As we forge ahead into 2025, the trends within the U.S. stock market are demonstrably shiftingThe once-mighty “Seven Sisters” of tech— a group that historically propelled the market upward for the past two years— are now losing steamA stark contrast emerges in the performance of major indexes; the Dow Jones Industrial Average has been the top performer, with the S&P 500 following closelyMeanwhile, the Nasdaq has lagged dramatically, even dipping into negative territory due to significant declines in large tech stocks.

On February 24, Eastern Time, the Dow showed a slight gain of 0.08%, the S&P 500 suffered a 0.5% dip, and the Nasdaq fell by 1.21%. This year's divergence is especially pronounced: by the market close on February 24, the Dow had climbed 2.16% year-to-date, the S&P saw a rise of 1.73%, while the Nasdaq faced a decrease of 0.12%. Such shifting market dynamics raise fundamental questions: is the Nasdaq’s underperformance merely a short-term dip, or is it the start of a longer-term trend?

A deeper look into the circumstances reveals a multitude of factorsZhang Chi, Chief Analyst at Fand Securities, emphasizes that the decline of the Nasdaq is primarily due to falling tech stocksA sector rebalancing is occurring, with funds transitioning from aggressive growth sectors to more defensive areas.

It's widely accepted that the high valuations and concentration of the “Seven Sisters” raise concernZhang anticipates a regression towards the mean for tech stock earnings growth, projecting a modest 15% growth rate for both 2025 and 2026. While not necessarily indicative of impending decline, these high valuations become particularly problematic in times of heightened riskAdditionally, the global exposure of U.S. tech stocks— with approximately 49% of their revenues sourced from overseas— leaves them vulnerable to international trade frictions.

Further insights from Wang Xinjie, Chief Investment Strategist at Standard Chartered's Wealth Solutions, suggest that AI chip suppliers may face immediate profit challenges due to declining training costs, putting overall valuations under pressure amid an industry landscape that continues to evolve

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Wang remarks that the previously overcrowded positions in the “Seven Sisters” are likely to seek alternatives as the costs associated with generative AI decrease.

Despite the growing concerns surrounding major tech players, the overall market sentiment appears to remain buoyantA survey by Bank of America in February showed that global fund managers have reduced their cash allocations to a mere 3.5%, the lowest in 15 yearsThus, while the “Seven Sisters” may be struggling, underlying risk appetite does not seem to have diminished significantly.

Goldman Sachs posits that moving forward, market upward momentum will be increasingly "micro-driven," meaning that stock prices might closely correlate with individual company performance rather than broader environmental factorsAn illustrative example of this trend can be seen in the market response following the launch of China's DeepSeek R1, which showcases the growing importance of tech innovation in shaping market dynamics.

The latest plunge of the Nasdaq seems inexorably linked to rising doubts regarding computing power requirements originating from MicrosoftRecent findings published by TD Cowen, a financial services entity under Toronto-Dominion Bank, reveal that Microsoft has terminated several leasing agreements with private data center operators.

Microsoft's response to these developments was somewhat ambiguous, insisting that it still intends to invest over $80 billion in infrastructure improvements, while simultaneously acknowledging the need to reevaluate strategic directions in select areasThe termination of these data center contracts has only intensified worries on Wall Street, raising existential questions about the opportunities for AI investment without exorbitant costs.

Recently, DeepSeek announced the open-sourcing of more code libraries, indicating a potential escalation in the global AI raceWang argues that Chinese tech companies involved in AI development stand to gain from this trend

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Despite facing headwinds from trade disputes, DeepSeek’s launch could represent a silver lining for Chinese assets, suggesting that investors with a neutral stance on Asian markets (excluding Japan) should consider increased exposure to China.

Amid growing reevaluation by investors regarding the high valuations of U.S. stocks, Chinese technology stocks may be emerging as an attractive alternativeEven following a strong performance early this year, European stocks are still trading at an average price-to-earnings ratio of about 14, compared to 17 for the Nasdaq Golden Dragon Index and a striking 22 for the S&P 500.

The emergence of DeepSeek R1— in conjunction with collaborations from Alibaba and Apple— has illuminated the capabilities of Chinese enterprises within the AI sector, fostering a reappraisal of Chinese asset valuesObserving market performance, one can clearly see increased foundational support for these stocksWang anticipates that the heightened involvement of Chinese assets in the AI field will not only contribute to improved industry prospects but also enhance expected returns on a societal level, positively impacting economic growth.

From Zhang’s perspective, the unveiling of DeepSeek has prompted a reassessment of hardware attractiveness, spotlighting segments within software and cloud computing that are performing remarkably wellThe timing of DeepSeek’s launch coincides with a market milieu lacking clear direction, paired with an inherent valuation recovery opportunity for many U.S. and Hong Kong-listed tech stocks, resulting in marked price increases.

Nonetheless, while concerns surrounding computing power persist, the long-term outlook may lean in favor of an expanded demand within the AI sectorThe Jevons paradox suggests that increased efficiency— stemming from technological progress— can drive resource consumption higher due to reduced costs enticing greater demand.

Wang elaborates that although short-term training demands might soften, the decrease in reasoning and training costs spurred by DeepSeek could catalyze further adjustments to models and draw additional enterprises into the arena, thereby raising overall demand for computational power in the long haul.

Thus, amid rising valuations and concerns over peak values in the context of the U.S. stock market, there lies a sense of opportunity

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The imminent U.S. tax season in March may present another hurdle for the S&P 500, as retail trading activity tends to taper off as tax time approachesScott Rubner, a global markets director at Goldman Sachs, echoes concerns that diminishing buying power from retail and institutional investors could push U.S. stocks into a correction phase.

Nevertheless, the future isn’t entirely bleakChristian Floro, a strategist at Signum Global Advisors, reminds us that bull markets don’t simply vanish based on longevity aloneHistorical data indicate that the Federal Reserve’s monetary policy stance plays a pivotal role in market conditionsSince 1995, most instances of market drops exceeding 10% correlate considerably with aggressive pivots to hawkish positions by the Fed or protracted restrictive policiesHowever, given that the U.S. economy shows no significant signs of “hard landing,” and anticipated corporate earnings growth aligns with expectations, a narrow but viable path for continued market ascendancy remains.

This year, the significantly increased number of stocks outperforming indices in the U.S. market demonstrates a shift; investors are eager to explore opportunities outside the realm of the “Seven Sisters.” Expectations on Wall Street indicate this transformative trend will persist as investment preferences broaden beyond primarily tech stocksWang reinforces that funds previously concentrated in the “Seven Sisters” might seek alternatives due to the declining costs associated with generative AI technology, creating a positive environment for fluid capital shifts across other sectors.

Zhang's insights suggest that leading tech stocks in the U.S. still possess potential for upward movement, provided market dynamics and performance continue on a strong trajectoryThe allure of previously soaring tech stocks has begun to fade, possibly paving the way for enhanced interest in mid- and smaller-cap tech firms, as well as the healthcare sector.

While DeepSeek R1’s significant cost reductions may momentarily pressure demand assessments for dominant chipmakers like Nvidia, the broader implications suggest that this could ultimately increase market opportunities for the AI sector, fueling sustainable long-term growth.

Looking forward, the “Seven Sisters” are not necessarily diminishing in influence

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