Apart from tech enthusiasts, few folks had heard of DeepSeek a week ago.
That all changed on Monday, though. A brutal sell-off in Nvidia and other artificial intelligence (AI) stocks sent the Nasdaq heavily lower.
The reason behind the sell-off?
Chinese startup DeepSeek released its latest AI model… which it claims can rival ChatGPT. Even more stunning, this performance comes at just a fraction of the cost.
And the real cruncher – though yet to be verified – is that DeepSeek’s model uses far fewer advanced AI chips than its American counterparts.
As it turns out, AI – already a disruptor in so many fields – is being disrupted by one of its own.
And that has major implications for the market…
An AI Arms Race
Nvidia holds a dominant position among AI stocks. As such, it was one of the heaviest hit on Monday. It lost a historic 17%.
That fall wiped more than half a trillion dollars off its lofty valuation. The plunge pulled the Nasdaq down nearly 3.0%.
It all comes at a crucial time for Big Tech…
Heavyweight tech stocks Microsoft, Apple, Tesla, and Meta Platforms are all releasing earnings this week.
The Magnificent Seven have had open checkbooks in regard to AI thus far. So this news may mean they’ll see far closer scrutiny of their spending plans…
The same could be true for the recently announced Stargate initiative. President Trump boasted that the government would put as much as $500 billion behind the venture to rapidly develop AI infrastructure throughout the U.S.
On a far bigger level, the DeepSeek news questions whether the U.S. is being outplayed by its Chinese rivals. As I mentioned on CNBC this week, this may be more of a China-U.S. issue than people think, which should make investors a little bit fearful.
DeepSeek’s latest model – if its claims are proven true – could have far-reaching consequences beyond chipmakers.
Energy companies and those building out mega-data centers to support AI are vulnerable to any change or pullback in AI-focused spending. For example, Constellation Energy has a 20-year power supply agreement with MSFT… and its stock dropped 20% on Monday.
Yet even if DeepSeek isn’t as amazing as it initially seems, it still reveals an important dynamic in the market right now…
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Priced for Perfection
We’re only in the infancy of AI. Few can guess how this technology will play out from here.
But the action this week highlights how vulnerable stocks can become when they’re priced for perfection – as they are now.
That’s even more true if a stock is wedded to a particular theme.
Although DeepSeek was this week’s catalyst, a shock can come from other far more mundane sources too…
Something as basic as an earnings miss or less projected growth can send stocks swinging.
The Federal Reserve can be another trigger. We could see volatility anytime the Fed changes its stance on interest rates. Likewise, actions like the government imposing tariffs could be another spark.
We can expect the debate to continue this week about whether DeepSeek’s model is the real deal… But that’s almost a null point either way.
If a dominant market leader like NVDA can lose nearly $600 billion of its valuation in a day, this week offers a timely reminder…
Even the most popular investment themes can reverse on a dime. So investors always need to remain wary – especially in hyped sectors like AI.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict