A casual observer might have glanced at the headlines following the launch of Chinese start-up DeepSeek’s latest AI model and assumed it caused widespread market carnage. It didn’t.
Yes, the Nasdaq tanked. Yes, the S&P 500 fell. However, not only did non-US indices do just fine, so did most US stocks – 70 per cent of S&P 500 stocks actually rose last Monday, even though the index fell 1.5 per cent.
This has never happened since the S&P became a 500-stock index in 1957, notes technical commentator Jason Goepfert.
For some time strategists have cautioned that US markets were becoming dangerously concentrated, with more than half of the S&P 500’s 2024 gains driven by the magnificent seven stocks. Those seven stocks account for a third of the index’s value, or more than the combined market capitalisation of the index’s bottom 400 stocks.
The worry was any mega-cap tech weakness would inevitably hurt the index – a worry realised during the DeepSeek-related bloodletting.
The huge growth of the magnificent seven means the S&P 500 is not nearly as diversified as one might assume.
One way of maintaining US exposure while dampening concentration risk is to buy an equal-weighted version of the S&P 500. Equal-weight indices weigh all component stocks equally, so no one stock has an outsize impact.
Last year, in a report on concentration risk, Goldman Sachs suggested an equal-weighted S&P 500 could outperform its capitalisation-weighted counterpart by 2-8 percentage points annually over the coming decade.
Of course, diversification has been out of fashion in recent years, and the allure of mega-cap tech may well remain strong in 2025. Still, the DeepSeek drubbing serves as a timely reminder of the value of diversification in a market increasingly dominated by a handful of giants.
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