is much more diverse and spans several sectors of the market. So, while Nvidia drew headlines on Monday as it fell nearly 17 per cent, three out of seven Mag7 stocks rose in value, while collectively the six ex-NVIDIA stocks saw broadly flat performance. It’s expected that the AI megatrend will continue, but sizing of exposure to any particular trend is key to managing risk.”
Tickle notes that long-term pension investors should “avoid overreacting” and that ups and downs in equity markets are entirely normal.
“Global markets are up 2.4 per cent year-to-date on the back of 20 per cent returns in 2024 and so pricing does need careful attention. However, a 1.4 per cent fall in a given day on the US, or any, stock market is entirely expected from time to time. We saw similar fears, albeit from a different source, on equity and tech valuations in August 2024 that proved short lived.”
However, Tickle warns investors against complacency, adding that should AI turn out to have no productivity impact and proves to be a waste of hundreds billions of dollars of capex, then global equity valuations will suffer considerable falls.
He concludes: “That is not our view at present. If anything, market uncertainty should remind investors about the importance of taking profits if weightings have grown above strategic levels. All investment, whether retail or institutional, should be for the long-term.”
