Much of this difference, of course, can be ascribed to the Chinese AI upstart DeepSeek, which shocked capital markets by launching a very competent open-source large language model at a fraction of the cost incurred by US AI giants like OpenAI. As a producer of graphics cards which suddenly seemed less critical to the development of artificial intelligence, US stock market giant Nvidia had its market cap slashed by almost $600 billion in a single day – the largest one-day loss in history. As Nvidia was not alone in being impacted, the S&P 500 fell by 1.5% that day (27 January).
DeepSeek was soon described as a black swan by many observers. I beg to differ. A black swan, as you may recall, is a metaphor for unexpected events of large consequence. As technological breakthroughs occur seemingly randomly, we can’t rationally expect them at any point in time, but we know there will be breakthroughs – especially in fields with a lot of resources put into it.
I may inadvertently reinforce the black swan label here by meeting a third criterion – that it is rationalised by hindsight. Let me add, though, that Nassim Nicholas Taleb – who coined black swan as a market term – thinks of technology companies as grey swans. His point is that investors underestimate the tail risk in their returns.
Simply put: The world does not move as smoothly forward as most investors seem to expect. Just look back at all that’s happened in the past century, all the wonderful and all the tragic events. How much could possibly have been expected?
Here’s a little paradox for you: The longer into the future we peek, the more uncertain it gets. But the longer into the future we try to anticipate stock market returns, the narrower the range of likely outcomes.
If you started investing in the S&P 500 in 1871 (setting aside the issue of longevity), you could have been lucky and hit 12 consecutive months with a total real return of almost 152%. If you stayed invested for 20 years, the best annualised compound return you could have hoped for would be a still impressive 13.7%. In that case, however, it would be near impossible to lose; the very worst 20-year period would have eaten less than 0.1% a year after inflation.
And if you came aboard after the Second World War, there would be no instance of a 240-month period setting you back after inflation.
That’s not to say that the same thing has to happen going forward. But there’s a logic to it beyond history repeating itself. After all, a large number of coin tosses converges towards a 50/50 split, right? A stock market, balancing boom and bust years, exhibits the same tendency.
That shouldn’t be surprising.
Finn Øystein Bergh
Chief Economist & Strategist
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