Stormy Skies Ahead: Tariff Showers with Thundering AI
Authors & Contributors
DeepSeek’s new AI model launch in late January caused a tech-led selloff with a $600 billion market-value loss in the Magnificent 71. Meanwhile, market stocks plummeted due to the US’ implementation of tariffs on our major trading partners. How will the concentration risk in tech companies’ benchmarks and the evolving US tariffs drive volatility in the year ahead?
Magnificent 7 Performance
The markets thundered into 2025 with the S&P® 500 reaching a record high in January fueled by the momentum of a strong US economy. However, two momentous events rattled investors and raised questions around the sustainability of the equity market’s remarkable run. First, the release of DeepSeek's new AI model in late January led to a tech-led selloff, with Nvidia's share price dropping 17% and losing a record $600 billion in market value in one session and dragged the benchmark lower with it. This highlighted the market’s vulnerability to swing in tech companies’ valuations.
Just as the market began to recover, the Trump administration announced new tariffs on February 1 of 25% on Mexico and Canada and 10% on China. This sparked a broad risk-off move, with stocks declining, bond yields diving, gold prices hitting all-time highs and currencies weakening against the US dollar. The tariffs on Mexico and Canada were postponed for a month after calls with their leaders, but the tariffs on China went into effect immediately. This raises concerns about more aggressive tariff scenarios from the US. Our latest piece, Cloudy with a Chance of Tariffs, previewed the tariff sensitivities amongst the top global economies and the dangers of an escalating trade war. The macroeconomic impacts of tariffs will remain uncertain until the details on their size, scope and timing become clear.
We can now assess the concerns raised by DeepSeek’s AI model and its potential impact on global benchmarks. At the start of 2025, the Magnificent 7 comprised about 33% of the S&P 500 by market cap. The market caps of these companies, including Apple ($3.8 trillion), Microsoft ($3.1 trillion) and Nvidia ($3.3 trillion) are larger than the economies of many countries. The market has stabilized since the Magnificent 7 led a sell-off that erased a massive portion of market capitalization from the S&P 500 in January and has regained ground. However, the period of market instability raised investors’ concerns about concentration risks in major benchmarks.
Magnificent 7 as a percentage of the S&P 500 Index
With just a few tech companies like Apple and Microsoft making up such a heavy footprint in benchmarks, quarterly earnings reports or disrupting news in the rapidly evolving AI space have the potential to significantly shift the markets in either direction. The late-January tech selloff was so notable that even Federal Reserve (Fed) Chair Powell was asked about his views on a potential asset bubble during a press conference. The higher the concentration within the index, the greater the impact that the share prices for a narrow set of companies can have on global financial markets. The reliance on a concentration of tech companies in the S&P 500 combined with impending tariffs on the US major trading partners are two key themes defining markets in the year ahead.
1 The Magnificent 7 stocks (Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia and Tesla) are seven high-performing companies that significantly influence the stock market and represent a large portion of major indexes like the S&P 500.
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