To The Moon

The opinions expressed here are those of the author, a columnist for Reuters.

By Jamie McGeever

ORLANDO, Florida, Jan 27 (Reuters) - The jury is still out on whether Chinese artificial intelligence startup DeepSeek will be the disruptive straw that breaks Wall Street's back. But it has certainly called into question the "U.S. exceptionalism" narrative that has helped create unprecedented concentration – and risk – in U.S. markets.

The assumption that Silicon Valley is the unassailable leader in the global AI arms race is a key reason why U.S. markets have sucked in trillions of dollars from around the world in recent years. This trend has come to define U.S. exceptionalism, the deep-rooted belief in the continued outperformance of U.S. growth and Wall Street returns.

But this narrative may be starting to unravel because of a Chinese startup that few outside the AI world had even heard of until last month. DeepSeek, which has operated on a shoestring budget, appears to be achieving similar or better results than U.S. behemoths that have spent hundreds of billions of dollars developing AI technology.

"To see the DeepSeek new model is super-impressive," Microsoft CEO Satya Nadella told CNBC in Davos last week. "I think we should take the development out of China very, very seriously."

Investors certainly should, especially when the fate of the entire U.S. stock market - indeed, global markets - is being driven by so few companies and essentially one AI story.

The clout Big Tech wields over Wall Street is eye-watering. Just look at the numbers:

• Before Monday's market rout, just five stocks - Nvidia NVDA.O, Microsoft MSFT.O, Alphabet GOOGL.O, Amazon AMZN.O, and Meta META.O - had contributed around 700 points to the S&P 500 .SPX over the last two years. Excluding these stocks, the S&P 500 would be 12% lower, according to SocGen's Manish Kabra. Nvidia alone had contributed 4 percentage points to the performance of the S&P 500's two-year gains through Monday.

• Nvidia's last 12 months of earnings, reported in its most recent quarterly results, totaled roughly $63 billion, which is around half the total made by all listed companies in each of Britain, Germany and France over the last year, according to Deutsche Bank's Jim Reid.

• These companies plus Apple AAPL.O and Tesla TSLA.O - the "Magnificent Seven", or "Mag 7" - have accounted for nearly 60% of the S&P 500's gains in the past two years, according to Bank of America analysts.

  In short, the "Mag 7" embodies the "American exceptionalism premium on the S&P 500," as Kabra wrote on Monday.

'PEAK MONOPOLY'

Wall Street has never been beholden to so few stocks, with the "Mag 7" now accounting for over 35% of the S&P 500's entire market cap. Meanwhile, U.S. stocks currently account for a record two-thirds of global equity allocation.

This is in part due to a virtuous cycle of inflows: as "Mag 7" stocks have soared, the U.S. has made up an ever larger percentage of global equities' market cap, meaning investors holding passive portfolios have to continue increasing their U.S. exposure, fueling price gains and necessitating further purchases.

But market concentration has been increasing for some time, as noted by Hendrik Bessembinder, professor of finance at Arizona State University in his 2023 study "Shareholder Wealth Enhancement, 1926 to 2022." He found that just 3% of the 28,114 U.S. firms publicly listed from 1926 to 2022 produced almost all of the $55 trillion in shareholder wealth created in that time.

Apple alone accounted for nearly 5% of the total, and the top three companies - Apple, Microsoft and Exxon Mobil XOM.N - together represented more than 10%.

This concentration has only accelerated in recent years. In 2016, the number of firms required to accrue 10% of gross shareholder wealth created was seven. This fell to four in 2022.

This could represent "Peak Monopoly", as BofA analysts suggest. And history shows monopolies never last forever, partly because of the emergence of disruptive technologies.

Indeed, as technological change has sped up, the average life span of S&P 500-listed companies has shrunk. According to a McKinsey study, the average lifespan of an S&P 500 firm in 1958 was 61 years. By 2023, that was down to less than 18 years.

Disruptive technologies have always propelled the U.S. economy and markets, and never more so than today. "Disruption always wins," as Bank of America's analysts note.

It remains to be seen who the winners and losers will be if DeepSeek's sudden emergence proves to be truly disruptive. But if Monday's market tremors are any guide, there may be quite a few losers – big ones.

(The opinions expressed here are those of the author, a columnist for Reuters.)

(By Jamie McGeever; Editing by Jamie Freed)

((jamie.mcgeever@thomsonreuters.com; Reuters Messaging: jamie.mcgeever.reuters.com@reuters.net))