The bad news: AI darling Nvidia lost $593 billion in market capitalization on Monday—the single-greatest one-day plunge in stock market history—after Chinese company DeepSeek introduced a new AI model that may be as robust but much cheaper to produce.
The good news: Nvidia’s Magnificent 7 peers held up much better—with three of the stocks (Amazon, Meta, and Apple) posting gains (see the chart).
Source: Bloomberg, 1/27/2025, Past performance is not indicative of future results. This is not a recommendation to buy or sell any security. Please see attached disclosures.
Two key takeaways from Monday’s volatility:
- Nvidia stock was priced for “perfection” and was highly susceptible to losses from even a whiff of bad news.
- Earnings growth expectations for the Mag 7 stocks remain sky high versus other areas of the equity market—38% on average over the next 12 months versus just 8% for mid-caps.
Going forward, investors may need to be more selective in how they pursue opportunities in the AI space. This week, the Mag 7 companies will start reporting their fourth-quarter results. In the wake of Monday’s developments and these firms’ massive planned expenditures on artificial intelligence—for example, Meta plans to spend over $60 billion on AI this year alone—investors will be laser-focused on what these market behemoths have to say about the future.
Just as important, there may be opportunities among less-appreciated market sectors. Example: The bar is low for mid-cap stocks. If the group’s earnings exceed expectations by even a small amount, that positive surprise could boost mid-caps. That could happen, given that the medium-size firms that make up the mid-cap universe tend to derive much of their sales from U.S. consumers—who remain in particularly strong financial shape.
And if Nvidia or other AI stocks hit more potholes, we think having mid-caps in a portfolio could help to smooth the ride.
The upshot: As exciting as AI remains, we believe portfolio diversification is a crucial component of a goals-based investment journey.
By Mike Dickson, Ph.D.
Originally published at Horizon Investments
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