(Bloomberg) -- What do you get when an established market narrative is suddenly flipped upside down, with stretched investor sentiment and positioning, right before one of the busiest earnings weeks of the season? About a trillion dollars of market value erased.
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Concerns about Chinese AI chatbot company DeepSeek’s challenge to AI spending plans sent US tech giants reeling. The Nasdaq 100 index sank more than 3%, and Nvidia Corp. was headed toward the worst market cap loss for a single stock in market history.
Stock markets trading near record highs are always precarious, and rich valuations make the margin of error even smaller. Momentum across major equity benchmarks was already extended and positioning was building into more bullish territory as many investors chased the recent rally following a weak start of the year.
“Megacap Tech is the US equities market, and anybody with a mandate to own equities is by default stuffed on these names in order to survive recent years,” notes Charlie McElligott, cross asset macro strategist at Nomura.
A significant decline in funding spread this year suggests that institutional investors’ positioning in equities was already shifting before Monday’s big drop. That leaves more short-term oriented investors in the market, with their penchant for quick reactions to the news potentially leading to more excessive swings. Investors were also likely positioning for favorable January seasonality, while tailwinds from systematic investors could now turn into headwinds.
Positioning was already changing ahead of Monday, as some investors rotated out of Big Tech. Goldman’s trading desk noted that the Magnificent 7 names were collectively net sold for a second straight week by both hedge funds and mutual funds. The net allocation now stands at 15.1% of total US net exposure versus a record high level of about 21% seen last June.
“On Friday it felt like 95% of questions I got were around the Chinese AI team at Deepseek and the emerging narrative that their performance-topping models call into question the billions being spent on leading edge AI capex,” writes Joshua Meyers, US TMT Spec Sales at JPMorgan.
A potential repricing of downside risks into the crowded AI trade is seeing a substantial bout of volatility reintroduced, with the VIX Index spiking the most since December. That market jolt last month was caused by another narrative shift, when investors dialed back expectations for the Federal Reserve to cut rates further.