
Macro Minute: Week of February 3, 2025
DeepSeek – What is it and what it means?
Today, I am going to give my thoughts on DeepSeek and what it could mean for markets. DeepSeek is an open-source large language model comparable to ChatGPT. Basically, it is a new AI (Artificial Intelligence) model out of China. I am no AI expert and do not claim to be. I will also honestly admit that I have not used these AI models except in how they are being integrated into search and other software. With that caveat out of the way, let me try to give my perspective on why it has been such a market moving, and possible continued market moving, release.
To begin with, we must remember the U.S. technology confrontation with China in Trump’s first term. The US banned certain technology built in China. We denied access to the latest and fastest chips. Europe joined the US in denying the latest chip-making tech to China. All in all, China has been forced to either make their own tech or use slightly outdated chips.
The perspective that has been priced into the market is that the U.S. is leading this AI arms race. This has been backed by the capital expenditures (CapEx) of large tech companies, (think Mag7). The companies that are spending the most in AI development have had rising stock prices over the last two years.
Well, then DeepSeek comes out of China. It doesn’t have the latest tech, it was supposedly much cheaper to develop, and it is less energy-intensive to run. This has completely thrown market assumptions around AI into a tailspin. The AI market darling, Nvidia, which makes the chips that DeepSeek uses, dropped $589 billion in market cap on Monday, January 28th. This is calling into question U.S. dominance in the AI tech race. It is also making market participants reconsider the high relative valuation of the U.S. stock market versus the rest of the world.
Now that the initial market reaction has happened, we need to consider what comes next. If we enter into a new phase of AI development where raw CapEx-spend is the perceived market winner then the market will have to determine a new metric of deciding the winners and losers. The market may be entering the phase where it is wanting to see how the CapEx-spend is going to lead to higher revenue. This could result in the market looking at other companies outside the U.S., not the Mag7, for the next winner. If the next phase of AI is going to be cheaper and more energy efficient, it could; ironically, create more energy demand, not less.
Regardless of how this next phase turns out, we can see that DeepSeek is raising questions about market assumptions. If, and it is still a big IF, AI is getting cheaper, easier to access, open-sourced, and more efficient, then that is good for society, but maybe less so for companies footing the bill.
DISCLOSURES:
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available upon request.