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By Lewis Krauskopf and Laura Matthews
NEW YORK (Reuters) - Turbulence in some of the biggest tech names is reminding investors of one of the major risks to the U.S. stock market's record-setting rally: Reliance on a handful of mammoth companies to power those gains.
Investors are scrambling to understand the fallout for the artificial intelligence (AI) investment theme that has been a critical driver for stocks over the past two years after the emergence of a low-cost Chinese AI model rattled markets.
Optimism over AI has helped propel shares of chipmaker Nvidia and others of the "Magnificent Seven" megacaps, which combined contributed more than half of the S&P 500's 25% total return in 2024.
Because of those gains, the Magnificent Seven account for one-third of the weight of the benchmark S&P 500 and about 45% of the Nasdaq 100 - meaning when they falter they have outsized impact on the closely followed market barometers.
"You run the risk when you have concentration that you have selloffs like this," said Chuck Carlson, chief executive officer at Horizon Investment Services. "It's certainly going to raise questions in terms of how investors are positioning portfolios."
The S&P 500 fell 1.5% on Monday after news of the DeepSeek AI model - cutting the index's year-to-date gain nearly by half -- while the tech-heavy Nasdaq 100 sank 3%.
While it is uncertain "how big a threat DeepSeek itself will be to the AI theme," said Phillip Wool, chief research officer and lead portfolio manager at Rayliant Global Advisors, "it's crystal-clear that there are a bunch of correlated and crowded trades at risk when the tide of sentiment turns."
Shares of Nvidia, the AI poster child whose stunning stock-price rise had propelled it to become the largest company by market value, tumbled 17% on Monday.
Seth Hickle, managing partner at Mindset Wealth Management, said he moved to position more defensively with Nvidia options amid the volatility following the DeepSeek news.
Nvidia "is really widely held," Hickle said. "So this really affects all Americans who have a retirement portfolio or a passive equity investment strategy."
Just last week President Donald Trump's announcement of private sector investment in AI infrastructure gave a lift to tech stocks and the broader market.
Analysts at Capital Economics said that if it became clear that AI models could indeed be trained effectively with less high-end computing power than had previously been assumed, "there would clearly be a risk of a further correction in the U.S. stock market."