The artificial intelligence-powered rally in US stocks has further to run, say equity investors, although the \u201cwake-up call\u201d from Chinese start-up DeepSeek is likely to reorder the winners and losers from the rapidly evolving technology.<\/p>\n
DeepSeek last week unveiled a cutting-edge reasoning model capable of competing with those designed in the US \u2014 but apparently for a fraction of the cost \u2014 sending shockwaves through equities markets and reigniting fears among some investors of a repeat of the dotcom crash at the start of this century.<\/p>\n
By the end of Monday, chipmaker and stock market darling Nvidia had shed almost $600bn \u2014 the biggest one-day loss in US history. A ferocious US tech sell-off spread to energy stocks and utilities that had been expected to benefit from demand for power to fuel AI data centres.\u00a0<\/p>\n
But since then, the sell-off has run out of steam. US indices ended the week lower, with Nvidia close to its Monday lows. The S&P 500 and tech-heavy Nasdaq Composite lost 1 per cent and 1.6 per cent over the past five sessions.<\/p>\n
\u201cDeepSeek isn\u2019t devastating for the overall market. The impact will be far more subtle,\u201d said Alicia Levine, head of investment strategy and equities at BNY Wealth.<\/p>\n
She expects healthcare stocks and other companies with access to massive amounts of data to reap the rewards as investors move into less richly priced areas of the market. <\/p>\n
\u201cIf AI becomes cheaper and faster, it makes sense that those companies would see a boost in value,\u201d Levine said. \u201cThe picks and shovels\u201d companies in the energy and infrastructure sectors, which have been among the main beneficiaries of Big Tech\u2019s huge capital expenditure on AI, may suffer most, she added.<\/p>\n Megacap tech stocks, and excitement around the potential of AI, have been the main driver of the US stock market\u2019s strong performance in recent years. Last year the so-called Magnificent Seven tech stocks were responsible for more than half of the S&P 500\u2019s gain.<\/p>\n However, bears fear that DeepSeek\u2019s breakthrough could have huge implications for the spending plans and valuations of some of the Silicon Valley giants that have driven that rally, and for the wider, top-heavy US market, where the largest 10 stocks now account for almost two-fifths of the S&P 500.<\/p>\n DeepSeek \u201ctells us there is growing competition and AI may be harder to monetise than assumed\u201d, said\u00a0Robert Almeida, global investment strategist at MFS Investment Management.<\/p>\n He thinks the Chinese firm represents the start of a new capital cycle, creating \u201cgrowing supply, growing competition, and lower returns\u201d that may threaten the high valuations of the big AI incumbents.<\/p>\n Billionaire investor Ray Dalio told the Financial Times this week that AI hype had fuelled a \u201cbubble\u201d in US equities<\/a>. <\/p>\n Beyond Nvidia, big losers this week have been chipmaker Broadcom and energy groups GE Vernova and Constellation Energy.<\/p>\n But many investors and analysts think the sell-off was a blip rather than the start of a fundamental market shift.\u00a0<\/p>\n \u201cI don\u2019t think [we\u2019re in] a bubble and I don\u2019t think we are about to see a bubble burst,\u201d said Peter Oppenheimer, Goldman Sachs\u2019 chief global equity strategist.\u00a0Instead, DeepSeek was simply a reminder that the \u201cdominant tech companies are not immune from disruption and competition\u201d.<\/p>\n Investor appetite for US tech companies appeared undimmed on Thursday, when shares in Tesla and Meta rose after the two companies pledged to pour billions more dollars into building out their AI infrastructure. <\/p>\n Some think DeepSeek\u2019s cheap alternative to OpenAI\u2019s popular ChatGPT app could in fact spur even higher AI spending in the US. Bank analysts\u2019 notes last week talked of the so-called Jevons paradox \u2014 the theory that demand for technology such as AI will surge as it becomes cheaper and more energy efficient, leading to an overall increase in energy use.<\/p>\n \u201cEverybody is [too] negative. [DeepSeek] is not going to change the underlying demand for computing capacity,\u201d said Christopher Rossbach, chief investment officer at Nvidia shareholder J Stern & Co, citing massive spending commitments made by groups such as Meta<\/a>.<\/p>\n He does not believe Nvidia is overvalued, and thinks that rising profits will support the stock price of some Big Tech firms. \u201cYou may not have an increase in the valuation but you will benefit from the growth in earnings, in revenues and in cash flows.\u201d<\/p>\n Venture capitalist Reid Hoffman, billionaire co-founder of LinkedIn and ManasAI, sees DeepSeek\u2019s breakthrough as bullish for the wider AI sector. <\/p>\n \u201cDeepSeek isn\u2019t a game-changer for global AI hegemony, but it is a welcome wake-up call that China\u2019s competitive talent is very capable,\u201d he told the FT.\u00a0<\/p>\n \u201cMany small AI companies in the US use large models to train their smaller models more efficiently. So a quality model like DeepSeek trained using that tactic is a positive signal for what small AI companies in the US can build,\u201d he added.\u00a0<\/p>\n Some even think this week\u2019s market turmoil could spark a healthy rebalancing for the wider market.<\/p>\n Marko Kolanovic, JPMorgan\u2019s former chief global markets strategist \u2014 who has long warned of the risks to market stability from investors piling into the same handful of stocks and trades \u2014 said Nvidia\u2019s 17 per cent decline on Monday should provide the market with a \u201cshot in the arm\u201d.<\/p>\n The past week\u2019s sell-off may trigger a rotation within the tech sector into relative \u201claggards\u201d like Apple, he said. \u201cMaybe [Nvidia] isn\u2019t such a sure bet after all.\u201d<\/p>\n![\"Line](\"https:\/\/www.ft.com\/__origami\/service\/image\/v2\/images\/raw\/https%3A%2F%2Fd6c748xw2pzm8.cloudfront.net%2Fprod%2F3496fd30-dfe5-11ef-ac4a-4b9a16b5e2a0-standard.png?source=next-article&fit=scale-down&quality=highest&width=700&dpr=1\")
<\/picture><\/figure>\n![\"Line](\"https:\/\/www.ft.com\/__origami\/service\/image\/v2\/images\/raw\/https%3A%2F%2Fd6c748xw2pzm8.cloudfront.net%2Fprod%2F43c88640-dfe3-11ef-b43e-7544065958ce-standard.png?source=next-article&fit=scale-down&quality=highest&width=700&dpr=1\")
<\/picture><\/figure>\n