Investment Update: Adjusting to Market Shifts After DeepSeek’s News
Many of you may have heard the recent news about DeepSeek, a Chinese AI upstart that could disrupt the AI cost model by offering a comparable alternative to ChatGPT at a fraction of the cost to develop and operate.
In this brief market update, we’ll explain how the equity portion of your portfolio is positioned to mitigate risk from any potential market impact stemming from this news.
If you are interested in a ‘deeper dive’ into DeepSeek, you can read a full detailed article from J.P. Morgan with all the details here.
What Do We Know So Far? How Has the Market Reacted?
On Monday, January 27th, the S&P 500 declined approximately 1.5%, primarily due to a drop in the Technology sector following news that the Chinese company DeepSeek had made significant advancements.
Utility and Energy sectors also declined amid concerns that the AI movement may require less energy than previously anticipated.
Despite the overall market downturn, certain sectors—such as consumer staples, healthcare, and financials—performed well.
Our current equity sector allocation overweights these value sectors of the S&P 500, which provided ample support, keeping our equity sector allocation essentially flat for the day (compared to the S&P 500’s 1.5% decline).
If you would like additional details on equity sector performance, please feel free to email us.
Additionally, for clients holding the S&P 500 Technology Sector ETF in their accounts (ticker: XLK), we have made an allocation adjustment to better manage risk:
The Technology Sector ETF is market cap-weighted, meaning four of the largest stocks in this index account for nearly half of its total value.
To reduce concentration risk, we have swapped the market cap-weighted Tech ETF for the Equal Weight Tech ETF (ticker: RSPT), which limits the weighting of those same four stocks to just 6% of the index’s total value.
This adjustment maintains the same overall equity exposure to the tech sector and is not intended as a market-timing strategy, which we believe is not a sustainable approach.
Additionally, the equal weight Tech ETF is more attractively valued when comparing its price-to-earnings (P/E) ratio, which measures whether an investment is cheap or expensive relative to historical levels. A higher P/E ratio suggests a more expensive investment:
Market Cap-Weighted Tech ETF P/E Ratio: 37.4X
Equal Weight Tech ETF P/E Ratio: 29X
Summary
As discussed in our last blog, when Investment Road Signs© become more prevalent, we increase our focus on risk management. Clear signals in Fed policy, market valuation, and unemployment guide our approach, allowing us to take proactive steps without relying on market timing.
Key actions include:
Overweighting value sectors to reduce exposure to the ten most overvalued stocks in the S&P 500
Incorporating equity hedging strategies into portfolios
Adding alternative assets like gold
These adjustments have strengthened risk management across many client portfolios—particularly for those with larger equity allocations—helping us navigate elevated market risks with greater stability.
Have questions or want to speak with our team directly? Contact us.
Robert Amato, CFP®, CIMA®
Principal
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Compass Wealth Management is a Registered Investment Advisor. Advisory services are only offered to clients or prospective clients where Compass Wealth Management and its representatives are properly licensed or exempt from licensure. This article is solely for informational purposes and is not intended to be relied on as a forecast, research, or investment advice, and is not a recommendation, offer, or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Compass Wealth Management to be reliable, are not necessarily all-inclusive, and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investments involve risks.