January often proves more eventful than anticipated, as we attempt to ease into the new year. It's a month when people tend to view things through a fresh lens, and companies release positive news they didn't want lost in the year-end festivities.

In the ongoing bulls vs. bears debate, there's no shortage of apparent winners and losers to discuss. The question remains: Are selloffs in mega-cap US companies a screaming buy opportunity or a warning signal of deeper troubles ahead?

A case in point is January's major news: a Chinese AI company by the name of DeepSeek released a new AI model. While its on-screen reasoning for answers is user-friendly, the most striking aspect is the reported time and cost efficiency of its development. DeepSeek trained this model in just two months, with the final training run costing less than $6 million—a fraction of OpenAI's $5 billion cash burn last year.

This announcement triggered significant selloffs within the AI ecosystem. Over the month, Nvidia experienced a 10% decline, and from its intra-month high, it has fallen nearly 22%, entering bear market territory.

So, does this development favour disruptors or enablers? Does massive AI spending allow the biggest investors to maintain an unassailable lead, or does it disrupt the status quo, enabling new entrants to catch up with minimal capital expenditure?

January's market reaction seems to favour the enablers. AI incumbent hyperscalers like Google, Amazon and Meta outperformed the broader S&P 500 by 3-6 times, signalling confidence in their future prospects. Conversely, the U.S. Technology sector as a whole declined nearly 3% due to share price drops in hardware and semiconductor sub-sectors.

Figure 1. January performance of select US listed technology companies

At Human Financial, we lean towards the disruptors' camp. History shows that most of us struggle to envision a world in which today's giants aren't at the top. While technology companies dominate the list of the world's biggest companies in 2025, just a decade ago the same list featured energy (Exxon), industrial (GE), and consumer staples companies (J&J). Two household names on today's list – Meta (Facebook) & Tesla – were founded just over 20 years ago, with the average age of the top five companies being less than 40 years.

Our point is that today's “enablers” were yesterday's “disrupters”, and we believe this pattern will likely continue. We're not suggesting these aren't great companies, nor are we predicting an imminent downfall, as befell Polaroid or Blockbuster. However, we emphasize that even great companies can face volatile futures. Over the past decade, these market darlings have experienced 2-6 times more share price pullbacks than the US market or technology sector.

Figure 2. Number of drawdowns of select US listed technology companies over the past decade

Source: Human Financial, Bloomberg

Where do we stand in early 2025? We believe we're in a situation similar to early 2022. We've just experienced an extremely strong year of returns. The path of monetary policy and interest rates remains uncertain. Geopolitical risks are rising, especially on the trade front. Sentiment is very positive, and fears are few and far between. 2023 turned out to be a challenging year, with a 25% drawdown in US equities and a more subdued 15% decline in the ASX200. Despite avoiding a recession, market returns were negative as investors faced a pullback in expectations.

This has relevance for the enablers vs. disruptors debate: we believe that in today's world of sky-high expectations for the world's biggest companies, surprise disruptors will continue to emerge, challenging the status quo. The potential rewards for winners are now so substantial that they create their own gravity, attracting new entrants. This, in turn, will challenge investor perceptions about the value of intellectual property, which may be becoming obsolete at an accelerating pace each year.

To manage our performance through the current macroeconomic environment and potentially benefit from the growing tension between "disruptors" and "enablers," we are continuing with our "3Ds" strategy in our active models: Defensive positioning, Diversification and Dollar management.

Defensive positioning

Equity markets are arguably priced near perfection. While high valuations alone don't guarantee short-term losses, the elevated risk encourages us to remain overweight fixed-income securities, emphasising higher income generation.

Diversification

Our active managers are, in aggregate, underweight major US technology companies. They continue to find attractive investment opportunities elsewhere within their investment universes, thus enhancing diversification. i.e. creating more ways to win.

Dollar management

In Q4, we capitalised on AUD weakness by adding currency hedges. We’ve now expanded our USD hedge to 60% across our active global growth exposures. This increased hedging will allow our models to benefit from any potential reversal of USD strength. While this trend is likely to unfold over a medium-term horizon, the current US political climate could accelerate this shift if final tariff agreements are less extreme than some of President Trump's campaign promises.

This refined active strategy aims to balance risk and opportunity in an evolving global market landscape.