Indiana Trust Wealth Management
Investment Advisory Services
by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

  • The U.S. equity market, represented by the S&P 500 index, slipped 1% for the week.
  • The companies that make up the S&P 500 index are in constant churn, and those on top of the index now may face disruption in the coming years.  

NVIDIA, the second largest constituent in the S&P 500 index, has become one of the most valuable companies on the planet because of its monopoly-like control of the microchips that go into AI architecture. Hundreds of billions of dollars have been deployed as companies have raced to build out their AI frameworks.

Microsoft, the third largest company in the S&P 500, is a major investor in one of the most prized AI firms, privately-owned OpenAI. The Wall Street Journal reported this week that an upcoming funding round will value OpenAI at $300 billion, making it the second-most valuable private company in the world. The investment firm Blackstone estimates that data center development globally will require $2 trillion of capital expenditure over the next five years.

Which is why the arrival of DeepSeek – a strong-performing competitor to OpenAI, launched by a China-based hedge fund, allegedly built using some spare NVIDIA chips they had lying around, and purportedly trained on a budget of a few million bucks – caused consternation in big US tech stocks on Monday.

Although DeepSeek has apparently been a known quantity in AI circles for some time, markets decided that this would be the week when its existence would dent expectations for limitless big tech AI capital spending and demand for NVIDIA’s chips. If DeepSeek could do what OpenAI does, what’s all the money being spent for? What about those stratospheric valuations?

While there was some pain for NVIDIA investors on Monday – the stock dropped 17%, and a triple-levered ETN tied to NVIDIA’s stock price was down over 50% – the overall market held up. Big tech stocks recovered, for the most part, and some leveraged ETFs tied to chip stocks had record inflows.

However, the DeepSeek episode may have changed the AI build-out narrative. It is a reminder that the biggest names in the market do not stay at the top forever. There is constant churn and disruption. As the chart below from Bank of America shows, the average company lifespan in the S&P 500 index has been trending downward. Companies are becoming more quickly disrupted.

Source: Bank of America, January 2024

It is hard to envision a global stock market where US tech is not leading the way, but it would buck the historical trend if the biggest technology names were to remain kings of the S&P 500 for another decade.

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