How DeepSeek Could Deliver Another Blow to the Stock Market

The rise of Chinese startup DeepSeek, promising cheaper and energy-efficient alternatives to harness artificial intelligence, may have significant implications for U.S. equities that are yet to be fully realized. According to Don Townswick, director of equity strategies at Conning Asset Management—which oversees $170 billion in assets—the full impact of DeepSeek has not yet reflected in the market, especially in the stocks of established tech companies known as the “Magnificent Seven.”

What DeepSeek Represents

DeepSeek’s chatbot launch earlier this month sent shockwaves through Wall Street, leading to a staggering $600 billion wipeout of AI chip developer Nvidia Corp.’s (NVDA) stock. This substantially raised questions about the massive sums being invested into AI infrastructure by prominent U.S. tech companies. Instead of reducing their commitments, these companies have doubled down on AI spending, further complicating the market’s outlook.

Impacts on Investment Strategies

As mentioned by Townswick, if DeepSeek proves to be a more cost-effective solution for integrating AI into business processes, it will create widespread opportunities for typical companies, beyond the current AI heavyweights. “The potential for accretive effects on earnings could increase productivity and efficiencies across a broader range of firms,” Townswick articulated.

If DeepSeek’s strategies indeed succeed, larger tech firms, particularly the “Magnificent Seven,” could experience a decline in their dominance in the stock market. Townswick mentions that if the validations of DeepSeek’s business model prove to be misguided, it would favor established tech giants benefiting from their existing profitable business models, especially if AI solutions remain expensive and less accessible.

Intensified AI Spending Race

In light of DeepSeek’s launch, big names in technology have reaffirmed their commitments to AI infrastructure. Meta Platforms Inc.’s (META) CEO Mark Zuckerberg announced plans to invest “hundreds of billions of dollars” over the next few years on AI, complementing an already earmarked budget of $60 billion to $65 billion for the current year. Similarly, Alphabet Inc. (GOOG) (GOOGL) forecasted capital expenditures of $75 billion for 2025, exceeding Wall Street’s expectations. Microsoft Inc. (MSFT) also reported that its cloud and AI spending surged 95% to $22.6 billion in its fiscal second quarter.

As Robert Pavlik, senior portfolio manager at Dakota Wealth Management, put it, “Spending on anything AI has got the market thinking: ‘Geez, how much more has to be done before we see capital expenditures reduced, instead of increasing by tremendous amounts?’” This wave of automatic spending bodes uncertainty for investors and raises questions about long-term financial sustainability in the tech industry.

The Effect on Stock Performance

Despite the pressures from AI stock dynamics, a rotation seen within the broader market is notable. Garrett Melson, portfolio strategist at Natixis Investment Managers, mentioned that defensive and rate-sensitive sectors have shown resilience while tech stocks face headwinds. The combination of this rotation and heightened scrutiny on stocks in the AI domain suggests a more cautious approach from investors.

Townswick remains temperate regarding the market’s movement. While the earnings growth rate of the “Magnificent Seven” has undoubtedly slowed in recent quarters—from a high-water mark of 61% yearly growth at the end of last year to a projected 16% to 18% for this year—he points out that this isn’t a disaster. However, it does place these growth rates closer to the 12% to 13% expected for the larger S&P 500 index, making current valuations for these mega-cap stocks increasingly difficult to justify.

The Resilience of the Market

Notwithstanding the chaos unleashed by DeepSeek and the ongoing trade tensions, recent market stability has surprised analysts. “The most surprising part of the past couple of weeks, given the news around DeepSeek and shocks on the trade front, is the fact that stocks were still close to their all-time highs,” Melson remarked, suggesting underlying resilience amid uncertainty.

Conclusion

As the ramifications of DeepSeek unfold in the stock market, stakeholders must keep a keen eye on the evolving technology landscape. While the existing giants foster robust plans for AI investments, the impact of innovative disruptors like DeepSeek could challenge their standing, reshaping market dynamics and drawing a more comprehensive range of companies into the AI narrative.