The Tech Slump on Monday Left The Rest of The Market Unscathed
Several measures of stock market health suggest that Monday’s sudden slump was in fact mostly an isolated hit to the world’s biggest technology firms and AI-related shares.
The Nasdaq 100 slid 3% and Nvidia Corp. plunged 17% — shedding almost $600 billion in market value in the biggest wipe-out in history. That came as Chinese startup DeepSeek’s latest model shook the belief that only Big Tech with huge budgets can compete in the artificial intelligence field — questioning the investment case that has favored the biggest players with rich valuations.
Yet looking under the surface, things were not that dramatic on Monday: a majority of S&P 500 stocks ended the day higher, with the Advance-Decline Index — which measures stocks rising minus those falling — showing a positive reading of 199 even as the US benchmark sliding 1.5%. That was unprecedented over the past 20 years.
“The selloff so far has not been indiscriminate, with markets distinguishing between winners (software) and losers (semis),” Barclays Plc strategists led by Stefano Pascale wrote in a note. “However, the high concentration of US equities translated into large losses at the index level.”
In another sign that the selling was contained to only the largest technology stocks in the US, the S&P 500 Index Equal Weight Index closed the day little changed. Even in Europe, benchmarks like the Stoxx 600 and Germany’s DAX are back to hovering around records.
This is why you build a diversified portfolio. It’s not great to have the the entirety of your capital in seven names because things like this can happen. Disruption happens.
The market action suggests investors are accepting that cheaper AI will speed up its implementation and use cases but will hurt the richly-valued stocks which benefited the most over the past two years, leading the US stock market higher — like Nvidia.
The heavy weight of big technology stocks on the S&P 500 might force investors to rethink their approach to passive lage-cap investing and limit sector concentration in hopes of chasing returns.
In a world where the best- and worst-performing asset classes tend to dominate the headlines, it’s easy to lose sight of the fact that a diversified investment portfolio is generally the most reliable approach for meeting long-term investment objectives.
On Friday we we heard from Fidelity PM Mark Schmehl and below are our notes from the session. Mark is an award winning PM and his Fidelity Global Innovators Class had another great year, returning +60.55% in 2024, and remains 100% peers beaten since inception (Nov. 1, 2017). Over 5 years, the fund has annualized over 27%.
Mark spoke on his outlook for the year, investments in AI, extreme valuations, private investments and more. Below we provide a summary from the session.
Opening Thoughts:
I just had another strong year of performance. This was my second-best calendar year return since our inception.
The market environment will be very noisy for the next 4 years.
We've done this before with Trump's administration, and it is exactly the same playbook as last time
The new administration will bring a lot of change.
I like change, and I like taking advantage of change to put money into the winners and avoid the losers.
People who can't adapt to change or don't like it will get 'run over' while people who can adapt will do better.
Current Outlook
I'm not bearish.
Historically after a couple of big years, things pause for a bit. Maybe at a broad macro level we see a pause with the magnificent 7
All the big technology companies are spending money like crazy (except apple). This spending is usually a headwind when that spending doesn't provide revenue right now.
From a bottom-up standpoint, it seems fair to think that these mag-7 stocks pause to digest all that spending that will bring revenue in 2-3 years
I don't think that these big companies will stop spending because they are getting enough signals that AI will eventually be worth it, will transform the economy, and change how we do things.
A lot of start-ups are going after really menial tasks that people don't want to do.
AI is not a fad, it will be monetized faster than the internet was, and it has a broader use case and potential than the internet was (the internet simply connected people, AI will do the work for us).
We will see tools starting this year:
AI is uniquely suited for marketing/advertising. Anything that is computationally heavy, with lots of decisions, and where AI can streamline and repeat that process, is that AI will go after.
Other parts of the economy are treading water. Globally, other economies are not doing as well. Inflation hasn't gone away, but it is not front and center anymore (rates are up, they will probably stay up for a while).
I'm trying to not focus on that. There is still opportunity in the market. In fact, I found 3 new ideas today I will be investing in.
When I stop finding new ideas that’s when I get worried, and I am still finding tons of new ideas.
What am I looking for in AI?
I am more interested in the users of AI than the builders of AI
This doesn't mean that I don't like the builders. I still own NVDA and some of the hardware stocks but I’ve reduced my position and am now underweight my benchmarks
Builders will still be good stocks, and people will keep spending money to build out the infrastructure but I think the next leg up will be in other areas of AI.
They key will be finding the areas in the market where companies are using AI best to get advantages over competitors.
I also look for companies that will benefit from changes in policies related to the government in power and deregulation.
The most bang for my buck: companies that use AI, and use it well.
Thoughts on Canada
Canada is not looking good, just “less bad”. It is still tricky
Most of the Canadian market is not related to Canada's economy (commodities are global, gold is global, about 60% of the TSX is global).
I'm not playing economic growth per say, but I think there are a lot of good companies in Canada. Canada is so hated that we don’t need a lot for the Canadian market to turn around.
I’m bullish on resources which Canada has a lot of and what its good at
I also think the Canadian dollar is near a low, and it shouldn’t be trading this low so this would benefit Canadian holdings
Below is a short video of Mark discussing the recent market movements.
Tony De Thomasis, Bsc, CFPPresident[email protected] 731 9800 ext 226
Jason De Thomasis, BMOS, CFPCertified Financial Planner[email protected] 731 9800 ext 229
Your Wealth Management Team
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This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or construed as an endorsement or recommendation of any entity or security discussed. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication. Market conditions may change which may impact the information contained in this document. All charts and illustrations in this document are for illustrative purposes only. They are not intended to predict or project investment results. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies.
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*Source: Ned Davis Research, Patient Capital, Bloomberg (USD). Past performance no guarantee of future results. Investments cannot be made directly in an index.
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