China-based artificial intelligence (AI) firm DeepSeek has sent “shockwaves” through the US equities market, highlighting the need for diverse and resilient portfolios, investment industry experts have stated.

Earlier this week, US tech stocks tumbled as stock markets suffered a sell-off following claims from DeepSeek that it had made new advances in the AI field, including that it trained a generative AI chatbot at a fraction of the cost and time of established market leaders.

This has raised questions for investors about the implications for the technology sector and US tech stocks, and reinforced the need for diverse and resilient portfolios.

“In situations like these, investors should be reminded of the importance of diversification, both with across their portfolios and below the headlines,” stated Barnett Waddingham chief investment officer, Matt Tickle.

“While the Magnificent 7 are often considered tech stocks, their reach is much more diverse and spans several sectors of the market.

“So, while Nvidia drew headlines on Monday as it fell nearly 17 per cent, three out of seven Magnificent 7 stocks rose in value, while collectively the six ex-Nvidia stocks saw broadly flat performance.

“It’s expected that the AI megatrend will continue, but sizing of exposure to any particular trend is key to managing risk.”

While improved efficiency could lead to reduced demand for chips and other AI equipment, potentially creating headwinds for firms such as Nvidia, this outcome is “far from certain”, according to Schroders.

Schroders portfolio manager and global sector specialist, technology, Paddy Flood, and head of global equities, Simon Webber, added that these developments could prove favourable for software companies.

“Lower AI costs might make these technologies accessible to a broader base of customers who were previously deterred by high price points,” they said.

“For software providers embedding AI capabilities into their products, this could bolster adoption while preserving profitability.

“Additionally, large hyperscale companies such as Microsoft, Meta, and Google could stand to benefit.

“Concerns have been growing around the potential returns on their substantial AI-related investments. If this situation results in reduced spending requirements for these companies, it could lower their capital expenditure needs and drive significant increases in free cashflow generation.”

Schroders group chief investment officer, Johanna Kyrklund, noted that there had been previous discussions about the dangers highly concentrated equity markets can pose to investors.

“The level of index concentration now far surpasses that of the late 1990s,” she continued.

“From a portfolio standpoint, having such high unintentional exposure to just a handful of companies does not feel prudent. Understanding the underlying stocks is crucial, and an active approach is needed to manage the risks.

“The full implications of DeepSeek’s technology still need to be understood. But this example highlights that markets are vulnerable to a misstep by one of the large US megacaps, or by the emergence of new competition.

“Major equity indices do not offer the diversification they did in the past. Investors wanting to build more resilient portfolios will need to take an active approach, looking across sectors and geographies, to build genuine diversification.”

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