- The market crash on Monday could mark the start of a longer period of broadening gains.
- Software stocks were a bright spot amid the DeepSeek sell-off.
- Revenue-generating apps are set to benefit from cheaper AI models.
The market chaos that battered the most dominant tech stocks on Monday may have been a welcome event for other corners of the market.
Although China’s DeepSeek AI app initially crushed investor confidence in US mega-caps, with traders worried about a supposedly cheaper chatbot that can compete with Silicon Valley rivals, some sectors might consider it a net positive.
That may have been hard to fathom at the start of last week. The tool is said to cost a fraction of what US AI hyperscalers have spent, challenging the idea that US firms need to pour massive investments into the technology and the energy infrastructure to run it. AI chipmaker Nvidia sank 17% on Monday, a plunge mirrored by other AI, nuclear, and utility stocks.
Entering the next phase of AI investing
With investors now debating what’s next for these sectors, traders shouldn’t overlook under-the-market winners minted by the DeepSeek episode.
According to Bank of America, one big implication is that AI capabilities could now come at a lower cost, a bullish takeaway for software. Since revenue-generating apps are contingent on the AI models that run them, cheaper and improved models should ramp up AI adoption in the first half of 2025, and turn into meaningful revenue by 2026.
The bank highlighted large-cap beneficiaries such as Salesforce, Adobe, ServiceNow, and Intuit.
JPMorgan agreed that AI investment momentum is shifting from hardware beneficiaries, such as chipmakers, toward an app-and-services phase.
“The lower cost of technology historically democratized opportunities for innovators and entrepreneurs with hardware eventually becoming a commodity compared to higher-margin Services with more sustainable growth (e.g., Software eclipsed Desktops and Chipmakers, Internet Service Providers surpassed Telecom Equipment and Services),” the bank wrote Tuesday.
Other market analysts are also picking up on the pattern.
In commentary this week, Gabelli Funds portfolio Manager John Belton cited an implied drop in computing costs that could also deliver positives for financial, internet, and healthcare stocks. Some, such as Laffer Tengler Investments CEO Nancy Tengler, have acknowledged a portfolio shift toward the application side of AI.
Since Monday’s opening bell, the iShares Expanded Tech-Software Sector ETF has gained 4%.
Meanwhile, Chris Zaccarelli, chief investment officer at Northlight Asset Management, has added exposure to power companies after the DeepSeek jitters. While this sector tumbled amid a fear that more efficient AI would require less power, he told Business Insider that rising energy consumption is just dependent on AI, there are other reasons to stay bullish on power.
Similarly, BofA noted that some non-AI IT hardware stocks slumped in the DeepSeek sell-off, creating a buying opportunity. That includes names such as Hewlett Packard, Western Digital, and Seagate Technology.
Fuel for a rotation
The DeepSeek saga may have given stock-pickers new areas to monitor, but this week’s crash may also have a silver lining for the broader stock market.
Long-momentum equities suffered their third-largest decline in forty years on Monday, but 70% of S&P 500 stocks actually gained during the session, JPMorgan reported.
“While the sell-off erased almost ~$1 trillion of market-cap from US equities, we view the rotation and higher dispersion as healthy given equity crowding was becoming increasingly stretched and unsustainable,” the bank said.
In other words, the crash appears to have encouraged a long-awaited rotation out of tech. The so-called “Magnificant Seven” tech names rallied aggressively on AI momentum last year, growing so big as to account for around a third of S&P 500 returns.
“We’re in a little bit of a stretched phase,” Zaccarelli said, pointing out that the Mag Seven stocks have a percentage weight in the index on a market cap basis that almost doubles their weight on a profits basis.
That’s made Wall Street anxious and eager to see the rally broaden out toward value stocks.
Although DeepSeek did not dispel the over-concentration issue — Mag Seven stocks have regained amid a flurry of earnings reports his week — Goldman Sachs noted that the market is likely facing the start of a longer broadening period.
The bank has been tracking a rising mix between value and growth investing, a balance not seen in years.
Macro conditions should support this. In a note authored January 24, Franklin Templeton outlined expectations for the rally to keep broadening, as historically happens amid a strong economy and as markets expect interest rate cuts.
Zaccarelli noted that a gradual cooldown in economic growth is what’s typically needed for investors to reposition, allowing “more money to flow into some of the other sectors, you know, “like healthcare, like financials, like industrials, not just tech, consumer discretionary and communication.”
Published by: Filip De Mott
