AI Stock Surge May Trigger Wider Gains in the US Market – One America News Network
By Lewis Krauskopf
January 29, 2025 – 3:21 AM PST
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NEW YORK (Reuters) – A breakthrough in artificial intelligence that rocked asset values could pave the way for a more robust stock market beyond the limited array of technology stocks that have been driving the market upswing.
The technology sector, spearheaded by major companies, has been the backbone of the current bull market. The S&P 500 tech sector (.SPLRCT) has surged approximately 90% over the past two years, nearly doubling the gains of the overall benchmark index.
However, the sector faced a notable decline on Monday as investors reacted to the implications of an inexpensive Chinese AI model, leading to significant losses for prominent tech companies like Nvidia (NVDA.O), Broadcom (AVGO.O), and Oracle.
While the sector regained some ground on Tuesday, investors were reflecting on the evolving market dynamics, particularly with expectations of broader earnings enhancements this year.
“It’s a catalyst for a more balanced market leadership,” remarked Keith Lerner, co-chief investment officer at Truist Advisory Services. “In the end, that’s a positive as it provides investors with various avenues to profit.”
Market leadership has been heavily concentrated among a select group of technology and tech-adjacent mega-cap stocks dubbed the Magnificent Seven: Nvidia, Apple (AAPL.O), Microsoft (MSFT.O), Google’s parent company Alphabet (GOOGL.O), Amazon (AMZN.O), Meta Platforms (META.O), and Tesla (TSLA.O).
As of Monday, these stocks were responsible for 55% of the S&P 500’s total return since the end of 2022, per Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
This year, however, the Magnificent Seven has had a detrimental effect on the S&P 500’s performance as of Monday.
Indicators of a budding market rotation were apparent in the aftermath of the DeepSeek incident. Despite the S&P 500 dropping 1.5% on Monday, largely driven by stocks with substantial weight in the index, around 70% of S&P 500 constituents saw gains, according to Barclays strategists.
“The performance across sectors diverged from similar risk-off scenarios experienced in previous years, indicating a significant ‘broadening’ away from technology,” the Barclays strategists noted in their commentary.
The S&P 500 growth index (.IGX), predominantly including tech stocks, fell by roughly 3.6% on Monday, while the corresponding value stock index (.IVX) registered an increase of nearly 1%. This represented the largest one-day percentage advantage for value stocks over growth in nearly three decades of recorded data, according to LSEG findings.
As Wall Street continues to digest the implications of DeepSeek, Monday’s market movements were described as a wake-up call for those who believed these stocks were untouchable. The ultimate outcome may involve reallocating some investments from that sector into other market areas, suggested Peter Tuz, president of Chase Investment Counsel.
In the options market, although some dip buying was observed, traders seemed eager to explore opportunities beyond the Magnificent Seven stocks.
“I believe people are seizing this chance to investigate other sectors,” stated Chris Murphy, co-head of derivative strategy at Susquehanna Financial Group.
Many investors had already anticipated that stock growth would extend beyond technology and the Magnificent Seven, driven by earnings trends. While the earnings growth of the Magnificent Seven significantly eclipsed that of the rest of the S&P 500 over the past year, this disparity is expected to diminish.
In 2025, the Magnificent Seven’s earnings are projected to increase by 19%, contrasted with a 12.3% rise for the rest of the index, according to Tajinder Dhillon, senior research analyst at LSEG.
A wave of quarterly earnings reports is set to arrive in the coming weeks, including reports from Microsoft, Meta, and Tesla on Wednesday and Apple on Thursday.
“It’s crucial to monitor how these earnings come in,” indicated Don Nesbitt, senior portfolio manager at F/m Investments. “There are signs suggesting that expansion may indeed be on the horizon.”
A significant number of investors remain optimistic about technology, and even those who envision a broadening market agree that the sector can continue to flourish. Indeed, the tech sector rebounded on Tuesday with an increase of over 3%, although it remained below levels prior to the fallout from the DeepSeek news.
Robert Pavlik, senior portfolio manager at Dakota Wealth Management, observed that DeepSeek could result in a shift towards companies that stand to benefit from access to lower-cost AI, particularly within the software sector. He manages portfolios that include software stocks such as Microsoft, ServiceNow (NOW.N), and Salesforce (CRM.N).
Monday’s market movements have provided a “jolt” towards potential market diversification, stated Walter Todd, chief investment officer at Greenwood Capital.
However, given technology’s prolonged dominance in the market, Todd cautioned that “it will take time for a shift to occur.”
Reporting by Lewis Krauskopf; additional reporting by Saqib Iqbal Ahmed and Terence Gabriel; editing by Megan Davies and Sam Holmes
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