A Nasdaq meltdown, like China’s Big Tech in 2021?

Shuli Ren, Bloomberg

After the Magnificent Seven’s 5% selloff Monday, global investors are reevaluating their faith in US exceptionalism. They’re asking whether the Nasdaq is just going through a minor correction, or if something way worse is in the works.

I worry that the US is at risk of entering a stage similar to what China experienced in 2021 — a massive devaluation of growth stocks. That year, the MSCI China Index lost as much as one-third of its value, as the government’s tech crackdowns slashed the earnings outlook and heightened investors’ sense of political risk. To put that in context, the Nasdaq 100 has tumbled 12% from its February high.

First, the Magnificent Seven’s tech dominance is being structurally challenged. The arrival of DeepSeek in late January showed the world that China is more than a manufacturing powerhouse, and that little-known startups can achieve algorithmic efficiency, too. Since then, Alibaba Group Holding Ltd. and Tencent Holdings Ltd. unveiled models that claim to rival DeepSeek’s, while AI agents that carry out more complex tasks on users’ behalf are coming to market.

The picture is even worse on the EV and smartphone front. Chinese companies are moving up the value chain, redefining what luxury means. Xiaomi Corp. recently released a $73,000 four-door sedan, its most premium model yet, in addition to a pricey $1,560 phone with advanced cameras. Meanwhile, BYD Co. happily tosses in software add-ons to its most basic EV models at no extra cost. As such, they are posing an uncomfortable new reality for big US names. Tesla Inc. and Apple Inc. have to fight harder for consumers’ wallets.

Second, the risk premium is on the rise in the US. While the White House imposes tariffs and cuts federal jobs, President Donald Trump is changing his tone, refusing to rule out a recession while claiming that “you can’t really watch the stock market” when an economy is in transition. Last Friday, his Treasury Secretary Scott Bessent said “there’s going to be a detox period” when the government moves away from fiscal largesse.

These remarks remind me of Chinese President Xi Jinping’s attacks on the “disorderly expansion of capital” in 2021. It was a clear sign that equity routs would not stop Beijing from carrying out economic policies loathed by asset managers. Unfortunately, just like Xi back then, the so-called “Trump Put” — the notion that Washington would do whatever it takes to improve the market mood — may not be present either.

Third, buying the US is a very crowded trade. Since the Global Financial Crisis, foreigners have net purchased about $2 trillion of American stocks, according to Nomura Securities. A rising market has skyrocketed their total holdings to $17.6 trillion, eclipsing their ownership of US debt. As of June 2023, the latest data available, overseas investors owned a record 17% of US equities.

But fund managers were uneasy. Entering 2025, a whopping 89% said US equities were overvalued, the most since at least April 2001, according to a Bank of America Merrill Lynch survey. So when strategists politely say US exceptionalism is on pause, foreigners might just head for the exit.

The question of whether China is investable came up late 2021 after Beijing’s harsh tech crackdowns shaved trillions of dollars off foreign investors’ books. Will we see that complaint bubbling up again — toward the US this time? [Abridged]

Courtesy Bloomberg/Shuli Ren