Many headlines are painting a picture of âblood in the streetsâ following Monday eveningâs market action.
The Nasdaq dropped 3.1%, the S&P 500 fell 1.5%, and the volatility index spiked 20%. In fact, markets have remained volatile throughout the week.
Before diving into the details, Iâd like to make one simple point: markets going down isnât unusual. The unusual part has likely been whatâs taken place the past few years.
Itâs been more than a full calendar year since the S&P 500 experienced a correctionâa decline of 10% or more. For context, since 1980, the S&P 500 has averaged an intra-year decline of 14%. In short, the US stock market has been outrunning the historical evidence.
Without risk, there can be no rewardâthe expectation should never be that markets go up in a straight line.
Now, letâs address the news event that unsettled the market:
- A significant portion of the US stock marketâs success (and earnings growth) in recent years has come from companies who benefit from artificial intelligence (AI).
- Conventional wisdom has perceived the US to be the leader in the AI race with little competition.
- That assumption has recently been upended. Over the past week, a new Chinese competitor named DeepSeek surged in popularity, climbing to the #1 spot in the US app store ranking.
- A key detail DeepSeek reportedly built its AI model for only $6 million USD. That number matters because US tech leaders competing in the AI race have spent tens of billions in capital expenditures.
- This raises a critical question: are US tech companies overspending to develop a product that can be replicated for 99% less?
- The answer remains unclearâmany prominent technology leaders have questioned the accuracy of the $6 million estimate and the capabilities of DeepSeek
- However, the market isnât waiting for verification and began adjusting expectations, with the biggest AI-related beneficiaries all trading lower, including NVIDIA, which fell by 17% on Monday.
Many are asking whether this AI selloff could spark a broader market correction. The reality is that no one knows for certain.
What I want to emphasise is this: the portfolios we build for our clients are not designed to outsmart the market in the short term. Instead, they are built to be durable through periods of volatilityâlike yesterday and whatever lies aheadâallowing you to capture the long-term returns that markets have historically provided.
Mondayâs market activity offers a useful example. While the headlines tell a grim story, the results under the surface say something much different.
- On Monday, while the S&P 500 declined 1.5%, 70% of the companies in the indexâ350 out of 500âposted gains. In fact, more than 80% of the stocks outperformed the index return that day.
- This highlights a concept we discuss often: diversification works.
- Market performance has been highly concentrated in AI-related companies, but when unwinds occur, broad exposureâparticularly to undervalued areas of the market and global diversificationâhelps provide protection against these shifts.
Stepping back, itâs important to remember that industries evolve through a process of âcreative destruction.â Over the decades, weâve seen this time and againâfrom Blackberry to Apple, Blockbuster to Netflix, or AOL to Google. AI is likely to experience similar leadership changes, and while we donât know who the ultimate winners will be, we believe the diversified investment plan weâve built for you is designed to weather these shifts.
I hope this letter provides clarity on how recent developments in AI are impacting the market. As always, weâll be here with you on this journey, helping you make sense of what matters. If you have any questions or concerns, please contact us on 1300 014 368 or via email – info@fpbydesign.com.au