ORLANDO: The jury is still out on whether Chinese artificial intelligence startup DeepSeek will be the disruptive straw that breaks Wall Street’s back. But it has certainly called into question the “US exceptionalism” narrative that has helped create unprecedented concentration and risk in US markets.

The assumption that Silicon Valley is the unassailable leader in the global AI arms race is a key reason why US markets have sucked in trillions of dollars from around the world in recent years. This trend has come to define US exceptionalism, the deep-rooted belief in the continued outperformance of US growth and Wall Street returns.

But this narrative may be starting to unravel because of a Chinese startup that few outside the AI world had even heard of until last month. DeepSeek, which has operated on a shoestring budget, appears to be achieving similar or better results than US behemoths that have spent hundreds of billions of dollars developing AI technology.

“To see the DeepSeek new model is super-impressive,” Microsoft CEO Satya Nadella told CNBC in Davos last week. “I think we should take the development out of China very, very seriously.” Investors certainly should, especially when the fate of the entire US stock market — indeed, global markets — is being driven by so few companies and essentially one AI story.

The clout Big Tech wields over Wall Street is eye-watering. Just look at the numbers: Before Monday’s market rout, just five stocks — Nvidia , Microsoft, Alphabet, Amazon, and Meta — had contributed around 700 points to the S&P 500 over the last two years. Excluding these stocks, the S&P 500 would be 12 per cent lower, according to SocGen’s Manish Kabra. Nvidia alone had contributed 4pc points to the performance of the S&P 500’s two-year gains through Monday.

Nvidia’s last 12 months of earnings, reported in its most recent quarterly results, totaled roughly $63 billion, which is around half the total made by all listed companies in each of Britain, Germany and France over the last year, according to Deutsche Bank’s Jim Reid. These companies plus Apple and Tesla — the “Magnificent Seven”, or “Mag 7” — have accounted for nearly 60pc of the S&P 500’s gains in the past two years, according to Bank of America analysts. In short, the “Mag 7” embodies the “American exceptionalism premium on the S&P 500,” as Kabra wrote.

‘Peak monopoly’

Wall Street has never been beholden to so few stocks, with the “Mag 7” now accounting for over 35pc of the S&P 500’s entire market cap. Meanwhile, US stocks currently account for a record two-thirds of global equity allocation.

This is in part due to a virtuous cycle of inflows: as “Mag 7” stocks have soared, the US has made up an ever larger percentage of global equities’ market cap, meaning investors holding passive portfolios have to continue increasing their US exposure, fueling price gains and necessitating further purchases.

But market concentration has been increasing for some time, as noted by Hendrik Bessembinder, professor of finance at Arizona State University in his 2023 study “Shareholder Wealth Enhancement, 1926 to 2022.”

Published in Dawn, January 29th, 2025