A cheaper, competitive AI model from Chinese artificial intelligence company DeepSeek sparked a sell-off in the S&P 500 (^GSPC) and Nasdaq Composite (^IXIC) on Monday as it challenged one of the key drivers of the current bull market.
For the first time in a while, investors had a tangible reason to believe some US tech giants, namely Nvidia (NVDA) and Broadcom (AVGO), might not grow earnings by as much as initially hoped in the coming year. The team behind DeepSeek, the artificial intelligence model maker, claimed that the technology uses cheaper chips and less data. Investors are concerned this could hurt future AI chip sales for a company like Nvidia as well as bring into question the dominance of US hyperscalers in AI.
The problem for markets is that Big Tech’s earnings beats have been driving stocks higher over the past two years.
“The key pillar of this bull market is earning estimates moving higher,” Truist co-chief investment officer Keith Lerner told Yahoo Finance.
He added, “Tech is at the forefront of the overall return for the market this year.”
As Barclays head of US equity strategy Venu Krishna pointed out in Yahoo Finance’s latest Chartbook, Big Tech earnings from the giants — Nvidia, Amazon (AMZN), Alphabet (GOOGL, GOOG), Apple (AAPL), Meta (META), and Microsoft (MSFT) — have seen earnings estimates rise more than the rest of the S&P 500 and the MSCI Europe (IEUR) index over the past 12 months.
Yesterday’s more than 3% decline in the Nasdaq and 1.5% drop in the S&P 500 show how the market could react if both the blue (Big Tech earnings estimates) and green lines (the rest of S&P 500 estimates) in Krishna’s chart below begin reversing direction.
The expected scrutiny over tech earnings will come amid a market that Richard Bernstein, CEO of Richard Bernstein Advisors, told Yahoo Finance is ripe for change. Bernstein’s contribution to Yahoo Finance’s Chartbook showed how just 29% of stocks in the S&P 500 outperformed the index in 2024 and 30% outperformed in 2023. This marked the lowest number of outperformers since the late 1990s.
“It’s probably incorrect that there is a new paradigm in which the ‘Magnificent Seven’ secularly dominate the market,” Bernstein said. “Such extreme, narrow leadership is rare because it goes against capitalism, open markets, and competition.”
“We think 2025 [will] be a year of returning to normal broader markets as speculation meets reduced liquidity and fundamental investing again outperforms.”
Bernstein’s call for broader returns in 2025 matches the takeaway from a chart shared with Yahoo Finance by Nicole Inui, HSBC’s head of equity research for the Americas. Inui’s chart shows that while Magnificent Seven earnings are still expected to grow more than the other 493 stocks in the index in 2025, the gap is expected to narrow, making the case for a broadening of the stock market rally.
“Mag 7, while still outpacing the overall index on earnings growth, is expected to be less of an outlier.”
To both Bernstein and Inui’s credit, that market action played out on Monday. Roughly 70% of stocks in the S&P 500 closed in the green, despite a more than 1.5% drop in the index itself. Nvidia’s large losses led to most of the downside action in the overall index.
This introduces a stark reality for investors. Should Big Tech’s dominance wane, it might become a better environment for stock pickers to find names that could outperform the S&P 500. But it also likely means that the massive gains seen for the broader indexes over the past two years won’t come as swiftly if the largest companies in the index aren’t leading the charge.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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