DeepSeek selloff: what now for the AI sector?

DeepSeek selloff: what now for the AI sector?

What has happened?

Chinese AI company DeepSeek announced a significant breakthrough with R1, its large language artificial intelligence (AI) model. The start-up claimed it had achieved performance comparable to leading AI systems from OpenAI and Google, but at a fraction of the cost. This development led to a substantial market reaction, with Nvidia's stock price dropping nearly 17%, erasing approximately $600 billion from its market value. The broader tech sector across the US and Europe also experienced declines, as investors reassessed the competitive landscape in artificial intelligence. 

Why does this matter?

DeepSeek's claims challenge the prevailing belief that massive investment in data and computing resources will be required to advance AI capabilities. By developing a high-performing model with significantly lower costs, DeepSeek has the potential to democratise AI development, making it more accessible to a wider range of companies and researchers. This shift could disrupt existing market dynamics, particularly affecting companies like Nvidia that have benefited from the high demand for powerful AI processors. 

What next?

Industry observers anticipate increased competition in the AI sector, as more companies attempt to replicate or build upon DeepSeek's cost-effective approach to model development. Nvidia and other established players might need to adapt their strategies, and demand forecasts, to address potential shifts in demand for their high-end processors. Additionally, there could be broader implications for AI research and development, with a possible acceleration in innovation due to lowered barriers to entry.

So what?

The scale of the initial reaction corresponds to the size of AI-related stocks in major equity indices such as the Nasdaq or the S&P500. Demanding valuations for AI growth related stocks, especially in the US, have meant there is little margin for error or disappointment.

The market reaction at this stage has been mainly stock-specific. This morning equity and bond markets are normalising and the S&P500 is down only 1% from Friday’s close.

AXA IM Select view

Our US equity portfolios have traditionally been neutral or underweight Nvidia and the Magnificent 7. We are moderately overweight US vs Europe and emerging equities. Nevertheless, we remain conscious of demanding valuations in some sectors, including tech. We look for a broadening of earnings growth across other sectors, highlighting the need to diversify within US equity markets.