It’s been a whirlwind week for markets, especially on the tech front. Stocks opened Monday reeling from the DeepSeek news out of China. Even an announcement from Alibaba about a major AI development failed to attract significant media attention.
Artificial intelligence has been a dominant theme in the U.S. over the past year, driving much of the strong performance in stocks. The level of capital expenditure (CapEx) in the AI space has been immense. However, as I’ll explain, it seems we’ve reached a critical inflection point.
Interestingly, the Chinese stock market (currently on holiday) was already on our radar. In the bigger picture, China’s recent AI advancements are poised to have a significant impact on the U.S. tech sector. Here’s why this could actually be a positive development…
New Bull Trends Emerging
One important thing to remember about the technology sector is its breadth. It encompasses a wide range of sub-sectors, including computer hardware, software, semiconductors, and electrical components, among others.
While tech remains the largest sector in the U.S. market, not all of its sub-sectors have been thriving.
Take software, for example. It hasn’t been all smooth sailing. To illustrate this, check out the ratio chart of software versus the S&P 500 below.
When the ratio is falling, it means software stocks are underperforming the index. When it’s rising, software stocks are outperforming the index.
To outperform the market, it’s critical to focus on its strongest sectors—and then identify the best-performing stocks within those sectors.
As you can see, software had a tough stretch between 2022 and 2024. However, it reached a significant bottom last year and has been showing signs of improvement ever since.
I believe the recent AI news from China marks a key inflection point for software. Here’s why:
- Lower AI Development Costs: If AI development becomes cheaper, software companies can access more affordable AI tools and infrastructure, enabling them to create more competitive products and services.
- Shifting Focus: Companies may shift from speculative AI projects to integrating practical AI applications into their existing software, enhancing functionality and usability.
- Targeted AI Solutions: Renewed interest could arise in software that uses AI to address specific industry challenges, rather than pursuing broad or impractical AI applications.
The Bigger Picture
The theme here is clear: instead of pouring excessive money into AI development, companies can focus on using AI to optimize existing infrastructure. As software becomes more efficient and valuable, it could pave the way for a new bull market in the sector.
As a trader, I always look for opportunities that emerge from crises—whether real or perceived. I’ll continue to monitor this trend and keep you updated on where it’s headed.
Gianni Di Poce
THEOTrade