Investing.com -- The recent stock market downturn, sparked by news of the DeepSeek AI model, is a correction rather than the beginning of a sustained bear market, according to Peter Oppenheimer, chief global equity strategist at Goldman Sachs (NYSE:GS).
While the selloff marked the first drop of more than 3.5% of the Magnificent 7 since last autumn, Oppenheimer explains that most bear markets are typically driven by concerns over falling corporate profits and economic recessions, and that is not the case now.
“Our economists remain confident about world growth and remain above consensus on their forecasts for the US, putting the probability of recession in the next 12 months at 15%,” he wrote.
Goldman Sachs also expects interest rate cuts this year, albeit modest ones, and further progress on inflation moderation. The entry of a lower-cost competitor into the AI space could reinforce these trends, supporting risk assets.
Equities entered the year “priced for perfection,” which left them exposed to negative surprises.
“Returns in equity markets, led by the US, have been unusually strong over the past couple of years, and particularly since October 2023,” Oppenheimer noted. In addition, valuation levels—especially in the US—had climbed to elevated levels.
“While much of this reflects the largest technology companies, the equity market remains expensive relative to history even if we exclude large cap technology,” the strategist added.
Despite these risks, Oppenheimer dismisses the notion of a broad market bubble. The growing dominance of US equities, the tech sector’s market leadership, and the concentration in a few large stocks are all rooted in fundamentals rather than speculation.
“The growing dominance of the US equity market has simply mirrored its relative profit growth since the financial crisis,” he said.
However, the entry of DeepSeek into the AI space has introduced competitive pricing pressures at a time when foundational AI models have reached a level “just about good enough for many enterprise use cases,” Oppenheimer said, quoting Goldman’s technology analysts.
This has served as a wake-up call to the concentration risk in markets, as equity prices “are not typically driven by absolute outcomes, but rather by outcomes relative to expectations,” he added.
Goldman Sachs recommends maintaining equity exposure but diversifying to improve risk-adjusted returns. It sees opportunities in equal-weighted indices and non-tech growth stocks, while also recommending broader geographical exposure.
In sum, the bank does not see a major market shift away from past winners but rather a gradual broadening of market leadership. “We reiterate our view that this is not a bear market and there remain attractive opportunities both within the US and also in technology.”
As such, the recent correction is not the start of a big rotation but rather the start of “a longer period of market broadening," Oppenheimer concluded.