“This week saw tech stocks tumble after ambitious claims from Chinese AI firm DeepSeek challenged the US’s ability to remain a frontrunner in AI. With the bulk of the ‘Magnificent 7’ now due to report earnings over the next two weeks, there are concerns this news could prompt knee-jerk reactions from investors as volatility continues over the short-term.
“In situations like these, investors should be reminded of the importance of diversification, both with across their portfolios and below the headlines. While the Mag7 are often considered tech stocks, their reach is much more diverse and spans several sectors of the market. So while Nvidia drew headlines on Monday as it fell nearly 17%, three out of seven Mag7 stocks rose in value, while collectively the six ex-NVIDIA stocks saw broadly flat performance. It’s expected that the AI megatrend will continue, but sizing of exposure to any particular trend is key to managing risk.
“For long-term pension investors, it's important to avoid overreacting. Global markets are up 2.4% year-to-date on the back of 20% returns in 2024 and so pricing does need careful attention. However, a 1.4% fall in a given day on the US, or any, stock market is entirely expected from time to time. We saw similar fears, albeit from a different source, on equity and tech valuations in August 2024 that proved short lived. Of course, don’t get complacent; if AI turns out to have no productivity impact and so proves to be a waste of $100bns of capex, then global equity valuations will suffer considerable falls. But that is not our view at present.
“If anything, market uncertainty should remind investors about the importance of taking profits if weightings have grown above strategic levels. All investment, whether retail or institutional, should be for the long-term.”
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