A low-cost artificial intelligence tool invented by DeepSeek, a Chinese startup, sent shivers through global stock markets Jan. 27, especially the high-flying technology sector.
As of 11:10 a.m. EDT, the tech-heavy Nasdaq Composite was down 2.9%, while the broader S&P 500 sank 1.7%. Individual stocks that are big players in AI, like chipmaker NVIDIA had plunged 15.1%, while Broadcom slumped 15.5%, Micron Technology dropped 10.5% and Advanced Micro Devices fell 5.8%.
David Bahnsen, managing partner and CIO at The Bahnsen Group, which has $6.5 billion in assets under management, said as DeepSeek AI models appear to be cheaper than those of established AI companies like OpenAI, new AI models might not require as many chips as previously thought from semiconductor giants like NVIDIA.
“What makes Monday's tech sell-off so jarring is that the valuations of many of these AI and tech companies offer no margin of error,” Bahnsen said. “Excessive valuation always becomes a problem, eventually, but fundamental news (like DeepSeek) becomes a heightened problem when it is combined with excessive valuation.”
Boosted.ai, a Toronto-based AI software company that serves asset management firms, described the emergence of DeepSeek's AI model as a "Sputnik moment" for the AI industry, highlighting the potential for Chinese companies to compete with and even surpass U.S. tech giants in AI development.
The technology sell-off, Boosted.ai noted in a report released Jan. 27, is linked to investor concerns about the sustainability of high spending on AI infrastructure by U.S. companies, as DeepSeek's model offers similar performance at a fraction of the cost. The model's efficiency has also raised questions about the necessity of the massive capital expenditures by U.S. tech giants, which have been a key driver of their stock valuations.
“This has led to a reevaluation of the investment strategies of U.S. tech companies, as investors question the return on investment from their substantial spending on AI technologies,” Boosted.ai said in the report. “The (DeepSeek) model's open-source nature and cost-efficiency have further intensified the competitive landscape, compelling U.S. companies to reconsider their pricing and development strategies.”
Bahnsen concluded that if AI is “an investable thing,” it will be because there are investable companies using it as a tool to enhance productivity and efficiency. “If the only investable aspect of AI is through the chips and back end, then it is not investable for long,” he cautioned.
But James Demmert, CIO at Main Street Research, with $2.5 billion in AUM, thinks the Jan. 27 sell-off was an overreaction to DeepSeek, as well as a “needed overdue correction” in the markets.
“Given the Fed (Federal Reserve) meeting this week, which may have a hawkish tone, we think that this correction may have further to run but will create a great window of opportunity to be a buyer of tech, telecom and the market as a whole,” he added.
Demmert also does not view DeepSeek as presenting a threat to companies like NVIDIA. “Though these disruptions may cause leadership changes in the technology that drives AI, it is confirmation that AI is real and that we are in the early stages of this transformative technology, which will benefit tech and telecom companies, (and) other industries such as healthcare,” he said.
UBS also downplayed the overall impact of DeepSeek in a Jan. 27 report. “If DeepSeek’s model were to prove to be the way to go for the broader AI industry, it is not necessarily a zero-sum game,” UBS said. “The overall market can grow, with potentially lower costs accelerating AI adoption across industries and further improving productivity gains.”
Still, DeepSeek's breakthrough has also raised questions about the effectiveness of U.S. export controls on advanced AI chips, as the company has somehow managed to achieve significant advancements despite such restrictions, Boosted.ai noted.
“This has prompted discussions on the need for the U.S. to rethink its approach to maintaining technological leadership in AI, as the current strategy may inadvertently fuel innovation in China,” the firm stated in the report.
Bahnsen similarly speculated that “attempts to limit China’s access to U.S. technology, in this case chips and chip equipment, have very likely incentivized China to develop on their own, and become more independent of U.S. capabilities in the process.” He also said the idea that a high level of spending on AI “may not be necessary or prudent to begin with — well, that could prove to be a fundamental game-changer.”
Could the appeal of DeepSeek compel institutional investors in the West to reconsider investing in China?
Main Street Research's Demmert doesn’t think so.
“We do not think that DeepSeek and its potential success is enough to bring investors back to China just yet,” he said. “Moreover, we think it is highly likely that within days the Trump administration will bring warnings which will include the risk of DeepSeek gathering personal information, as well as questions around the reality of DeepSeek’s power. China's economy is troubled and needs broad solutions beyond DeepSeek to attract investors.”
Josh Pantony, CEO at Boosted.ai, cautioned that while there are opportunities for institutional investors to make smart plays into the Chinese stock market, “in a world where there is a looming specter of 25%-plus tariffs, it seems unlikely that there will be a huge exodus of funds from U.S. sources into Chinese stocks.”
Ian Toner, CIO at consulting firm Verus Investments, said most of his clients are focused on making very long-term decisions about allocations, not tactical bets.
“The big impact of the news today is mainly short-term price reaction to a potential question about business model efficiency for specific companies that have been trading very rich recently, and it has allowed the market to take back some of the recent big gains in those stocks," Toner added.
Verus has about $1 trillion in assets under advisement.
However, Chris Brigati, CIO at Southwest Business Corp., a San Antonio-based investment firm with more than $1 billion in assets under management and also known as SWBC, is more sanguine about investing in China.
“Broadly speaking, China is a demonstrable leader in AI and technological innovation, investors would be well served to participate in such explosive growth opportunities,” he said. “In recent years, the Chinese government has been making efforts via easier regulation and tax incentives to attract foreign investors. U.S. investors may naturally benefit from the opportunity to diversify investments into the Chinese economy which typically reacts differently to global stimuli as compared to U.S.-based entities.”
Brigati also noted that maintaining investment interests in China provides U.S. institutional investors with access to the second-largest consumer-based economy in the world.
“Tapping into such a large and still expanding consumer base would serve both investors and U.S.-based manufacturers with another outlet for goods and services. Naturally, the potential impact of Trump-led tariffs must be considered as a possible obstacle to maximizing the opportunity, but as we know in the U.S., the power of the consumer is remarkably strong.”
