Every day in the stock market that goes by marches us deeper into science fiction territory. On Monday tech behemoth Nvidia, maker of semiconductor chips used for AI applications, dropped 17% when news came out that Chinese AI app DeepSeek grabbed the title of top ranked AI app on the Apple iPhone App Store. Tuesday, Nvidia surged and recovered some of its losses while OpenAI, a Microsoft interest, accused DeepSeek of stealing their technology. Then today, Chinese giant Alibaba released Qwen 2.5 Max, an AI model they tout as better than DeepSeek, ChatGPT and Meta and crashed Nvidia’s stock yet again while President Trump considered restricting Nvidia’s chip sales to China.1 So enter Alibaba into the AI Wars versus DeepSeek versus Microsoft versus Meta.
We’ve descended into the basements of so many 1980s nerds. You know who you are. It’s starting to look like the really bad Sci-Fi B movies featuring future wars between not countries but companies. Perhaps before we can move to the events of the original Terminator, we must first sort out via capitalism and corporate espionage which AI will be responsible for bringing about the downfall of humanity?
The subplot that no movie director worth his salt would be interested in, but we are fascinated by, is how does that affect Megacap technology stocks here in the US, where once upon a time (last week), we assumed total American domination?
The issue is many-fold. First, we have the valuation of the Megacap stocks: it’s sky high as are the valuations of many chipmakers not in the Magnificent 7. Perhaps more frightening than that is the degree to which the S&P 500 was overweighted in those stocks. For that percentage where else should we turn for this article but the AI Overview in Google? It tells us that “as of early 2025, the Magnificent Seven stocks collectively represent approximately 33% of the S&P 500 index weight, meaning they make up roughly one-third of the total market capitalization of the index.” Globally these stocks account for 18% of the developed world’s stock market cap. That is heavily concentrated and it’s grown from 20% at the start of 2023 to 28% a year later2.
Another issue is one of recouping investment. What if the big players got it wrong in the arms race to spend as much on AI as possible? It’s been written that DeepSeek was created with tens of millions of dollars of investment. The megacap tech stocks are spending tens of billions themselves and hundreds of billions collectively. They’ve got a lot invested in it, namely a whole boatload of $40,000 Nvidia chips. So they have to charge a lot to recover their investment while DeepSeek and perhaps others, can get away with a low cost offering of a very functional AI. It begs the question who’s going to buy $40,000 Nvidia chips if the public can get low cost, functional AI on their phones? Will the fact that the AI app is Chinese be enough to deter cash-strapped consumers still struggling with righting themselves after the inflation of the last few years? Will the administration throwing $500 billion into AI have the effect they’re hoping for or has the die been cast on the commoditization of the AI space?
[BEGIN CLIENTS ONLY SECTION]
We’ve discussed these issues at length in our Investment Committee meeting and determined that the server is getting a little too hot. There’s money to still be made in AI, but we believe it’s in the surrounding spaces, such as utilities. Running AI applications like large-language models (LLMs) require power. So do cryptocurrency mining, hospitals and data centers. With that in mind, we’ve removed XLK, which is the Technology SPDR ETF, from your Extended Equity ETF portfolios and replaced it with XLU, which is the Utility SPDR ETF. We’re going to rely on the already technology-overweighted nature of the S&P 500 to give you the tech and Megacap tech exposure you need in the SPLG S&P 500 ETF, which remains in the portfolio. We’ve also added a healthcare technology-specific ETF thinking of the increased demand aging baby boomers will place on the healthcare system.
[END CLIENTS ONLY SECTION]
Opportunities abound for growth, but they are changing. So many mutual funds that lack investment discipline have severely overweighted companies like Nvidia and Broadcom, and while they’ve been successful over the last 2 years, they are dying by that sword this week. For the record we still have Nvidia in our Growth Portfolio, but we believe strongly that no company should be more than 5% of your portfolio, perceived juggernaut or not. We’re going to make sure our clients aren’t overexposed in any area while trying to grow your assets above taxes, expenses and inflation. The AI Wars can capture our imaginations, but we’re more concerned with capturing growth for our clients, whatever the prevailing investment “wisdom” out there.
We’re not robots – at least not yet. So, you can call us and have a real conversation without those creepy long AI digital assistant pauses. If you haven’t heard them elsewhere, you will soon. AI is coming whether we like it or not. But we don’t have to act like robots when we invest. Let us fight your AI Wars for you with a human touch.
Source:
1@TheKobeissiLetter
2https://www.openingbelldailynews.com/p/stock-market-outlook-investors-magnificent-seven-fed-rate-cut-powell-sp500
