DeepSeek Delivers a Startling 'Never in Market History' Gut Punch
It's now clear that AI is going to be very competitive, and that the U.S. underestimated China.
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The market was hit hard on Monday, with the Nasdaq 100 QQQ dropping 3% and the S&P 500 losing 1.4%. The damage was primarily in the technology sector, which suffered its worst performance in three years. However, breadth wasn’t terrible, with around 4,000 gainers and 5,600 decliners. The DJIA finished in the green, and the Russell 2000 exhibited some relative strength.
The surprise introduction of an AI model called DeepSeek caused the carnage in the technology sector. DeepSeek claims to have been developed at a fraction of the cost of other AI models and performs just as well.
Never in market history has the introduction of a product from a single company had such a profound impact. Trillions of dollars in market cap were lost, and Nvidia NVDA alone lost more than $589 billion, a record for a single stock.
The market hates uncertainty, and DeepSeek delivered a truckload. It is unclear how it will affect the development of other AI models and its impact on semiconductors and data centers. The only thing that is clear is that AI is going to be extremely competitive, and the U.S. was wrong to underestimate China.
There was a parade of pundits and analysts proclaiming that the market overeacted to the DeepSeek news, but there wasn’t much recovery intraday, although the indexes did not close at the lows of the day.
Upcoming earnings calls from the Magnificent Seven names and other companies leveraged to AI will be even more important now as they provide insight into how DeepSeek may impact their plans.
It is probably positive that AI is taking this hit and shaking up the complacency that has developed. The mega-caps had become safe havens simply because of their relative strength, but valuations do matter, and now there will be more focus on them.
The bears are licking their lips and anticipating a major market top, but it is far too early to make that declaration. We should see a bit more clarity about AI as earnings start to roll in.
Have a good evening. I’ll see you Tuesday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
