Hey everyone!

After Monday’s global financial market debacle, I just wanted to check in real quick to give my thoughts on what happened, what the composition of market returns looked like and what it could mean for near-term performance.

What Happened?

It was announced at the end of last week that Chinese AI developer DeepSeek had developed and deployed its own AI model that used cheaper chips, less data and only cost around $6 million to make, yet produced comparable results to OpenAI’s ChatGPT.

That raised a couple of big questions on Wall Street.

First, it was assumed that the huge investments being made into AI by the big mega-cap tech firms in the U.S. would yield huge revenue and earnings gains. Now, the street is worried whether all of that capex spend is going to go to waste if alternatives can be developed at a fraction of the cost.

Second, it raises serious questions about whether it’s the U.S. or China that’s actually winning the global AI race right now. The biggest perceived winners might not end up being such huge winners in the end.

And that’s what led to Monday’s big pivot. I won’t even call it a rout because there were a lot of areas of the market that delivered gains, some of them pretty big.

Here’s the breakdown of what Monday’s action looked like:

Now, let’s run through a few key takeaways.

This Was A Strong Rotation Away From Tech & Growth

It’s no surprise that the day’s biggest losers were tech, growth, high beta and the magnificent 7 stocks. By extension, the momentum factor lost almost as much because it’s heavily overweight to tech. The quality factor, which also includes several of the mag 7 companies, actually salvaged a relatively reasonable day because it was balanced out by other more defensive holdings.

But look at the biggest winners - dividend aristocrats, low volatility, high dividend, value, Treasuries, consumer staples and healthcare. Those are all the leaders you would expect to see in a broad risk-off move, which is exactly what this was.

In a lot of cases, especially over the past couple years, you’ll see the S&P 500 down, but tech still being one of the best sector performers. Not today. This was as traditional as traditional gets when it comes to market rotations.

NVIDIA Led The Tech Sell-Off, But It Was Far From Alone

NVIDIA accounts for nearly 14% of the Technology Select Sector SPDR ETF (XLK), so it was entirely expected that the cap-weighted indices would perform worse on Monday. The equal-weight version of the sector, the Invesco S&P 500 Equal Weight Technology ETF (RSPT) in which NVIDIA accounts for less than 1.5% of the weight of the 70-ish name index, however, didn’t perform significantly better.

Beating XLK by 1.5% obviously isn’t meaningless, but a 3.4% loss is still significant. NVIDIA may get the headlines, but the selling was quite broad across the sector. This was a mass rejection of almost anything tech-related.

Rotation Doesn’t Necessarily Mean Sell-Off

Now, before you I give you the impression that I think everything is all doom and gloom, let’s look at the bright side. Look at the return matrix above and realize that this was a rotation, not a sell-off. It becomes a sell-off when everybody capitulates and heads for the exits no matter the cost. Sell-offs are marked by disorder and high volatility.

Monday didn’t really have those markers. Look at this chart of the VIX.

Right at the open, it touched the low-20s, but almost immediately moved into the high-teens where it remained for the rest of the day. That’s not panic trading. That’s pretty orderly.

On a day when the S&P 500 was down 1.5%, a total of seven of the 11 S&P 500 sectors were positive. Nine of the factors listed above were in the green. Several of the major international markets posted gains as well. The equal-weight S&P 500 was virtually flat on the day.

There’s no question that this was a major risk-off move on Monday, but there wasn’t the big rush to cash that you might expect to see. Instead, it was a larger move from large-cap growth and tech to value, low volatility and Treasuries.

Final Thoughts

This was always the biggest risk of an S&P 500 that is so top-heavy. A big down day in one of the magnificent 7 stocks could trigger a big decline in one of the major indices. We got that today from NVIDIA. Unfortunately, most investors are piled into the S&P 500 and Nasdaq 100, so they got to experience the brunt of the damage. But that was far from representative of the rest of the market. If you were diversified and balanced out growth with value, tech with dividend payers and high beta with low volatility, you probably didn’t experience much pain today.

Does the sentiment of what happened today carry into the future? We don’t really know enough about DeepSeek to give a confident answer, but I’d be a little worried right now. The catalyst for this wasn’t just a disappointing economic number that will be forgotten in a week and replaced in a month. This could be a genuine sea change in the landscape of the AI marketplace, the biggest technological revolution since the internet. If we find out that we were understanding this all wrong, there could be a significant market repricing.

My takeaway would be to not make any sudden or major portfolio changes. Keep an eye on the situation and if you’re feeling a little uneasy, rotate out of some of your riskier positions into something more conservative. A lot of people find out what their risk tolerance really is on days like this. The DeepSeek development could become a game changer, but keep a level head for now.