Amidst AI Mania, Tech Stocks Have Their Worst Week in Months as 'nobody Saw DeepSeek Coming'

The technology sector within the S&P 500 just experienced its worst week since early September, as concerns over a Chinese artificial intelligence firm, DeepSeek, unsettled investor confidence in the ongoing AI-driven stock rally.

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Both the S&P 500 and Nasdaq Composite ended the week with losses, weighed down by sharp declines in tech stocks. The selloff was largely attributed to fears that DeepSeek’s emergence could shake up the competitive landscape of artificial intelligence. Notably, Nvidia Corp., a leading AI chipmaker, suffered a major setback, losing $552 billion in market value throughout the week. The stock struggled to recover after Monday’s 17% plunge.

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According to Rob Arnott, founder and chairman of Research Affiliates, few anticipated DeepSeek to develop technology comparable to OpenAI while utilizing seemingly less expensive and less powerful chips. While investors did not necessarily expect DeepSeek to surpass OpenAI, Microsoft, or Google, the company's progress has led to questions about the competitive moat surrounding these tech giants.

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For months, Big Tech companies have benefited from optimism that AI-driven innovations would lead to higher corporate earnings and improved productivity. Nvidia, in particular, has seen remarkable growth, fueled by expectations that major tech firms such as Microsoft and Meta Platforms would pour billions into acquiring its AI chips.

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However, Arnott cautions that market bubbles are built on compelling narratives, and even disruptive companies can be overtaken surprisingly quickly. He pointed to historical parallels, noting that while AI may indeed revolutionize industries, the current perceived winners may not necessarily maintain their lead. This sentiment echoes the late-1990s dot-com boom when the internet was expected to change everything, yet many of the hyped companies failed to justify their lofty valuations over time.

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Research Affiliates recently highlighted that AI’s "picks and shovels" sector, including companies like Nvidia, has been the early beneficiary of the boom. However, the real long-term winners will likely be firms that develop the yet-to-be-discovered "killer apps" that define AI’s future.

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The S&P 500, a market-capitalization-weighted index heavily concentrated in Big Tech due to their massive valuations, has surged in recent years. Companies such as Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta, and Tesla have driven much of the index’s gains since the current bull market began over two years ago.

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Despite recent volatility, some analysts remain confident in the continued strength of AI-driven capital expenditures. Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, noted in a report that capital spending among major tech firms remains robust despite competition from lower-cost AI models like DeepSeek. She emphasized that AI demand remains strong, citing positive outlooks from Microsoft and Meta. According to UBS, the combined capital expenditures of Alphabet, Amazon, Meta, and Microsoft are expected to rise by 25% this year to $280 billion—a trend that supports ongoing investment in AI infrastructure.

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Arnott, however, advocates for a value-oriented investment strategy, using the Research Affiliates Fundamental Index to maintain a diversified portfolio. Unlike the S&P 500, which is weighted by market capitalization, this index selects stocks based on financial fundamentals such as cash flow, dividends, and book value.

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For investors seeking stability, Arnott warns against overexposure to the S&P 500, given its heavy reliance on a handful of tech giants, often referred to as the "Magnificent Seven." Drawing comparisons to the dot-com era, he noted that none of the top 10 tech stocks from that period managed to outperform the broader market over the following 15 years—a long wait for investors betting on today’s AI leaders.

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Even if AI-related businesses continue to thrive, their stock prices may struggle to sustain current levels, given how much future growth has already been factored into valuations. Research Affiliates pointed out that while some AI stocks, such as Nvidia, are trading at lofty valuations, others remain more reasonably priced or even available at a discount.

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Arnott mentioned that there are different versions of the RAFI U.S. index, including ETFs like the Invesco FTSE RAFI U.S. 1000 ETF and the Schwab Fundamental U.S. Large Company ETF. While both funds dipped 0.2% for the week, they ended January with year-to-date gains of approximately 4%, outperforming the S&P 500’s 2.7% increase over the same period.

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Scott Wren, senior global market strategist at Wells Fargo Investment Institute, believes that the market’s reaction to DeepSeek’s emergence was exaggerated. He pointed out that after a prolonged rally driven by AI enthusiasm, investors were looking for an opportunity to take profits. Given the S&P 500’s rapid rise, some pullback was inevitable.

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Further uncertainty arose in the market on Friday after reports surfaced that President Donald Trump planned to implement new tariffs over the weekend. This news contributed to additional market jitters in the afternoon trading session.

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Ultimately, the S&P 500 ended the week with a 1% loss, while the technology sector fell 4.6%—its steepest decline since early September, according to FactSet data.

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Research Affiliates concluded that while AI-driven investing has generated remarkable gains, investors should be cautious. The real risk may not emerge in the short term but rather in the long-term reckoning that follows a period of speculative excess. While sitting out entirely could mean missing out on generational opportunities, blindly chasing AI stocks at ever-higher valuations can be equally risky.

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