It was a busy week in the markets, and it all started with a small Chinese startup company that is shaking the pillars of the US stock market. For over a year, the US stock market has been dominated by a handful of very large US tech companies competing for dominance in the field of AI (artificial intelligence). It has become accepted as fact that massive amounts of money must be spent by anyone seeking to compete at the leading edge of AI. Developing and training AI models requires tens of thousands of very expensive, very fast computer chips. A single data center housing the computers using these chips can consume huge amounts of electricity, often more than enough to serve a city of over 700,000 households or 1.8 million people.
Chip stocks and energy stocks in particular, have been rallying on this new reality. But a tiny Chinese company, DeepSeek, has now thrown the whole AI movement into turmoil with its recent announcement this week. Basically, DeepSeek demonstrated that it has been able to make tremendous advances in their AI model, even outperforming some US models, while using older chips and spending MUCH less than expected. US tech stocks tumbled on the news.
“DeepSeek is also catching investors off guard because of the low development costs for its AI app, which Wedbush Securities analyst Dan Ives pegged at only $6 million. By comparison, OpenAI, Google and other major U.S. companies are on track to invest a total of roughly $1 trillion in AI over the coming years, according to Goldman Sachs.”
https://www.cbsnews.com/news/what-is-deepseek-ai-china-stock-nvidia-nvda-asml/
This announcement is causing investors to reconsider the assumptions that have driven stock prices of AI-related companies so high. If no one saw this coming, why would investors assume there won’t be more disruptions?
“DeepSeek has taken the market by storm by doing more with less,” said Giuseppe Sette, president at AI market research firm Reflexivity, in an email. “This shows that with AI the surprises will keep on coming in the next few years.”
“The fact that this technology is supposed to take less energy and is more cost-effective than U.S.-based models has U.S. technology investors very concerned,” Jay Woods, chief global strategist at Freedom Capital Markets, said.
The accomplishments of DeepSeek seem to be legit, as some of Silicon Valley’s legendary investors are praising the news.
“Some experts praised DeepSeek’s performance, with noted tech investor Marc Andreessen writing on X on Jan. 24, “DeepSeek R1 is one of the most amazing and impressive breakthroughs I’ve ever seen — and as open source, a profound gift to the world.”
Other big names in Silicon Valley are using this as an opportunity to criticize the approach US tech companies have taken in their efforts to develop AI.
Have a great weekend.
Jack C. Harmon II, CFP®, CIMA
Principal, Harmon Financial Advisors
Registered Principal, Raymond James Financial Services
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