When stockmarket moves feature as part of the main news headlines, you know there’s something going on of note. This time, it’s the sell off in tech stocks as a result of the new kid on the block, Chinese AI start-up DeepSeek. It has caused markets to re-evaluate valuations on some of the market’s darlings – Nvidia in particular – which shed almost $600bn off its market capitalisation yesterday as investors took fright.
But let’s not get too carried away with headlines. Beneath the surface there’s plenty of room for optimism as investors highlight in their thinking about DeepSeek and this latest AI development.
Following the emergence of DeepSeek, a Chinese chatbot competitor to OpenAI’s ChatGPT, Rahul Bhushan, Managing Director of ARK Invest Europe says:
“DeepSeek’s recent breakthroughs serve as a pivotal reminder that the AI opportunity is expanding far beyond the narrow focus on semiconductors and infrastructure. For over a year, we’ve been emphasizing to investors that concentrating too heavily on GPUs risks missing the transformative opportunities emerging in software, platforms, and open-source innovation.
“DeepSeek’s V3 model, which matches the performance of GPT-4 using just 5% of the GPU compute, and its R-1 model, delivered at 1/13th of the cost of GPT o1, underscore an important truth: AI’s future is not just about throwing more GPUs at the problem. These advancements demonstrate how necessity is driving invention, with resource constraints fostering breakthrough efficiencies that are redefining what’s possible in AI development.
“Moreover, the fact that DeepSeek’s innovations are open source cannot be overstated. This move opens the door to widespread adoption and decentralization, a trend that could democratize AI access and accelerate progress far beyond traditional players in the West. It also hints at China’s growing strategic ingenuity in shaping the AI landscape under constrained circumstances. We strongly urge investors to re-evaluate their AI funds and positions. Focusing solely on semiconductors risks being materially underexposed to where the real opportunities are emerging: scalable, efficient AI solutions and the open-source ecosystems enabling them. The paradigm is shifting—AI portfolios need to shift with it.”
Tom Stevenson, Investment Director, Fidelity International has shared his comments on what’s driving the markets this week as China unveils major AI breakthrough: “As the second week of Trump 2.0 began, news of a significant Chinese AI breakthrough sent shockwaves through the US tech sector and unsettled markets.
“Wall Street reeled at yesterday’s opening, with the S&P 500 down 2% and the Nasdaq tumbling 3.5% as advances in Chinese artificial intelligence called into question US dominance in the technology that has underpinned the market’s recent rally.
“DeepSeek, a Chinese AI start-up, unveiled a large language model rivalling US leaders, OpenAI and Meta, while relying on significantly fewer Nvidia chips. Nvidia, which has been a key driver of US stock market gains, plunged 13% on the news.
“While the tech sector bore the brunt of the initial reaction, the sell-off extended into other areas of the market too. In Europe, Germany’s Siemens Energy, a major supplier to the AI industry, dropped more than 20% even before US trading began.
“Investors fled to safe havens, pushing the yield on the benchmark 10-year US government bond down 0.1% to 4.52% – one of the strongest bond rallies in the past year.
“This development underscores the rapidly shifting dynamics in AI and as the situation unfolds, investors are closely monitoring the implications of this breakthrough on the future of AI technology and the balance of power in the tech industry.”
DeepSeek’s emergence was a catalyst for a market correction, but all that has changed longer term with some of the froth being removed from valuations. This is according to George Lagarias, Chief Economist at Forvis Mazars as he comments: “The emergence of DeepSeek a Chinese Large Language Model which can compete with its Western counterparts at much lower costs and using less high-end tech catalysed a correction for the technology sector and especially Nvidia. US large caps were down nearly 1.5% on Monday and Nvidia had lost nearly 20% of its value from its recent highs.
We have often said that valuations were high and that the market was susceptible to a correction (although the timings are always unsure). Additionally, geoeconomic uncertainty is rising. So even a less significant event would be enough to catalyse a correction.
The underlying narrative that drove equity performance in the past two years, that AI will profoundly change the world, is still very much relevant. The only thing that has changed is that some of the froth is being removed from valuations and earnings expectations, especially around Nvidia.”
Also sharing her comments, Louise Dudley, Portfolio Manager, Global Equities, Federated Hermes Limited, said:
“With corporate optimism running at record levels, the news about the launch of the DeepSeek app has sent prices for some of the biggest tech stocks tumbling. There are still several questions yet to be answered, some of which we expect to hear answers to as earnings are reported this week for a number of the big tech names. For Nvidia, as the key supplier of premium chips globally, the concern is that companies will need fewer chips going forward, however the company has responded to the news highlighting the “excellent advancement” signalling their optimism for the ongoing development of AI models which is still in its relative infancy. For those companies involved in the build out of data centres, there is likely to be a near term impact as demand has been very strong, and the new DeepSeek model code will be scoured for potential performance improvements. Current development pipelines are at risk, and this will be a focus for investors. This news is likely to advance the business and consumer appetite for AI tools, given the improved accessibility, leveraging this innovation and accelerating the time horizon for AI adoption.”
Jamie Mills O’Brien, Investment Director, at abrdn said: “Recent jitters in the tech market reinforce our view that investors should not be confining themselves only to the so-called MAG7 when looking for growth.
The US stock market has been highly concentrated in a small number of tech companies, including Apple, Amazon and Nvidia, for several years. DeepSeek – and we are working with our regional teams to assess reliability of claims that the cost to build the material is materially lower – represents another version of this risk. Chipmaker Nvidia represented more than 20% of the returns of the S&P500 last year, and, with such a run, the stock, and broader AI ecosystem, entered this year with more vulnerability around specific pieces of news flow.
The gap in earnings growth between the largest stocks in the US market – the so-called ‘MAG7’ – and the rest of the market is the narrowest it has been in a long time. So although these large stocks are expected to outgrow the other 493 in 2025, the difference is much smaller than it has been in a long time. Specifically, the gap in earnings growth between these large stocks was c.28% in 2023, c.35% in 2024 – and this is expected to shrink to c.4-5% in 2025.
We think this narrowing growth premium for the larger cap technology stocks likely also brings with it a far less narrow US equity market – by which I mean a US market that is much less concentrated in terms of performance.
This is likely material for fund performance too – given these seven stocks now represent c.32% of the S&P500, the relative over/underweight to this small number of stocks has also been a key driving factor in relative performance over the last few years.
We are also starting to see signs of a market behaving slightly differently, with earnings growth – rather than multiple expansion – becoming a more important arbiter of equity returns. Historically when you hit the peak of a hiking cycle, market focus turns to earnings growth. And that is what we are seeing again – earnings, not multiples, are driving relative performance in 2024 than they have done over the last couple of years. This is even more relevant in a late-ish cycle backdrop where there is potentially some growth vulnerability on the horizon (and the incoming administration’s tariff policy potentially exacerbates that).
This is actually a very positive environment for those global equity managers – like us – which are focused on identifying that select and small group of high quality companies globally which are able to deliver earnings and cash flow growth over and above market on a consistent basis. And with a slightly longer term hat on, the next 10 years are going to be lower growth than the last 10 – driven by lower fiscal headroom globally, demographics and deglobalization – and that again means that there will be a much higher premium on those rare companies which can grow independently of the economic cycle.
Part of our thinking here is because we have seen this before. Over the very long run, you do get these patterns that are remarkably similar of US outperformance followed by outperformance of markets outside the US. The period 2000-2010 was very much a lost decade for US stocks – and what followed has been a very strong run for US stocks. Similarly, the earnings and cash flows of US vs non-US stocks go through cycles. Over the last 10 years, we have seen enormous valuation compression between US and non-US stocks. US stocks used to be at a 14-15% premium. Today that number is greater than 50%. That isn’t to say we are negative on US equities – because we are not – rather we see potential for a rotation towards a less narrow market structure, regionally and sectorally, in 2025 and beyond.
Emerging markets and China are set to deliver earnings growth over and above the US market. We think that might be significant, in particular given the valuation discrepancy we are seeing.
With a longer term hat on, the next 10 years are going to be likely lower growth than the last 10 – driven by lower fiscal headroom globally, demographics and deglobalization – and that again means that there will be a much higher premium on stocks that can grow independently of the economic cycle.”
