Over the past two weeks, global markets have experienced significant volatility, particularly in the technology sector. This upheaval was notably highlighted on Tuesday when the NASDAQ plunged by 3.1%. This dramatic downturn was led by NVIDIA, which saw a stark 17% drop in its stock price. This shift was largely catalyzed by the emergence of DeepSeek, a new Chinese tech startup. DeepSeek’s free AI assistant quickly dominated downloads, topping both Apple’s iPhone App Store and the Android Play Store, challenging the perceived dominance of American firms in the AI sector. This unexpected shift has raised concerns regarding the long-term sustainability of large-scale AI development budgets.
DeepSeek’s R1 model has emerged as a formidable contender in the AI landscape, developed on a modest budget of $5.6 million. It has ascended the ranks in the Chatbot Arena, proving that high-quality AI can be developed with far less financial input than previously thought necessary. For perspective, OpenAI’s model, notably the Chat GPT, involved expenditures exceeding $100 million, according to OpenAI’s CEO, Sam Altman. Similarly, the cost of developing Meta’s Gemini model, which accepts text, voice commands, and images, is estimated to be between $30 million and $191 million, excluding staff salaries. The economical development of the R1 model is prompting a reassessment among U.S. tech giants like Microsoft, Google, and Meta regarding their AI development strategies and costs.
The past 12 months have been stellar for the tech industry, with the “Big Seven” tech giants—Alphabet Inc., Amazon.com Inc., Apple Inc., and Nvidia Corp. included—adding more than $5 trillion in combined market value as their stock prices surged by 66%. This performance significantly outpaces the broader U.S. stock market, which itself has seen substantial growth, adding $8 trillion in value. The tech giants now account for over half of the 24% advance in the S&P 500 Index during this period. However, the volatility earlier this week highlighted the market’s sensitivity to tech stock movements: a major sell-off in tech stocks led to a 1.5% drop in the S&P 500, despite advances by 359 of its components; conversely, a rebound in tech stocks the following day helped the index climb almost 1%, despite declines by 349 of its members.
Outlook:
Recent data suggests a significant broadening of the market rally. While technology stocks have led market gains in recent years, other sectors are now contributing more substantially to overall market performance. For example, the S&P 500 Equal Weight Index, which assigns equal weight to all constituent companies, has outperformed the traditional S&P 500 Index year-to-date (3.56% compared to 3.23%). This suggests a healthier and more balanced market environment, with financial, energy, and materials sectors demonstrating notable strength, buoyed by strong earnings reports, expectations of deregulation, and rising commodity prices. This broader and more robust trend promises a more inclusive and sustainable market rally, extending beyond a handful of tech behemoths.
From an industry perspective, increased competition in AI is promising, as it drives greater productivity, efficiency, and cost-effectiveness. However, for companies like NVIDIA, which depend heavily on high-end chips, the future looks increasingly complex. The emergence of lower-cost AI solutions could potentially decrease demand for their products, which have been critical revenue drivers. NVIDIA will need to innovate further to maintain its dominant market position.
House View:
The recent precipitous decline in NVIDIA’s stock value—one of the most significant market cap losses in U.S. history—highlights the critical importance of diversification. Investors with portfolios overly concentrated in a single company or sector face heightened risks, especially in volatile market environments.
For our balanced investors, we strategically mitigate these risks by diversifying across a broad spectrum of asset classes. Our diversification strategy extends well beyond equities. We provide clients access to global bonds and commodities like gold, ensuring that their portfolios are robust across various market conditions. Geographical diversification is another pillar of our strategy, allowing us to allocate capital across multiple regions to leverage global opportunities. For instance, our modest allocation to China has recently yielded significant returns, particularly with the rise of innovative companies like DeepSeek AI. By coupling exposure to high-growth technology sectors with investments across diverse asset classes and regions, we equip our clients with a resilient and adaptable investment strategy poised to capitalise on shifts in the global market landscape.
