January 27, 2025

A storm thundered through the U.S. stock market on Monday.  Amid revelations that Chinese artificial intelligence firm DeepSeek has developed a new application to rival ChatGPT at a small fraction of the cost, investors freaked their freak by dumping the shares of some of the leading tech shares at a breath-taking double-digit rate in just a single trading day.  In the aftermath of the lightning strike to AI stocks on Monday, what are the key takeaways investors should take as they look ahead to the rest of the trading week and the months ahead?

Weather check. Monday’s thunderstrike was indeed shocking.  But before going any further, it is important to look past the staggering headlines to put what took place in context.

First, it is important to note that Monday’s jolt was a high-flying tech and tech adjacent only issue.  Case in point: while the tech heavy NASDAQ plunged a staggering -3%, the broader and more sector balanced Dow Jones Industrial Average posted a solid +0.65% gain for the day.  Moreover, seven of the eleven sectors in the S&P 500 Index traded higher including consumer staples and health care that were both up over +2%.  The fixed income complex was also strongly higher on Monday including long-term U.S. Treasuries, which rallied over +1%.

Next, while the tech bloodletting for the day looked staggering on our financial news network screens, it was much less dramatic when considering it in the context of what has taken place in the recent trading days leading up to today.  For example, in falling by just over -3% on Monday, the NASDAQ Composite Index “plunged” to levels last seen on, wait for it, less than two weeks ago on Tuesday, January 14.  Where is the Fed with emergency interest rate cuts, am I right? 

Don’t get me wrong, I’m not wild about the technical set up on the NASDAQ oozing from the chart above.  The tech heavy index has repeatedly failed to break out above December 16 highs with a modest downside trend bias in the weeks since that has included what is now the second break of its medium-term 50-day moving average.  None of this is great.  But Monday’s pullback was nothing more than the latest move in a back-and-forth sideways grind dating back for more than a month now.

OK, so what about the “so white hot they’re blue” AI stocks that got obliterated by as much as -20% or more on Monday?  We’ll begin with a look at the biggest dog of them all in NVIDIA, which coming into the trading week was the largest company in the U.S. by market cap (it was not the largest company in the world by market cap coming out of today, as it lost more than a MasterCard in market cap, which is the fifteenth largest company in the U.S. by market cap in its own right).

Yeah, NVIDIA was down -17% on Monday, which is some stock market crash of 1987 kind of declines.  And it did break below its long-term 200-day moving average for the first time since the midpoint of the Biden administration in the process.  Nonetheless, Monday’s drop only brought the stock back to levels NVIDIA was trading in early October.  The stock was not even considered officially oversold on a Relative Strength Index (RSI) basis coming out of Monday’s trading despite the extraordinary magnitude of the decline.  Basically, if your stock price quintuples, or increases by fifteen times, in just over two years, then a -17% single day pullback is like a mere flesh wound in an ongoing uptrend.

Let’s go one more for emphasis.  Broadcom, which is another top ten in the U.S. market cap company even after Monday, was also a member of the dubious -17% decline club on Monday.  So what was the damage?  Broadcom still closed trading on Monday at levels that are roughly +10% higher than levels that were all-time highs for the stock less than seven weeks ago.  Quel dommage!

So while the trading carnage across the AI segment on Monday was certainly notable, it was not nearly as bad when stepping back from the tree and looking at the forest.

Do these defenses effectively signal the all clear?  Is it now time to back up the truck and buy the latest in so many tech sector dips?  Not so fast.

Respecting the ozone.  It cannot be ignored that the behavioral finance vibe of this latest tech sell-off has a decidedly different feel to it versus anything that we’ve seen in the recent past.  Let’s break it down.

Check it.  A company on the other side of the planet in China (repeat . . . China) that didn’t even exist when the current AI bubble got started less than two years ago puts out an AI app that it says it created with the equivalent of chips from some old Commodore 64s lying around along with a dose of good old fashioned elbow grease and moxie, and it sends the world’s largest AI giant and friends lower by one-sixth of their entire value if not more.  Really?  Is it just me, or did Monday’s news have a bit of a Fleischmann and Pons cold fusion scent about it?  Just sayin’ that it’s probably not that easy at the end of the day.

Let’s take this premise one step further.  The Federal government is actively considering banning a Chinese app in Tik Tok where users post funny pictures of their cat among other mindless things, yet we’re going to be good with our country and all of the corporate behemoths that call it home scrapping their AI capex plans and outsource it to a company in China (repeat once again for emphasis . . .  China) that most of us never even heard about less than 24 hours ago to support the accelerated growth of their businesses and the broader economy over the next decade?  No security issues here?  Hmmm.

OK. We’ll go one more.  Suppose the premise that DeepSeek’s new app has raised questions about whether corporations may be able to achieve their AI goals for significantly less spend than what has been projected up to this point.  Um, really?  Are you telling me nobody across the investment landscape was chewing on this idea until Monday?  I’ve actually heard this idea actively discussed on financial television for months now, particularly given how richly valued these semiconductor companies that effectively make commodity products at the end of the day are, and I almost always have my TV on mute.

Nah.  I’m not buying any of these narratives.  Monday’s sell off had that classic feel of an Icarus-ish segment of the market that was just itching for a reason to sell off bigly, and DeepSeek was the arbitrary headline that showed up to do it.

Why does this matter?  I can remember like yesterday when past gorillas like Cisco Systems were just as awesome in April 2000 when they were getting obliterated for no clear apparent reason other than they were trading at extraordinary valuations than they were in February 2000 when they themselves were still flying toward the sun.  

Another example comes from the biotech industry from roughly a decade ago in 2015.  Just as AI stocks have been killing it in recent years, biotech stocks were having a phenomenal upside run of their own from 2013 to 2015 when investors were touting a “biotech revolution” to justify boundless valuations.  But following a seemingly endless meteoric rise, it was the proclamation on September 21, 2015 by then Presidential candidate Hillary Clinton that she would be delivering a plan to address “skyrocketing drug prices” that sent biotech shares plunging by -28% over the next six trading days.  A benign headline to say the least – Clinton was more than a year away from assuming office in a presidential race that she eventually didn’t even win – yet it took biotech stocks more than five years afterwards and a global pandemic along the way to eventually return to their 2015 highs.  And a decade later in 2025, they are still trading effectively flat to these 2015 highs.

I’m not saying that the same fate will befall the high-flying AI industry in the tech sector this time around.  We’ve seen so many tech pullbacks since late last decade, and each time they have found their footing and eventually rebounded to new highs.  Thus, the tech sector in general and AI stocks in particular should not be counted out until they are officially out.  But given how extremely concentrated the U.S. stock market has become in a select few high flying AI titans, a prudent approach for investors remains keeping a focus on a long-term investment philosophy of broad portfolio diversification that can certainly include a meaningful allocation to these popular areas of technology but are complemented with exposures to a variety of other sectors that may be poised to assume stock market leadership in future phases of the market cycle whenever they may finally come.  Monday was a good illustration of why such diversification makes sense.

Bottom line. Monday’s pullback in AI related technology stocks was staggering to say the least, but it is important to keep these declines in context.  When viewed more broadly, the declines to start the trading week were not as dramatic as the headlines might suggest.  

With that said, investors should exercise caution in rushing in to buy this pullback.  Just as with most any stock related pullback, it is worthwhile to watch developments closely in the coming days to determine whether the recent sell-off may be fleeting or could be only the beginning of something more pronounced.  

Given still extreme valuations across the AI stock space, the possibility of further declines should not be ruled out going forward before a bottom in these shares is finally reached.  In the meantime, other long overlooked sectors that performed well on Monday may also be poised to continue to follow through to the upside.

As always, please reach out to The Howe Team with any questions.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.  I wrote this article myself, and it expresses my own opinions.  I am not receiving compensation for it.  I have no business relationship with any company whose stock is mentioned in this article.  

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