The Chinese startup DeepSeek has the potential to impact the U.S. stock market significantly due to its promise of delivering cheaper, more energy-efficient artificial intelligence solutions. This was highlighted by Don Townswick, director of equity strategies at Conning Asset Management, which manages $170 billion in assets.
DeepSeek’s AI potential disrupts U.S. stock market dynamics
Townswick noted that if DeepSeek’s offerings prove to be credible and effective, it could facilitate the adoption of AI technologies across a wider array of companies, enhancing earnings through increased efficiencies. Conversely, if DeepSeek’s claims are found to be less valid, established AI companies known as the “Magnificent Seven” may benefit instead.
The launch of DeepSeek’s chatbot in the U.S. earlier this month sent shockwaves through Wall Street, resulting in a $600 billion loss in stock value for Nvidia Corp., an AI chip developer. This incident has increased scrutiny on the massive investments being made by U.S. megacap tech firms into AI infrastructure. In response to this competitive landscape, U.S. tech companies have further intensified their spending on AI.
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Meta CEO Mark Zuckerberg recently announced plans to invest “hundreds of billions of dollars” in AI infrastructure over the coming years, having already committed $60 billion to $65 billion for this year. Additionally, Alphabet Inc. projects $75 billion in capital expenditures for 2025, surpassing Wall Street’s expectations. Microsoft reported a 95% increase in its cloud and AI spending, amounting to $22.6 billion in its fiscal second quarter.
Robert Pavlik, senior portfolio manager at Dakota Wealth Management, emphasized concerns regarding the relentless climbing of capital expenditures. He questioned how much more investment is necessary before these expenditures begin to decline.
While Nvidia shares saw a rise due to fresh commitments in AI spending, Tesla, Apple, and Amazon stocks exhibited declines, possibly influenced by concerns surrounding President Trump’s trade policies. The U.S. has recently implemented a 10% tariff on goods from China, and has threatened additional tariffs on Canada and Mexico.
Investors have also begun to rotate their focus toward defensive and rate-sensitive market sectors amid concerns facing tech stocks. Garrett Melson, portfolio strategist at Natixis Investment Managers, indicated that there has been a shift, highlighting improvements in these alternative sectors despite the pressure on tech stocks.
Townswick noted that the growth rate for the “Magnificent Seven” has been declining, having peaked at a 61% yearly rate in Q4 2023. He forecasts this rate to normalize between 16% and 18% by the year’s end, a figure closer to the overall growth rate expected for the remaining S&P 500 companies, making their high valuations harder to justify.
According to Market Watch, Keith Lerner, chief market strategist at Truist Advisory Services, indicated that the combination of DeepSeek’s impact and turbulent trade policies could lead to more volatility in the market. Lerner advised against hastily buying into the market following the recent dips driven by these developments. He pointed out that historical trends show a typical intra-year pullback of around 14% and highlighted that the U.S. economy is expected to remain strong into 2025.
Lerner further noted a resurgence across 10 of the 11 large-cap sectors this year and anticipates that earnings will surpass expectations, with 79% of S&P 500 companies beating consensus earnings estimates by an average of 6%. He prefers large-cap stocks due to their stronger financial positions and believes that midcap stocks also present a favorable investment opportunity.
In technology news, Alphabet’s stock is declining following a revenue miss coupled with ambitious spending plans for AI. Shares of AMD are also down due to a discouraging outlook for its data center business, as the company has ceased providing forecasts on AI revenue. Meanwhile, Mattel’s stock is rising following positive profit projections related to Barbie, while Chipotle has faced challenges due to a disappointing sales forecast. Upcoming earnings reports are expected from Disney and Uber, with Ford and Costco results anticipated later in the day.
This week, the U.S. Postal Service announced it will stop accepting parcels from China, impacting shares for both Amazon and Temu. Economic data releases, including the private-sector payroll report and the U.S. trade deficit, are scheduled for later today, accompanied by remarks from several Federal Reserve officials.
Disclaimer: The content of this article is for informational purposes only and should not be construed as investment advice. We do not endorse any specific investment strategies or make recommendations regarding the purchase or sale of any securities.
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