Home Insights Macro views DeepSeek disruption: What it means for investors

DeepSeek disruption: What it means for investors

February 5, 2025 | 4 min read
Seema Shah
Chief Global Strategist

U.S. tech stocks faced a sharp sell-off recently as investors reassessed lofty valuations following the release of a powerful open-source AI model by Chinese startup DeepSeek. The model, which seems to rival those from top U.S. developers but at a significantly lower cost, has raised concerns about the sustainability of current equity premiums.

What is DeepSeek?

A Chinese AI startup founded in 2023, DeepSeek developed a low-cost, open-source large language model artificial intelligence that functions as a chatbot, similar to OpenAI or Meta AI. Its latest R1 Model, which powers its chatbot app, has surged to the top of app store download charts since its release in November 2024. The model has drawn global attention for achieving performance on par with Western AI counterparts despite being developed at a fraction of the cost, without access to advanced semiconductor chips, and while maintaining significantly lower energy requirements.

Potentially disrupting the U.S. tech dominance narrative

If DeepSeek’s low cost can be verified, it will threaten the assumption that to build or use AI, the industry must undertake heavy capex spending on advanced chips, and that those chips must come from the most advanced semiconductor manufacturing companies. Indeed, chipmakers were hit hardest following the DeepSeek announcement, with Nvidia and Broadcom both falling 17% on Monday 27 January. The Philadelphia Semiconductor Index fell 9%, while ASML was down 7% in Europe.

Notably, the release of DeepSeek’s new open-source AI model comes at a time of significant vulnerability for big-tech firms. With valuations stretched to extremes—drawing comparisons to the dot-com bubble—investors are increasingly questioning whether these companies can sustain the exponential earnings growth baked into their stock prices.

The concern extends beyond big-tech. The AI frenzy has been the primary driver of U.S. equity performance in recent years, leading to historically narrow market breadth. As a result, the S&P 500 has become heavily reliant on the performance of Nvidia and the Magnificent 7 technology stocks. The latest developments from DeepSeek not only challenge the dominance of the U.S. tech giants but also raise concerns about the stability of the entire U.S. equity market.

AI infrastructure was also impacted

The DeepSeek announcement also sent shockwaves through the entire AI ecosystem. Beyond the immediate impact on chipmakers, data centers and energy providers too faced significant pressure as investors questioned the need for such an energy-intensive ecosystem to house and power complex AI models.

Investor considerations from the AI induced volatility

AI’s rapid evolution will likely continue to disrupt markets, creating both risks and opportunities for investors. While DeepSeek’s breakthrough has intensified concerns about the dominance of U.S. tech giants and the sustainability of their sky-high valuations, beyond the immediate market reaction, the long-term implications of AI democratization could be broadly positive.

AI-driven productivity gains

While DeepSeek’s emergence challenges the dominance of U.S. chipmakers, it also presents an opportunity to democratize AI technology. By significantly lowering the cost of training advanced AI models, DeepSeek’s innovation could accelerate widespread AI adoption and drive long-term global productivity gains. While certain chipmakers may face headwinds, the broader economy—and equity markets—are likely to benefit.

AI infrastructure concerns may be overdone

The initial market reaction to DeepSeek’s announcement triggered a sharp sell-off in stocks related to U.S. AI infrastructure. However, this may have been an overcorrection. If lower costs and improved efficiency accelerate AI adoption, demand for computing infrastructure, AI applications, and energy providers will likely remain robust. The recent market dip may, therefore, present opportunities in data centers and energy sectors.

AI expansion could strengthen broader markets

DeepSeek’s model raises concerns about the competitive advantage of U.S. tech firms and the sustainability of their multi-billion dollar AI capex investments. While the sell-off in mega-cap tech reflects investor doubts about sky-high earnings expectations and assumptions of limited competition, these companies remain at the forefront of AI development, deployment, and innovation.

What’s more, the productivity boost from AI could enhance corporate profitability across sectors that have so far been excluded from the “U.S. exceptionalism” trade. With a strong economic backdrop, earnings growth has already begun to broaden in recent quarters, and the AI tailwind could further accelerate this trend.

The case for portfolio diversification

Deepseek’s breakthrough has underscored the risks of excessive concentration in the Magnificent 7 and the importance of diversification—both across sectors and geographies. The AI-driven rally has led to stretched valuations in certain areas, but attractive investment opportunities remain globally. Looking ahead, investors should consider a more balanced approach to mitigate risk and capitalize on emerging growth areas.

AI will remain a powerful driver of growth and efficiency in the years ahead, with lower costs accelerating its adoption across companies and sectors. However, while embracing innovation and competitive disruption is often key to finding differentiated companies, investors must also stay grounded in the importance of strong business fundamentals. A long-term perspective and a well-diversified portfolio will be critical in navigating the evolving AI landscape, striking the right balance between opportunity and risk.

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