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Investing.com -- The emergence of DeepSeek AI models draws into question the narrative of US exceptionalism, raising concerns about the dominance of the Magnificent 7, Citi strategists said in a recent note.
While the impact on NVIDIA (NASDAQ:NVDA) and AI-driven stocks remains uncertain, the Chinese AI startup’s breakthrough adds new risks to the US market’s leadership.
In the note, Citi acknowledges that the “obvious risk of a permanently cheaper and more efficient AI landscape is to NVIDIA via weaker chip sales.” However, its tech analysts remain bullish on the technology giant, citing doubts over claims that DeepSeek was developed without advanced GPUs, ongoing US chip restrictions that provide a competitive advantage, and potential cyclical tailwinds from Stargate investments.
“Citi tech analysts remain bullish on NVDA, and our updated bubble work does not point to an end of the US equity bull market,” strategists led by Adam Pickett wrote.
The strategists used the GMO bubble definition to compare the current US market with historical episodes, finding that while conditions are frothy, there is no immediate sign of a reversal. They highlight that a meaningful downturn would require multiple leadership names falling below their 200-day moving averages. Currently, only NVIDIA has crossed that threshold.
Still, the deterioration in the momentum of the tech-focused Nasdaq 100 index raises broader macro implications. Citi warns that if the index continues to underperform, it could undermine US exceptionalism by eroding household wealth.
“A 1% increase in SPX corresponds to a 0.30% increase in US household financial assets,” Citi noted, implying that a continued Nasdaq slump could weaken consumer spending and lead to lower front-end US rates.
Cross-asset implications suggest that “tech-heavy and commodity-heavy equity markets would underperform” in a scenario where Nasdaq extends its losses, impacting Japan, emerging Asia, Latin America, and CEEMEA (Central & Eastern Europe, Middle East and Africa)
By contrast, Chinese and UK stocks would outperform in that scenario, as well as US rates.
But while China may appear to be an attractive buy given muted tariff risks and advancements in AI, Citi strategists note that their momentum measure has not triggered. They believe investors are likely to wait for more clarity on tariffs before making significant moves.
In the foreign exchange market (FX), the US dollar and rates have historically rebounded from similar periods of equity underperformance.