Article Featuring Greg Luken: Roiling financial markets have 2025 off to a chaotic start.
The U.S. stock market swung between volatility and chaos as the Nasdaq, and artificial intelligence and semiconductor stocks in particular, plunged amid news that a potentially cheaper and more efficient China-based AI model called DeepSeek had launched.
On Jan. 27, the Nasdaq Composite Index dropped 3.1%, while Magnificent Seven stalwart Nvidia Corp. (ticker: NVDA) shed 17% of its share price and lost about $600 billion in value, breaking the record for a one-day loss by a U.S. company. NVDA stock did rally the next day, as retail buyers "bought the dip." NVDA shares ended the day up 8.9%, and the Nasdaq gained 2%.
Wall Street analysts say that one way or another, the technology bubble burst, and the DeepSeek news gave sector investors a reason to shed portfolio shares.
"With the current S&P draw-up already exceeding 30% and valuations approaching stretched levels, history suggests it's too late to avoid a bust at this point," Bank of America analysts said in a recent research note.
This week's tech-stock drain leaves the stock market in a precarious position. Investors must wonder how much risk remains with artificial intelligence stocks while also wondering if they'll miss out on any significant rebound.
"It's a mixed picture," says Stephen Wu, a former AI software engineer at Amazon.com Inc. (AMZN) and founder of Carthage Capital, an options trading firm. "The market was heavily concentrated in AI and tech stocks and performed well. DeepSeek's breakthrough exposed vulnerabilities in the tech sector, leading to sharp declines in Nvidia and Microsoft."
One big market problem is that overreliance on a few companies can amplify risk. "Any disruption, like DeepSeek or companies underperforming, could trigger a broader correction," Wu notes.
A Top-Heavy Market
As the DeepSeek-triggered sell-off revealed, the market got away with a handful of stocks – notably those Magnificent Seven stocks – generating outsized performance in 2024 and early 2025.
Those seven stocks – Apple Inc. (AAPL), Nvidia, Microsoft Corp. (MSFT), Amazon, Alphabet Inc. (GOOG, GOOGL), Meta Platforms Inc. (META) and Tesla Inc. (TSLA) – recorded more than a 60% average gain in 2024. The Magnificent Seven was responsible for more than half of the S&P 500's performance in 2024.
"Tech overconcentration is a risk factor," Wu says. "A select few stocks have driven the majority of market gains, so the market is vulnerable to any disruption."
International Competition
Related to DeepSeek's emergence are concerns that there's a threat to U.S. supremacy as an AI superpower. "DeepSeek's efficiency with fewer resources challenges U.S. AI leadership," Wu adds. "That could have long-term implications for tech companies' revenue and investments."
As the relationship between the U.S. and China has deteriorated, semiconductors have become entrenched in every aspect of daily life, from smartphones to energy to defense technologies. Since semiconductors support AI in many applications, dominance in this area will play a key role in economic growth, technological development and national security.
The Fed and Interest Rates
Another key risk factor is how the Federal Reserve handles interest rates. The Fed paused interest rate cuts at its policy meeting on Jan. 29, and traders don't expect another cut until May or June.
"They initially evaluated inflation as transitory, but it's proven to be sticky," says Phil Bloyd, an investment advisor with Revolutionary Financial Group in Bluffton, South Carolina. "The Fed tends to take a wait-and-see approach when raising or lowering interest rates. New economic investments should lead to a stable job market, and if government spending slows down, that could also be a positive sign for the markets."
Waning Consumer Confidence
When shoppers snap their wallets shut, that's bad news for the stock market.
"Consumer confidence impacts spending, which is crucial for corporate earnings," says Derrick Fung of New York-based Cardify.
Cardify, which tracks over $70 billion in consumer spending across the U.S., currently sees spending down across every shopping category in retail, travel, consumer discretionary, leisure, and oil and gas this year compared to last year. "Consumers are exercising caution right now," Fung says.
Government Overspending
Stock valuations may be high, but there's an even bigger problem in play – a budget-busting U.S. government spending habit.
According to data from the U.S. Congressional Budget Office, the federal government is staring down a $1.9 trillion deficit for fiscal year 2025. The CBO notes that that's about 6.2% of the U.S. gross domestic product. "That's significantly more than the 3.8% that deficits have averaged over the past 50 years," the CBO notes.
Currently, Uncle Sam is spending more cash than it collects, a scenario that could lead to foreign U.S. Treasury buyers demanding higher interest rates when purchasing American bonds. The situation likely isn't abating, as the CBO estimates the deficit will rise to $2.7 trillion by 2035.
Read the full article on US News
Comments