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“The music is not in the notes, but in the silence between.” – Mozart
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
The S&P 500 finished last week with its second straight weekly gain, and it was the first week of back-to-back 1.5%+ advances since mid-May as the S&P 500 managed to close at an all-time high last Thursday. Since the S&P 500 ETF’s (SPY) closing low on 1/10, the large-cap benchmark is up 4.73% while the Nasdaq 100 ETF (QQQ) has rallied by a similar amount (4.42%). Moving down the market cap spectrum, mid-caps (MDY) have rallied 5.64% while small caps (IWM) are up 5.47%. The leader has been micro-caps, though, as the Russell 2000 micro-cap ETF is up 5.75%.
Much of those gains from the last two weeks have been erased over the weekend as both the S&P 500 and the Nasdaq 100 are indicated to open sharply lower on concerns over DeepSeek upending the entire investment landscape for AI. News of DeepSeek first dropped around Christmas and started to pick up steam early last week as articles reported that the model has achieved comparable progress in AI to the most advanced US models for fractions of the cost. Articles published over the weekend have hit a nerve, resulting in a massive sell-off in mega cap US stocks.
If the reports of DeepSeek’s success at such low costs are true, and this is a big if as there is still a lot we don’t know in terms of how it was developed, it would pose problems for some of the biggest AI winners over the last two years. As we type this, the S&P 500 (proxied by SPY) is trading down about 2.25% which would be the largest downside gap since early August and the 60th largest downside gap in the ETF’s history dating back to 1993.
For the Nasdaq 100 (QQQ), the declines are even steeper. With the ETF poised to gap down 3.8% at the open, it would be QQQ’s largest downside gap since early August and the 20th largest downside gap since its inception in 1999. As shown in the chart below, before last August’s downside gap, the last time QQQ gapped down as much as it on pace to today was back in September 2020.
Among the mega cap stocks, this morning’s declines aren’t uniform. The chart below shows where each trillion-dollar market cap stock is trading this morning relative to Friday’s close. Leading the way to the downside, Broadcom (AVGO) and Nvidia (NVDA) are both down by double-digit percentages. These have been the biggest AI winners, so it’s no surprise that investors are selling them the fastest. Microsoft (MSFT) has also declined more than 5% given its close relationship with OpenAI. One name that has barely been impacted by the overnight sell-off is Apple (AAPL); in pre-market trading, it’s down less than 1%. Ironically, all anyone could talk about last week concerning AAPL was how it’s overvalued and missed the boat on AI. Today, that lack of investment in AI is being looked at as a plus!
