(Bloomberg) — What do you get when a longtime market narrative is suddenly flipped the wrong way up, with stretched investor sentiment and positioning, right before considered one of the busiest earnings weeks of the season? A few trillion dollars of market value erased.
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Concerns about Chinese AI chatbot company DeepSeek’s challenge to AI spending plans sent US tech giants reeling. The Nasdaq 100 index sank greater than 3%, and Nvidia Corp. was headed toward the worst market cap loss for a single stock in market history.
Stock markets trading near record highs are at all times precarious, and wealthy valuations make the margin of error even smaller. Momentum across major equity benchmarks was already prolonged and positioning was constructing into more bullish territory as many investors chased the recent rally following a weak start of the yr.
“Megacap Tech is the US equities market, and anybody with a mandate to own equities is by default stuffed on these names as a way to survive recent years,” notes Charlie McElligott, cross asset macro strategist at Nomura.
A major decline in funding spread this yr suggests that institutional investors’ positioning in equities was already shifting before Monday’s big drop. That leaves more short-term oriented investors available in the market, with their penchant for quick reactions to the news potentially resulting in more excessive swings. Investors were also likely positioning for favorable January seasonality, while tailwinds from systematic investors could now turn into headwinds.
Positioning was already changing ahead of Monday, as some investors rotated out of Big Tech. Goldman’s trading desk noted that the Magnificent 7 names were collectively net sold for a second straight week by each hedge funds and mutual funds. The web allocation now stands at 15.1% of total US net exposure versus a record high level of about 21% seen last June.
“On Friday it felt like 95% of questions I got were across the Chinese AI team at Deepseek and the emerging narrative that their performance-topping models call into query the billions being spent on forefront AI capex,” writes Joshua Meyers, US TMT Spec Sales at JPMorgan.
A possible repricing of downside risks into the crowded AI trade is seeing a considerable bout of volatility reintroduced, with the VIX Index spiking probably the most since December. That market jolt last month was brought on by one other narrative shift, when investors dialed back expectations for the Federal Reserve to chop rates further.