February 5, 2025: Seeking Deeper in the Equity Market

The Deepseek issue has stirred domestic equity markets over the past couple of weeks. A Chinese AI app demonstrated results comparable to—or in some cases, better than—large language models (LLMs) developed by OpenAI, Meta, and Google. Deepseek’s ability to achieve this at a fraction of the cost has raised concerns about whether the billions spent by major U.S. tech firms on AI chips will yield meaningful returns.

What should we make of this? In the short term, the implications may be limited. A couple of key considerations: (1) Cheaper AI models could accelerate AI adoption, potentially expanding opportunities across the AI value chain, including software firms and cloud service providers. (2) The specifics of Deepseek’s model remain unclear. The notion that it represents a truly disruptive, low-cost alternative is still unproven. The market may have reacted first, saving the details for later.

More broadly, the sharp reaction in stocks like Nvidia (NVDA) highlights the risks of a concentrated market. The volatility spikes caused by perceived threats to dominant growth themes like AI underscore the fragility of concentrated leadership. While the Deepseek episode may not alter the trajectory of mega-cap AI strategies in the short term, it serves as a reminder to balance an appreciation for U.S. tech’s strong earnings power with opportunities elsewhere in the broader market.

Weekly Market Update: February 5, 2025