{"id":10019,"date":"2025-02-19T18:17:50","date_gmt":"2025-02-19T18:17:50","guid":{"rendered":"https:\/\/zacksim.com\/financial-professionals-insights\/?p=10019"},"modified":"2025-02-19T18:17:50","modified_gmt":"2025-02-19T18:17:50","slug":"deepseeks-market-shock-a-crucial-reminder-for-investors","status":"publish","type":"post","link":"https:\/\/zacksim.com\/financial-professionals-insights\/deepseeks-market-shock-a-crucial-reminder-for-investors\/","title":{"rendered":"DeepSeek\u2019s Market Shock: A Crucial Reminder For Investors"},"content":{"rendered":"\n

The Investment Principle Reinforced by DeepSeek<\/strong><\/p>\n\n\n\n

The news cycle has been moving fast in 2025, with a flurry of policy announcements from the Trump administration. However, the story that has arguably been most impactful to markets did not have any connection to U.S. politics at all.<\/p>\n\n\n\n

It was the announcement of a new, powerful artificial intelligence model from China created by a startup called DeepSeek.<\/p>\n\n\n\n

Up until the moment \u2018DeepSeek R1\u2019 was released, there was a long-held assumption that the U.S. was comfortably winning the AI race. The launch of ChatGPT two years ago was viewed as a landmark moment for the nascent technology, with OpenAI as the clear frontrunner. The AI race\u2014as market participants largely understood it\u2014was confined to U.S. mega-cap technology companies spending hundreds of billions of dollars on chips and data centers needed to develop models and push the economic transformation ahead. The competition was under-capitalized, and far behind.1<\/sup><\/p>\n\n\n\n

But then came the release of DeepSeek R1, which demonstrated capabilities on par with leading American firms, while also achieving significant breakthroughs in reasoning\u2014a vital area in AI research that many experts consider key to achieving human-level intelligence.<\/p>\n\n\n\n

The proverbial \u2018gut punch\u2019 to the U.S. tech sector, however, was that DeepSeek developed its model for a fraction of the cost of U.S. firms, by utilizing creative engineering methods. Some estimates suggest that DeepSeek used only $5 million worth of chips to train a previous model, though this figure excludes research and experimentation costs. Regardless, the actual number is likely nowhere near the hundreds of billions of dollars being spent by major U.S. tech players.<\/p>\n\n\n\n

The worry that washed over Wall Street was palpable. DeepSeek challenged the understanding that high-end chips were necessary for developing advanced AI models, which led to sharp selling pressure across the high-end chipmakers. The so-called \u201cAI hyper-scalers\u201d also looked increasingly vulnerable, given the vast sums of capex they\u2019ve committed to spending.<\/p>\n\n\n\n

This brings me to the investment principle that this DeepSeek story should reinforce: The long-term benefits of diversification<\/em>. <\/p>\n\n\n\n

Over the past two-plus years, it may have felt like the only trade in U.S. equity markets was owning concentrated in mega-cap Technology companies. In 2024, for example, five of the biggest tech companies account for 41% of the S&P 500\u2019s total return (+26%), with the median stock in the index returning just +12%. The outsize impact of this small slate of critical companies was even memorialized with a household nickname, \u201cThe Magnificent Seven.\u201d<\/p>\n\n\n\n

Some investors piled into this trade, becoming overly exposed to the Technology sector at best and just a handful of companies at worst. But the arrival of DeepSeek hopefully serves as a reality check on a feature of the AI race that should have been obvious all along\u2014that early winners do not always maintain their position at the top. In the words of Salesforce CEO Marc Benioff, “The pioneers are not the ones who end up being the victors.\u201d In my view, this should serve as a reminder to investors that the crowded AI trade may not reward early innovators over the long-term, and we should expect the ground to keep shifting. This argues for diversification versus a concentrated, company-specific approach to investment in the AI theme.<\/p>\n\n\n\n

Keeping the focus on the long-term, I do continue to believe that AI will be transformational for the U.S. and global economy, driving productivity gains in business and perhaps even creating new industries in the process. If AI is as impactful as the internet was 30 years ago, we should expect opportunities to emerge across the economy\u2014not just in the Technology sector.<\/p>\n\n\n\n

Bottom Line for Investors<\/strong><\/p>\n\n\n\n

For all the worry over DeepSeek\u2019s arrival and what it means for mega-cap U.S. technology companies, there is a counter theory, known as Jevons Paradox, that suggests that more efficient and cheaper AI models will ultimately increase demand for AI services, \u2018lifting all boats\u2019 in the process. Surging demand, the argument goes, would sustain chip makers (even high-end ones) and make all of the capex worthwhile.<\/p>\n\n\n\n

Time will tell. In the short run, investors are correct to question where the return on investment for mega-cap tech players will come from, assuming the barrier to entry in creating AI models is relatively low\u2014as proven by DeepSeek. In the long run, I think this episode argues for maintaining exposure across the economy, not just in the sector responsible for developing AI. <\/p>\n","protected":false},"excerpt":{"rendered":"

The U.S. was leading the AI race until DeepSeek upended the market. Mitch comments on this development and how it underscores an age-old investment maxim.<\/p>\n","protected":false},"author":4,"featured_media":9971,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[181,1],"tags":[],"class_list":["post-10019","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financial-professionals","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/10019","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=10019"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/10019\/revisions"}],"predecessor-version":[{"id":10021,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/10019\/revisions\/10021"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media\/9971"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=10019"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=10019"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=10019"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}