Why US tech stocks nosedived this week

If you’ve been keeping an eye on the stock market this week, you might have noticed US technology stocks taking a big dive. Companies like Nvidia, Microsoft and Alphabet (Google’s parent company) saw their share prices tumble, wiping out billions of dollars in market value. What caused this? The answer lies with a Chinese AI company called DeepSeek, but let’s break down what happened. 

What is DeepSeek? 

DeepSeek is a relatively new AI company from China. It started as a university project and has quickly made waves in the tech world, because it has developed an AI model called R1 that’s shaking up the industry. 

The R1 model is different because it performs advanced tasks (like coding and maths) just as well as the AI models created by US tech giants like OpenAI and Meta. But DeepSeek’s model uses less computing power to achieve these results, which means it’s cheaper to run – a big deal in the world of AI. This efficiency challenges the assumption that cutting-edge AI development needs massive investment in expensive hardware, something US companies have relied on. 

Why did this impact US tech stocks? 

The release of DeepSeek’s R1 model spooked investors. AI chip company Nvidia, for instance, took the hardest hit, losing nearly $600 billion in market value in a single day – the biggest one-day loss in US history. That’s because Nvidia makes GPUs, the chips that power many AI models. If DeepSeek’s tech is as efficient as claimed, it could mean less demand for Nvidia’s hardware. 

In addition, Microsoft and Alphabet also saw their stock prices drop, as investors worried that they might have spent more money than they needed on AI-related infrastructure. 

The table below shows how the different members of the so-called ‘Magnificent Seven’ group of technology stocks were affected, and their proportion of the market based on the S&P 500 index of large US companies. Also included is Broadcom, which isn’t a Magnificent Seven stock, but is a semi-conductor company that has rocketed on the back of the AI boom and now finds itself in the top 10 holdings of S&P 500 tracker funds. 

Sources: Refinitiv, iShares. *iShares Core S&P 500 ETF as at 24 January 2025

Does this mean AI is in trouble? 

Not necessarily. While some investors panicked, others believe the reaction might be overblown. There are a few theories about why it is not all bad for AI-focused companies. There is a thinking that as something becomes more efficient (like AI), demand for it actually increases. If AI becomes cheaper and easier to deploy, more companies might adopt it, driving demand for chips and software. 

On top of that, Nvidia has responded to the news, acknowledging DeepSeek’s achievement but pointing out that many AI tasks still need powerful GPUs to function. So, while DeepSeek is shaking things up, it’s not necessarily replacing existing tech overnight. 

What can UK investors learn from this? 

If you’re new to investing, events like this can feel overwhelming, but there are some things we can learn from it. The first is that stock markets can be volatile and unpredictable, especially the tech sector. Sudden news can cause big swings, both up and down. 

A key thing to learn from this event is making sure that you’re not overly exposed to one company, sector or country. For example, instead of putting all your money into a few big tech stocks, spread it across different sectors and asset types. This reduces your risk when one sector takes a hit. 

Another lesson is that short-term dips happen (as do big ones), but they are often just bumps in the road. If you’re investing long term, don’t let temporary setbacks shake your confidence. 

How to protect your portfolio from a tech market crash 

A correction in the tech stock prices may not be on the cards, but it's smart for investors to work out their overall exposure to the US technology sector, and see if they are happy with it, or want to dial it down. If you do decide to reduce your exposure you need to acknowledge the risk that if the US technology sector continues to perform strongly, your portfolio may get left behind. 

There are a number of ways to reduce exposure to Magnificent Seven stocks in a portfolio. Probably the simplest strategy is to diversify away from the US and into other regions such as the UK, Europe, Japan, or emerging markets. You can do this by choosing active funds in these regions, or passively through trackers and ETFs.  

Investors who want to shift away from the Magnificent Seven but still want to keep exposure to the wider US stock market, might consider an active fund that has lower exposure to the tech giants. For example, this may be achieved by investing in value managers or investing in smaller US companies. 

Another option would be to seek out an equally weighted S&P 500 tracker, which allocates money to each of the stocks in the US index equally. In recent times these equal weighted indices have underperformed the more conventional trackers: over the past five years the S&P 500 index has returned 105% compared to 77.6% from the equal weighted version (source: FE, total return in GBP). But clearly that’s a period dominated by US mega cap tech outperformance, and weaker performance from the Magnificent Seven would hit the traditional size weighted index harder.  

Some investors might decide the recent jitters in the highly valued US stock market are reason to reduce their stock market exposure altogether. They might consider increasing their investments in more cautious multi-asset funds, money market funds, or indeed individual government bonds. 

If you're thinking of adjusting portfolios, there’s no need to throw the baby out with the bathwater. Managing a portfolio needn’t be an all-or-nothing endeavour, and you can tilt your portfolio towards or away from any given region or sector without carrying out a wholesale switch. 

Given the importance of the Magnificent Seven to the global stock market, it may be unwise to ditch all exposure to these companies. But the potential for upheaval as the AI race progresses might mean you opt for a more thoughtful, nuanced approach to investing in this space.