Stock market’s $1 trillion wipeout is a taste of what can happen when AI bets unspool
An earlier version of this story misspelled the name of Jason Browne, a portfolio manager at Alexis Investment Partners.
U.S. stocks suffered a $1 trillion wipeout on Monday, the latest hiccup during what has been a hectic stretch for markets.
It was the second time since the start of the year that U.S. stocks have seen that much, or more, value destroyed during a single day, Dow Jones Market Data show.
A robust rebound on Tuesday helped to calm some frayed nerves. Nvidia Corp. shares NVDA rose by nearly 9% after falling 17% on Monday and dropping below their 200-day moving average for the first time since January 2023, according to Dow Jones data.
Still, some investors said the dramatic selloff that kicked off the week helped to underscore a key vulnerability in the stock market’s torrid rally — one that could come back to bite investors in the future. Over the past couple of years, a handful of stocks have powered much of the market’s advance.
That doesn’t matter so much when the market is climbing. But when those stocks stop rising and start falling, they can have just as much of an outsize impact on the way down as they had on the way up. Case in point: On Monday, more than 350 individual stocks within the S&P 500 SPX climbed, Dow Jones data show. But the index fell anyway, weighed down by losses for Nvidia and some other Big Tech names.
Even gains elsewhere in the tech space weren’t enough to offset losses for Nvidia and other semiconductor names. Outside of the semiconductor industry, shares of heavyweights like Microsoft Corp. MSFT, Amazon.com Inc. AMZN, Alphabet Inc. GOOGL GOOG and Tesla Inc. TSLA also finished lower. But two Big Tech megacaps, Apple Inc. AAPL and Meta Platforms Inc. META, actually rose, as did a number of software stocks.
Clearly, any gains weren’t enough to prevent a punishing selloff in the S&P 500 and Nasdaq Composite COMP — although the Dow Jones Industrial Average DJIA, which isn’t heavily weighted toward technology stocks, did manage to finish higher.
It just goes to show that backlash to a seemingly richly valued market can occur precisely when investors’ enthusiasm appears particularly elevated and inflows into U.S. equity funds have been particularly robust, said Jason Browne, a portfolio manager at Alexis Investment Partners.
“Trees don’t grow to the sky. No one stock goes straight up, and no one market goes straight up,” Browne said during an interview with MarketWatch.
Data from EPFR showed that $276.2 billion flowed into equity funds over the past three months, although January hasn’t yet finished. An analyst at EPFR, now a sister company of ISI Markets, described the pace as “very high” relative to history. During the fourth quarter, U.S. equity funds experienced their largest inflow on record.
Since the S&P 500 was expanded to include shares of 500 companies in 1957, there had never been a day when the index had fallen by nearly 1.5% while more than 300 of its member stocks traded higher — until Monday, according to Jason Goepfert, chief research analyst and founder of SentimenTrader.
Only three days came close. In each case, more than 250 stocks rose while the S&P 500 fell by as much, or more. Each example occurred shortly before, or shortly after, the index hit its dot-com bubble peak in March 2000.
Browne told MarketWatch that Monday’s drop would likely prove to be another buyable dip, as investors look to pounce on the opportunity to buy popular stocks at a discount.
The VIX index, commonly known as Wall Street’s “fear gauge,” uses activity in S&P 500 options to gauge how volatile traders expect the market will be over the next month or so.
So far, that average figure for January was 38% higher than in December. The month is on track for the heaviest average trading volume in VIX calls since a U.S. “growth scare,” and the unwind of the Japanese yen USDJPY carry trade, rattled stocks in August and September.
Meanwhile, the put-call ratio for options linked to the volatility gauge has fallen to approximately 0.5, meaning there were two calls traded for every put. That is a notable decrease from the highs of around 0.83 in November.
Owning a VIX call represents a bet that volatility will spike, which tends to happen when stocks sell off. Contracts can be used to speculate on, or hedge against, such a move.
According to figures from Société Générale, Nvidia and its four largest customers — Microsoft, Alphabet, Amazon and Meta — had contributed about 700 points to the S&P 500 over the past two years through Friday. Their gains have left the S&P 500, by some measures, more concentrated than it has been in decades.
Put another way, excluding these five stocks, the U.S. benchmark index would be 12 percentage points lower. Nvidia alone has contributed 4 percentage points to the S&P 500’s performance over the past two years.
As a result, major indexes have become so concentrated that steep losses for a minority of stocks can be enough to drag them lower, translating into losses for investors invested in passive index-tracking mutual funds and ETFs.
Monday’s selloff was inspired, at least in part, by the emergence of DeepSeek’s latest generative AI models. They appeared to be about as effective as some of their U.S. rivals, but the company claimed they had trained them at a small fraction of the cost, and without the most advanced Nvidia chips.
A smartphone application for an AI chatbot designed by the company became the most downloaded app in the Apple app store over the weekend.
This helped to sow doubts about whether U.S. tech companies’ aggressive spending on AI-related chips and infrastructure was really necessary. This second-guessing appeared to hit Nvidia the hardest.
Of course, it is possible, even likely, that DeepSeek’s revelation could ultimately benefit U.S. markets and the economy.
According to Browne, lowering costs could make AI products more accessible to a wider swath of clients, potentially hastening adoption by more companies and allowing them to boost their productivity, and corporate earnings along with it.
See: The stock market ‘is telling us that cheap, open-source AI is a good thing’ after DeepSeek rout
Over time, this shift could help to justify what has become an increasingly pricey stock market, Browne said.
But such an outcome could also be accompanied by some serious volatility, at least in the short term, as investors shy away from shares of AI highflyers.
While the DeepSeek drama seemed to come out of nowhere, investors are facing some known risks over the days and weeks ahead. On Wednesday, Federal Reserve Chair Jerome Powell will take questions from reporters after the Fed announces its latest interest-rate decision and shares an updated policy statement.
And over the next few weeks, major tech firms will start reporting their latest quarterly earnings.
U.S. stocks tallied strong gains on Tuesday. The S&P 500 gained 55.42 points, or 0.9%, to finish at 6,067.70, while the Dow gained 136.77 points, or 0.3%, to end at 44,850.35. The Nasdaq gained 391.75 points, or 2%, to close at 19,733.59.