The S&P 500 has rebounded from the heavy losses experienced on Monday (27 January). But the world’s most widely followed share index isn’t out of the woods just yet.
While volatility has calmed as the week’s rolled on, concern over tech stocks’ profitability — and more specifically those in the artificial intelligence (AI) space — remains at the front of investors’ minds.
Could the S&P 500 be about to crash?
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Deep trouble?
To recap, the S&P 500 nosedived on Monday following fresh news on DeepSeek, a Chinese startup that’s developing its own AI system to rival those developed in the US.
DeepSeek’s been around for a while, but performance data from its R1 model has just blown industry experts’ socks off. Testing data shows performance comparable to that of existing AI systems like OpenAI’s o1. However, DeepSeek has achieved this at significantly lower cost.
If these findings hold, there may be significant implications for the global AI landscape. From providing direct competition to established system operators like OpenAI and Google, to impacting demand for high-power computer chips, DeepSeek’s advancements could drive major changes in market dynamics, and with it expectations of soaring profits across the US tech sector.
What next?
Given the S&P 500’s large weighting of technology stocks, it’s easy to see why the index slumped. At the start of 2025, tech giants like Nvidia, Microsoft, Apple, Meta, and Alphabet made up just over 30% of the S&P’s entire market capitalisation.
Their share price gains last year, which were built on hopes of booming AI-related profits, have come under serious scrutiny. Even after Monday’s washout, many tech names still command sky-high valuations.
Yet despite this, the chances of a full-blown market crash look (for the moment at least) pretty low. Disruption has long been a common theme across the tech sector. In addition, R1 has so far has not reached the artificial general intelligence (AGI) level, and can only be used for narrow tasks. It’s possible that disruption to current AI assumptions will not be as severe as thought.
It’s also important to remember that DeepSeek’s model could boost earnings and cash flows across the S&P 500 if it revolutionises AI development.
For system developers, the expense of developing and running these systems may be lower moving ahead. Meanwhile, large swathes of the S&P 500 could benefit from more affordable AI solutions that substantially bring down costs.
Here’s what I’m doing
I continue to remain optimistic over the US tech sector and, by extension, the S&P 500. As well as AI, other tech phenomena like cloud and quantum computing, autonomous vehicles, and cybersecurity offer significant growth opportunities.
But rather than putting all my eggs in the same basket, I think a diversified approach is the best way to invest. The iShares S&P 500 Information Technology Sector ETF (LSE:IUIT) is a top exchange-traded fund (ETF) I hold in my own portfolio and think investors should consider.
With cash spread across 69 companies, it gives me exposure to all of the growth opportunities mentioned above. These include semiconductor manufacturers, software developers, IT consultants, and communications equipment suppliers.
These are early days in the AI revolution, so a crash that pulls this fund (and the broader S&P 500) lower can’t be ruled out. But on balance, I think the outlook for the US tech industry remains extremely bright.
