The Magnificent Seven stocks suffered their sharpest drop since last autumn after news broke that DeepSeek, an open-source AI model from China, had entered the fray, raising concerns over pricing power and competition in the sector. Yet, despite the tech sell-off, Goldman Sachs sees no reason to panic, indicating this is a temporary setback rather than the start of a deeper bear market.
In a note shared Wednesday, Goldman Sachs analyst Peter Oppenheimer indicated that bear markets typically emerge when profit expectations decline due to growing recession fears -conditions that are not currently in place thanks to solid economic fundamentals.
The U.S. economy remains on solid footing, with the bank assigning just a marginal probability of a recession in the next year.
"In our view this is a correction and not the start of a sustained bear market," he said.
Market Context: High Valuations, No Recession, Rate Cuts Expected
Goldman Sachs highlighted that equity markets entered 2025 with high valuations, particularly in the U.S., where price-to-earnings multiples expanded significantly since late 2023.
"Equity markets came into the year priced for perfection, leaving them vulnerable to disappointments," Oppenheimer said.
Yet, Goldman Sachs remains confident in the broader economic outlook. The bank assigns just a 15% probability of a U.S. recession in the next 12 months and expects inflation to continue easing.
Modest interest rate cuts this year should further support stocks, while a cheaper AI entrant could even help lower costs in the tech sector.
High Market Concentration: A Risk Or An Opportunity?
Oppenheimer highlighted that the U.S. stock market has become increasingly concentrated, with the dominance of the technology sector and a few mega-cap stocks amplifying market swings.
Yet, the concentration risk is not a result of speculative excess but rather strong fundamentals driving earnings growth. While Goldman Sachs expects technology earnings to remain robust, their growth rate may moderate as competition intensifies.
"The revelation of a cheaper competitor entering the AI space has exposed the risk of concentration," the report said.
A key question for investors is whether AI-driven growth will continue benefiting the same dominant players or shift toward a broader set of companies involved in infrastructure and electrification.
Historical examples, such as the telecom boom of the late 1990s and the rivalry between Advanced Micro Devices Inc.
What Next: Stay Invested, But Diversify
So, what should investors do now? According to Goldman Sachs, staying invested is key, but diversification is more important than ever.
The bank recommends spreading exposure beyond the biggest tech names while maintaining hedges to protect against downside risks.
One way to do that is by focusing on the equally weighted S&P 500, tracked by the Invesco Equal-Weight S&P 500 ETF
Another is to look at non-tech "compounders," companies with strong earnings potential but lower valuations.
Investors should also consider broadening their geographic exposure. Non-U.S. markets have quietly started to outperform in 2024, offering new opportunities beyond the tech-heavy U.S. landscape.
Funds like the iShares MSCI ACWI ex U.S. ETF
