A Nasdaq Meltdown, Like China’s Big Tech in 2021?

Following a 5% decline in the shares of the Magnificent Seven on Monday, investors around the globe are reassessing their faith in the notion of US exceptionalism. They find themselves questioning whether the Nasdaq is simply experiencing a minor correction, or if it is on the verge of a far more severe downturn.

There are concerns that the US market may be heading toward a scenario similar to what China faced in 2021—a significant devaluation of growth stocks. That year, the MSCI China Index lost nearly a third of its value after the government imposed strict regulations on tech companies, which greatly reduced the earnings forecasts and increased the sense of political risk among investors. For context, the Nasdaq 100 has seen a drop of 12% from its peak in February.

Before labeling me as overly dramatic, consider the following points.

Challenges to Tech Dominance

First, the stronghold of the Magnificent Seven in the tech sector is under structural pressure. In January, the introduction of DeepSeek showcased that China is not just a manufacturing giant, as lesser-known startups began to demonstrate significant algorithmic capabilities. Not long after, major firms like Alibaba and Tencent announced their own models that aim to compete with DeepSeek's innovations, while various AI agents are being developed to perform more complex tasks on behalf of users.

These rapid developments indicate that Chinese companies are advancing in software, a field that has long been dominated by American firms. As investors look to the next phase of AI technology, the potential disruptive influence of China cannot be overlooked, even if attention shifts from established players like Nvidia to emerging solution providers.

Shifts in Market Sentiment

The outlook is even grimmer in the electric vehicle (EV) and smartphone sectors. Chinese firms are climbing the value ladder, reshaping the definition of luxury products. Recently, Xiaomi launched a $73,000 luxury sedan, its most upscale vehicle yet, along with a high-end smartphone priced at $1,560, equipped with advanced camera technology. Meanwhile, BYD has included complimentary software upgrades with their entry-level EV models, challenging major US brands.

This creates an unsettling dynamic for established names like Tesla and Apple, which must now compete more aggressively for consumer attention.

Increasing Risk Perception

Second, the risk premium in the US appears to be on the rise. With the government imposing tariffs and reducing federal employment, President Donald Trump is taking a more cautious approach, hinting that a recession may not be off the table while claiming that "you can’t really watch the stock market" during economic shifts. Recently, Treasury Secretary Scott Bessent commented that a detox period will occur as the government moves away from generous spending.

These comments echo the rhetoric from Chinese President Xi Jinping during 2021 when he criticized the " disorderly expansion of capital." This signaled that equity market declines would not deter Beijing from executing economic policies that many investors opposed. Sadly, much like Xi’s era, the so-called “Trump Put”—the belief that the government will intervene to support market sentiment—might also be absent.

Crowded Trading Landscape

Third, investing in US equities has become a crowded trade. Since the Global Financial Crisis, investors from abroad have poured nearly $2 trillion into American stocks, leading to total holdings ballooning to $17.6 trillion, which surpasses their investments in US debt. According to the most recent data from June 2023, foreign investors owned a record 17% of US equities.

However, there are signs of discomfort among fund managers; as we approach 2025, a staggering 89% believe US stocks are overvalued, the highest percentage recorded since at least April 2001, according to a Bank of America Merrill Lynch survey. Consequently, when market strategists begin to note that US exceptionalism may be temporarily stalled, many foreign investors might prepare to exit.

As 2021 raised questions about the investability of China following severe tech regulations, we now face the prospect of similar concerns emerging regarding the US.

Nasdaq, Stocks, China