On Monday, markets were shaken by the news that China’s DeepSeek AI model outperformed expectations at a lower cost of development, causing a 3% panic sell-off on the Nasdaq-100 futures. The implications of this event are vast and far-reaching, with potential repercussions for the global AI industry and technology sector as a whole. Here’s what investors need to know:
DeepSeek – What We Know So Far
China’s DeepSeek AI model has disrupted the status quo with its innovative approach and distinct advantages over existing large language models (LLMs) developed in the U.S. Key characteristics that set DeepSeek apart include its cost efficiency, resource utilization, open-source nature, and high performance capabilities. Let’s dive deeper into what makes DeepSeek unique:
- Cost-Effective Development: DeepSeek’s R1 model was developed in just two months with an investment of under $6 million, showcasing that high performance AI can be achieved without exorbitant budgets typically associated with cutting-edge technology.
- Resource Optimization: DeepSeek’s innovative training methods allow it to operate effectively with less advanced hardware, reducing barriers to entry and making advanced AI capabilities more accessible.
- Open-Source Nature: By openly releasing its code, DeepSeek encourages collaboration and global contributions, challenging the closed-off nature of U.S. LLMs and fostering innovation worldwide.
- Performance: Despite its cost efficiency, DeepSeek delivers comparable performance to U.S. models in key areas like problem-solving, programming, and natural language inference, proving that high costs are not always synonymous with success in AI development.
Is DeepSeek The Sputnik Moment Of Our Generation?
The emergence of China’s DeepSeek AI model and its challenge to U.S. dominance in AI development draws parallels to the "Space Race" of the 1950s and 60s, where competition between the U.S. and the Soviet Union led to groundbreaking technological advancements. DeepSeek could serve as a modern-day "Sputnik moment" for the global AI industry, sparking a new era of innovation and economic growth. Here’s why this comparison holds weight:
- Parallels to the Space Race: The competitive pressure posed by DeepSeek mirrors the intense rivalry of the Space Race, driving innovation, technological progress, and economic expansion.
- Accelerated Innovation: Just as the U.S. ramped up investments in space technologies after Sputnik, companies like Google and Microsoft may increase R&D spending to maintain their competitive edge in AI, leading to advancements in models, algorithms, and applications.
- Demand for High-Performance Hardware: Companies like Nvidia, a leader in AI hardware, could benefit from heightened competition as advanced AI models require powerful computing infrastructure.
- Expansion of AI Applications: The competitive push could accelerate AI adoption across various sectors, driving innovation and growth.
In conclusion, the rise of DeepSeek presents both challenges and opportunities for the AI industry, with potential impacts on technology companies, hardware suppliers, and the broader economy. Competition breeds innovation and progress, leading to advancements that benefit society as a whole. By staying informed and understanding the implications of events like DeepSeek’s emergence, investors can position themselves for success in a rapidly evolving landscape.
Increased Government and Private Sector Funding
As seen during the Space Race, heightened competition often spurs increased investment from both governments and the private sector. Governments may allocate more funding for AI research and development, while private companies may double down on their AI initiatives to maintain relevance in a rapidly evolving market.
Broader Economic Benefits
A surge in AI innovation could lead to productivity gains across industries, boosting economic growth. The ripple effects of AI advancements could create jobs, transform industries, and enhance the quality of life, much like the technological spin-offs from the Space Race.
What We Think Right Now
Yes, the rise of DeepSeek poses competitive challenges. However, it also creates opportunities for U.S. companies to innovate and expand their markets. However, this competition will require significant investments, and companies must navigate potential risks, such as overvaluation and increased regulatory scrutiny. For investors, this environment underscores the importance of focusing on companies with strong fundamentals, competitive advantages, and a proven track record in AI development.
“Startups need to realize that they are “default dead” companies. This means they must, by definition, grasp victory from the jaws of defeat. Meanwhile, VCs are asleep at the switch – massively overfunding marginal ideas. We must improve at taking huge shots on goal and allocating capital to the best of these ideas. I worry that in this current melee, we’ve overspent billions on dumb features which these next-gen models will roll over in the next 12months or earlier. Lots of capital losses are coming.”
The parallels between the Space Race and the current AI competition sparked by DeepSeek are striking. Just as Sputnik catalyzed an era of unprecedented innovation and economic growth, DeepSeek could serve as a similar wake-up call for the global AI industry. This competition presents an opportunity for technology-related investments and companies to accelerate innovation, expand markets, and drive long-term growth. While the road ahead is competitive, the potential rewards for staying ahead in the AI race are immense. The A.I. “Cyber Space Race” is only just beginning, and there are still many opportunities that we will want to participate in.
So, why did the market react so negatively to the news if that is the case?
The Selloff Just Needed A Catalyst
A great note from Societe Generale sums up our current view on the magnitude of the early-week selloff in .
“Market panics are common, and currently, it is understandable with American exceptionalism in full force. The Mag-5s (NVDA + its top 4 customers, i.e. Microsoft, Google, Amazon, Meta) have contributed approximately 700 points to the S&P 500 over the last 2 years. In other words, the S&P 500 excluding the Mag-5s would be 12% lower today. Nvidia alone has contributed 4% to the performance of the S&P 500. This is what we find to be the ‘American exceptionalism’ premium on the S&P 500.”
Moreover, Bernstein analysts Stacy Rasgon and team have published their take on this, concluding that:
- DeepSeek DID NOT “build OpenAI for $5M”
- The models look fantastic, but we don’t think they are miracles, and
- The resulting Twitterverse panic over the weekend seems overblown
Okay, so why the panic selling?
As we previously warned, when “everyone is on the same side of the boat,” an unexpected, exogenous event causes sharp reversals.
Over the last two weeks, sentiment reversed from negative to extremely bullish following the inauguration. This week we stated,
“The technical gauge reversed sharply for short-term oversold back to more bullish levels. While not at more severe “overbought” warning levels, current levels suggest that near-term upside could be somewhat limited.“
Furthermore, the investor “Fear/Greed” gauge moved from neutral territory back into extreme greed.
This indicator is based on how professional and retail investors position themselves based on equity allocations, including options, bullish and bearish sentiment, and concerns about risk.
We see the same surge in investor sentiment by the standard deviation of “net bullish sentiment.” After reversing rather sharply from the December highs, investing sentiment reversed sharply last week following the inauguration. While not back to more extreme levels, the swiftness of the reversal has been remarkable.
Up until now, the A.I. field has been dominated solely by U.S. companies. That dominance led to a rise in markets driven by a handful of mega-capitalization companies. Suddenly, everything has changed, or at least it seems that way. With everyone short-term bullish on the market, the risk of a reversal was elevated. Such is particularly true when an unexpected event, like DeepSeek, causes the market to question current earnings growth assumptions.
This is why, as investors, we must remain vigilant about the risks we take within our portfolios.
S&P 500: Technical View
Technically speaking, the selloff on Monday, while unexpected, only reversed some of the recent gains. The market remains on a buy signal and defended support at the 50 and 20-DMA. Could there be more selling pressure in the days ahead? Possibly. However, much of yesterday’s selling seemed to be a “shoot first, ask questions later” type of action.
The current bull market is likely not over. Furthermore, the panic will subside as markets come to grips with DeepSeek and its real implications. However, our recent discussions have made our aversion to risk more apparent.
DeepSeek only adds to why we are becoming more cautious on outlooks as we head into 2025. The risks seem obvious between high valuations, a slowing economy, and elevated earnings expectations.
Does this mean we expect the market to crash?
No. Not yet, anyway.
But it is incredibly difficult to know with certainty, so we suggest that investors “.”
Analysis of Content
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Through a technical view of the S&P 500, the content examines the recent selloff and its implications for investors. It stresses the importance of remaining vigilant about risks and maintaining a cautious approach in the face of market uncertainty.
Overall, the content is informative, engaging, and accessible to readers with varying levels of financial knowledge. It provides valuable insights for investors and individuals interested in the impact of AI advancements on the economy and financial markets.
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