DeepSeek just revealed a huge risk to the stock market
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Overly enthusiastic AI bulls might have just gotten their comeuppance after AI upstart DeepSeek sent major players like Nvidia (NVDA) into a trading tailspin on Monday.
One valuable lesson according to Carlyle's head of global research Jason Thomas? Be mindful of the current concentration risk in markets.
'You can make your projections and have your best estimates about what's going to happen on the top line. You can make your assumptions about competition,' Thomas told Yahoo Finance executive editor Brian Sozzi during an Opening Bid podcast (see video above; listen below). 'But then you have the question of the valuation, this is an issue of what is the expected return here.'
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Not a day has gone by the past year, when major AI players haven't captured headlines or reported explosive growth. Nvidia, long thought to be the darling of the coming AI revolution, has basked in what felt like a perma-glow of demand for its products, both fully realized and under construction.
In turn, that has sent investors plowing more dollars into Magnificent 7 names such as Nvidia, Amazon (AMZN), and Microsoft (MSFT).
Thomas notes that Nvidia and its five largest customers now combine for a whopping 27% of the value of the S&P 500, and an astonishing 12% of global stock market capitalization.
These are mega-cap tech stocks now priced for absolute perfection, warned billionaire investor Ray Dalio on Opening Bid last week from the World Economic Forum.
So when perfect situations don't materialize, the crowded trades get unwound the fastest and weigh on other stocks.
Watch: what Salesforce's CEO Marc Benioff is up to in AI
DeepSeek represents the rise of an imperfect situation to the Mag 7 bulls.
It's a Chinese company that's also in the AI development space. Last week, it surprised more than just markets after unveiling RI, its AI model that gave a ChatGPT-esqe performance but at an arguably cheaper price tag. RI costs a reported $5.6 million to build for a base model, compared to the hundreds of millions of dollars incurred at US-based companies, according to CNN.
Fears mounted that US companies are over-spending on AI infrastructure, which includes Nvidia chips.
In response, stocks went haywire on Monday. Nvidia's market value dropped by $588.8 billion, or 16.97%. It was the biggest ever single-day loss in a stock's market cap in absolute terms, according to Deutsche Bank data. Monday's decline for Nvidia was larger than the total market cap of the likes of Exxon (XOM) and Mastercard (MA).
Violent market responses like this are why Thomas continues to remind investors to be skeptical bulls at best.
'Again, this sense of concentration risk is something that a lot of analysts have pointed out,' he said.
'The reason that I'm more concerned is because of the macro significance,' he continued. 'You have a relatively small share of the economy that is accounting for an outsized share of the growth in GDP because of how much they've been investing.'
Yet, for every skeptic, there are those who say moments like the Monday sell off are expected and overblown.
Tech analyst Dan Ives and the team at Wedbush released a bullish note in response to the chaos.
'No US Global 2000 is going to use a Chinese start-up DeepSeek to launch their AI infrastructure and use cases. At the end of the day there is only one chip company in the world launching autonomous, robotics, and broader AI use cases and that is Nvidia,' Ives said.
Three times each week, Yahoo Finance Executive Editor Brian Sozzi fields insight-filled conversations and chats with the biggest names in business and markets on Opening Bid. You can find more episodes on our video hub or watch on your preferred streaming service.
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