The hawkish Federal Reserve and DeepSeek's shockwave reshape the narrative of the US stock market "bull market." Are the "seven giants" bidding farewell to the leading role?

According to the Zhitong Finance APP, the wealth management division of Morgan Stanley, a top investment institution on Wall Street, recently released a report indicating that the benchmark index of the U.S. stock market—the S&P 500—shows signs of fatigue. It stated that the Federal Reserve's pause on interest rate cuts reflects a "hawkish monetary policy stance," and the "low-cost AI shockwave" brought by DeepSeek is changing the "bull market narrative logic" of the U.S. stock market.

In this latest research report, Morgan Stanley noted that since the bull market in U.S. stocks began at the end of 2022, the S&P 500 has risen by about 70%, but it is now showing increasing signs of weakness. The report indicated that, aside from technical driving factors, the U.S. stock market is facing two fundamental changes. The first is the Federal Reserve's firm decision to maintain interest rates after a series of rate cuts; the second is the ultra-low-cost AI training innovation prospects sparked by the Chinese startup DeepSeek, which triggered a severe sell-off wave in U.S. tech stocks, including Nvidia (NVDA.US), last week.

Morgan Stanley emphasized in the report that, overall, investors should focus on the "rotation and switching trend of leadership forces" in the U.S. stock market. As the bull market narrative is shaken by the aforementioned two forces, the core contributors to the U.S. stock market are expected to shift from the "Magnificent Seven" tech giants to value stocks, cyclical stocks, and long-term performance growth areas related to "non-generative AI."

The so-called "Magnificent Seven," which hold significant weight in the S&P 500 and Nasdaq 100 indices, includes Apple, Microsoft, Google, Tesla, Nvidia, Amazon, and Meta Platforms (the parent company of Facebook). They are the core driving force behind the S&P 500's record highs.

Looking at the entire U.S. stock market, the seven tech giants have been the leading force since 2023, attracting global capital with their incredibly strong revenue driven by AI, solid fundamentals, consistently strong free cash flow reserves over the years, and expanding stock buyback programs.

Interest rate cut expectations cool down, "Magnificent Seven" enters a correction trajectory

Lisa Shalett, Chief Investment Officer of Morgan Stanley's wealth management division, wrote in this research report: "Although the market has largely priced in the Federal Reserve's pause on interest rate cuts in January, many investors still hope the Fed will express a projected path for monetary easing. However, the Fed has not made the 'dovish' statements that the market expected. Investors now need to acknowledge that policy-driven valuation expansion is nearing its limit, and market drivers will shift to earnings realization, especially the monetization path of AI."

Shalett pointed out that the narrative of this bull market in U.S. stocks has revolved around American technological innovation and the absolute dominance of the "Magnificent Seven" in the AI field, while the continued path of interest rate cuts by the Federal Reserve has supported expectations of a "soft landing" for the U.S. economy, maintaining market momentumIn the report, she stated: "Last week's DeepSeek shock event... reinforced our view that the market bull narrative is shifting, and we are entering the so-called 'Great Normalization' phase. We believe this phase will be dominated by the normalization of interest rates and market valuations; earnings growth will once again become the main driver of the stock market, while the market capitalization concentration of the S&P 500 index is expected to decline significantly, indicating a weakening trend among the seven major tech giants."

Shalet pointed out that as investors' consensus expectations for the Federal Reserve's terminal interest rate this round are concentrated between 3.75% and 4.0%, the upper limit of stock market valuation expansion will also be severely constrained. She stated that this is because the neutral interest rate level and negative equity risk premium faced by "market capitalization leaders" such as the seven major tech giants "must be acknowledged."

Currently, the interest rate futures market's expectations for the Federal Reserve to cut rates in 2025 have significantly cooled compared to the second half of last year, with some traders even beginning to price in that the Federal Reserve will "not cut rates" in 2025. The "dot plot" released in December 2024 shows that the expectations for rate cuts in 2025 have been sharply reduced from four times to two times, and the interest rate expectations for 2026, as well as the market's focus on "neutral interest rate" expectations, have all been raised, forcing the U.S. Treasury market to reprice rate cut expectations, while the increasingly rising budget deficit expectations have pushed the "anchor of global asset pricing"—the 10-year U.S. Treasury yield—leading yields across all maturities to suddenly turn upward.

Last week, due to investors' concerns that the "low-cost AI large model computing paradigm" led by DeepSeek would prompt tech giants to significantly cut AI GPU orders in the short to medium term, "AI chip giant" Nvidia's stock price plummeted nearly 17% last Monday, closing at $118.42, with a single-day market capitalization evaporation of $589 billion, marking the largest market capitalization loss in U.S. stock market history, breaking the previous record.

As this "DeepSeek low computing cost storm" from the East swept across the globe, investors began to strongly question whether the "irrational" fervor of U.S. tech giants like Microsoft and Google for artificial intelligence and their extravagant AI spending plans were reasonable. After all, expenditures reaching hundreds of billions of dollars, compared to DeepSeek's mere million-dollar training costs and significantly lower inference costs compared to U.S. AI leaders like OpenAI, left these U.S. tech stock investors both shocked and furious, which is why the total market capitalization of the Nasdaq 100 index evaporated by nearly $1 trillion last Monday