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.

Macro views

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The contents of this website have not been verified or approved by any competent regulatory or supervisory authority. No liability, whether in negligence or otherwise, arising directly or indirectly from the use of the information or any part of it on this website is accepted and no representation, warranty or undertaking, whether express or implied, is or will be made at any time by Principal Real Estate or its affiliates or any of their respective advisers, directors, officers, employees, representatives or other agents (“Principal Agents”) for any information or any of the opinions contained herein or for any errors, omissions or misstatements.

None of Principal Real Estate or its affiliates or any Principal Agents makes or has been authorised to make any representation or warranties, whether express or implied, in relation to Principal Real Estate or regarding the truth, accuracy or completeness of any of the information contained on this website at any time. No representation or warranty is given by Principal Real Estate, its affiliates or the Principal Agents as to the achievement or reasonableness of, and no reliance should be placed on any projections, targets, estimates or forecasts contained in the information on this website. Furthermore, nothing contained on this website is or should be relied on as a promise or representation as to the future. No reliance may be placed by any person for any purpose whatsoever on the information or opinions contained on this website or on its completeness, accuracy or fairness at any time.

Principal Global Investors (Europe) Limited is not authorised by the FCA to directly deal with retail investors; any distribution of the Fund to retail investors in Europe is facilitated by fund distributors with which Principal Global Investors (Europe) Limited has entered distribution arrangements, pursuant to advice provided to investors by those distributors, based on the documents Principal Global Investors (Europe) Limited provides. Retail investors should not be provided with access to this website.

The name of the Swiss representative is ACOLIN Fund Services AG, Stadelhoferstrasse 18, CH-8001 Zürich. The name of the Swiss paying agent is Banque Cantonale de Genève, 17, quai de l’Ile, 1204 Geneva. Investors can obtain the prospectus, trust deed, the simplified prospectuses and the annual and semi-annual reports free of charge from the representative in Switzerland.
The value of units and the income from them may fall as well as rise.

Investments in the Funds are neither insured nor guaranteed by the US Government or the Federal Deposit Insurance Corporation and are not deposits or obligations of, or guaranteed by, Principal Global Investors.

No Solicitation
Nothing contained in this website shall constitute an offer or solicitation, in relation to units in the Funds or generally, in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised.

In particular, shares issued by the Company, and units in the Funds, have not been and will not be registered under the United States Securities Act of 1933 as amended or the securities laws of any state or political subdivision of the United States and may not, except in a transaction which does not violate US securities laws, be directly offered or sold in the United States or to any US Person. The Company will not be registered under the United States Investment Company Act of 1940 as amended.

This website is reserved exclusively for non-US persons and should not be accessed by any person in the United States.

No Investment Advice
The information in this website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such nor should it be construed as specific investment advice, an opinion or recommendation. The general information it contains does not take account of any investor’s investment objectives, particular needs or financial situation, nor should it be relied upon in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision.

You should also inform yourself as to (a) the possible tax consequences, (b) the legal requirements and (c) any foreign exchange restrictions or exchange control requirements which you might encounter under the laws of the countries of your citizenship, residence or domicile and which might be relevant to any investment, including the subscription, holding, transfer or disposal of units in the Funds

Delegation of Investment Management to Affiliates

Products upon which composite results contained in this material, if any, are based may not themselves be available in the United Kingdom and certain other jurisdictions; however, the underlying investment management capability can be made available to institutional investors subject to all applicable local regulations and restrictions. In connection with its management of client portfolios, PGIE may delegate management authority to affiliates that are not authorised and regulated by the Financial Conduct Authority. In any such case, the client may not benefit from all protections afforded by rules and regulations enacted under the Financial Services and Markets Act 2000.

Disclaimer
The information on this website is given by Principal Global Investors in good faith and has been derived from sources believed to be reliable and accurate as at their date. However, Principal Global Investors makes no representation or warranty of any kind for the accuracy or completeness of the information and it is under no obligation to update or correct any errors in the information after the date of publication. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

Subject to applicable law, Principal Global Investors and its affiliates and their respective directors, employees and associates do not accept any responsibility arising in any way (including by reason of negligence) for errors in, or omissions from, the information and do not accept any liability for any loss or damage, however caused, as a result of any person relying on any information on the website or being unable to access the website.

The Internet is not a totally reliable and secure medium of communication. Principal Global Investors accepts no liability for the security or confidentiality of information transmitted in this way and any such transmission of information shall be at your own risk.

The entire content of this website is subject to copyright with all rights reserved. You may not copy, reproduce, distribute or modify the content of this website without the prior written permission of Principal Global Investors.

No instructions for investment purposes will be accepted directly from this website or by e-mail.

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You may view, download for caching purposes only, and print content from the website for your own personal use, subject to the restrictions set out below and elsewhere in these Terms of Use.

No Guarantee of Timeliness
This website may contain videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions. The information and materials contained on this website, and the terms, conditions, and descriptions that appear, are subject to change. All content on this website is presented only as of the date published or indicated, and may be superseded by subsequent market events or for other reasons. In addition, you are responsible for setting the cache settings on your browser to ensure you are receiving the most recent data.

No Warranties
The information on this website has been developed internally and/or obtained from sources believed to be reliable; however Principal Global Investors and its affiliates do not independently verify or guarantee its accuracy or validity. The information and services provided on this website are provided ""AS IS"" and without warranties of any kind, either expressed or implied. To the fullest extent permissible pursuant to applicable law, Principal Global Investors disclaims all warranties, including, but not limited to, any warranty of non-infringement of third-party rights and any implied warranties of merchantability and fitness for a particular purpose. Principal Global Investors does not warrant, either expressly or impliedly, the accuracy or completeness of the information, text, graphics, links or other items contained on this website and does not warrant that the functions contained in this website will be uninterrupted or error-free, that defects will be corrected, or that the website will be free of viruses or other harmful components. Principal Global Investors expressly disclaims all liability for errors and omissions in the materials on this website and for the use or interpretation by others of information contained on the website. Subject to any contrary provisions of applicable law, no company in the Principal Financial Group nor any of their employees or directors gives any warranty of reliability or accuracy nor accepts any responsibility arising in any other way (including by reason of negligence) for errors or omissions on this website.

If you have questions, please email us.

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This website contains general information only on investment matters and nothing in this website is intended to constitute or form part of any offer or inducement to issue or sell, or any solicitation of any offer to subscribe for or purchase, any securities or investment products in the UAE (including the Dubai International Financial Centre) and accordingly should not be construed as such. Information in this website is not directed at you if we are prohibited by any law of any jurisdiction from making the information on this site available to you and is not intended for any use that would be contrary to local law or regulation. Products or services mentioned on this site are subject to legal and regulatory requirements in applicable jurisdictions and may not be available in all jurisdictions. Accordingly, persons are required to inform themselves of and observe any such restrictions.

The information in this website is being made available on the basis that the recipient acknowledges and understands that the entities and securities to which it may relate have not been approved, licensed by or registered with the UAE Central Bank, the Dubai Financial Services Authority or any other relevant licensing authority or governmental agency in the UAE or elsewhere in the Middle East.

The information in the following website should not be construed as investment advice or a recommendation for the purchase or sale of any security. The value of investments and the income from them may fall as well as rise. Principal Investor Management (DIFC) Limited and the other member firms of Principal (collectively, the “Firms”) do not guarantee any investment results and there can be no assurance that the strategies employed will improve investment performance, and make no guarantee that a client’s investment objectives will be achieved and no warranties or representations, expressed or implied, are made by the Firms concerning the benefits of these strategies discussed herein. The information in this website has been developed internally and/or obtained from sources that the Firms believe to be reliable; however, the Firms do not guarantee the accuracy, adequacy or completeness of such information and are not responsible for any errors or omissions. This website also contains videos where the comments were valid on the date the video was recorded. Markets move continuously and you should only rely on current information for any investment decisions.

This website contains general information only on investment matters and should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information it contains does not take account of any investor’s investment objectives, particular needs or financial situation. Past performance is not a reliable indicator of future performance and should not be relied upon as a significant basis for an investment decision. You should consider whether an investment fits your investment objectives, particular needs and financial situation before making any investment decision.

Nothing in this website should be construed as investment, tax, legal or other advice.

The content of this website has not been approved by or filed with the UAE Central Bank or Dubai Financial Services Authority.

Access to this website is only permitted for “Professional Clients” as defined in the Conduct of Business of the Dubai Financial Services Authority’s Rulebook. If you are not a “Professional Client”, you may not access this website and you should select the “Decline” link below.

By selecting the “Accept” button below, and entering this website, you agree to these terms and confirm and represent that you are a “Professional Client”.