By Kyle Tetting
From a market perspective, the start of 2025 has been largely positive. Mid-January saw key indexes returning toward all-time highs and market leadership broadening – important when much of the excess return of prior years had come on the back of technology stocks. Despite a massively rewarding market that, as a result, appears expensive, investors wasted little time continuing to push stock prices higher to start the year.
That’s why it was so jarring when stocks sank so dramatically following news on China’s DeepSeek artificial intelligence model. Reports that DeepSeek was able to recreate much of the capability and capacity of existing well-resourced competitors at a fraction of the cost and resources caused a deep sell-off. If DeepSeek could compete using less power, outdated chipsets and, as a result, at less cost, perhaps the AI spending boom wouldn’t be quite as significant as investors have thought.
In a matter of minutes, semiconductor stock Nvidia had lost hundreds of billions of dollars in market value – a record single-day decline for a U.S. stock. Interestingly, though, while the market broadly declined that day, fears of a larger cascade of selling appear quelled.
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Perhaps, investors recognized that we can’t always take reports such as DeepSeek’s at face value. DeepSeek likely built on a foundation rather than blazing a trail, and it remains obvious that we should be at least as suspicious of information security in AI as we are in social media. If we’re looking to keep TikTok off our phones and computers, we probably shouldn’t be complacent about Chinese AI.
For investors, I think there’s a bigger issue at play.
Not a day goes by that I’m not addressing stock market valuations. I continue to insist that comparing current earnings multiples to historical averages is an apples-to-oranges comparison, and today’s S&P is worth a lot more than the S&P of previous decades. But, by any measure, stocks aren’t cheap. And in that environment, investors tend to act like a child who knows they did something wrong. They start looking for excuses.
A single headline probably shouldn’t have the power to erase $600 billion in market cap from a stock. Yet, Nvidia’s decline was only part of the day’s selling. It appears to me that part of what we saw amid the DeepSeek chaos was that investors may simply have been looking for a reason to pull back after two years of strong gains. After all, stocks aren’t cheap, and some of the biggest decliners also happen to have been some of the stocks that have gotten the most expensive.
Just the Friday before the Monday sell-off, Adam Baley and I had been discussing one of my favorite comparative valuation measures on the Money Talk Podcast. Adam remarked, rightfully, that for much of the year so far, you could be paid more in yield on a 10-year Treasury than you could get in earnings for the same dollar invested in the S&P 500.
It’s a concept we’ve covered at length at our Investment Outlook Seminars. I discussed it at our most recent seminar as the gap between stocks and bonds had narrowed, but the comparison’s only become more favorable for bonds. Notably, you’d have to go back more than 20 years to see the last time the 10-year Treasury outyielded the earnings yield of the S&P 500. While this one might be an apples-to-orangutangs comparison, it speaks to a bond market that finally offers real return potential even as stocks are expensive.
In the end, it’s easy to overstate the significance of a single day’s market movement purportedly resulting from a single headline. But it is a strong reminder that valuations matter. Simply allowing the largest and most significant gainers in your portfolio to remain unchecked can leave you overexposed.
It’s why I write repeatedly about the importance of balance and planning. It’s why portfolio reviews include not just prognostication but a continued emphasis on risk tolerance and management. Most importantly, it’s why for all the optimism I have in stocks for the long run, more than ever, bonds have their place.
Kyle Tetting is president of Landaas & Company, LLC.