S&P 500: Deepseek
A Risk to the Magnificent 7
Disrupting AI Valuations?
If it hasn’t already— “DeepSeek” is likely to find itself in a headline you read throughout the week, or perhaps this will be the first and only mention of it before it fades. I am selecting to pay attention because this emerging narrative could disrupt the AI-driven valuations that have bolstered the Magnificent 7 and much of the broader market.
What is DeepSeek? In short, DeepSeek is an AI startup that has developed a high-performing AI model with a modest $6 million investment—matching the capabilities of models from tech giants like OpenAI, whose operating expenses are projected to hit $8.5 billion in 2024. DeepSeek’s cost-efficient model poses a genuine threat to the demand for high-priced AI hardware.
Why it Maybe Matters— DeepSeek’s ability to achieve similar performance with dramatically lower costs introduces the potential for reduced demand for critical semiconductor components, a key pillar of the AI narrative. This could ultimately lead to a revaluation across the AI space. While the possibility of commoditization has always loomed in AI, DeepSeek may be the first significant early sign of this shift.
The chart below, courtesy of Bank of America Global Investment Strategy, highlights the 75-year high in U.S. equities relative to the rest of the world. At some point, every bubble pops.
As I’ve written in past letters, while I enjoy exploring market narratives and contemplating their potential impact, I rely heavily on my systems for decision-making. I’m confident that before any market “pop,” my risk systems will signal an alarm. At the end of last week, however, all systems remained clear.
It is the final week of the month, and as always in the last week of each month this weekly note provides updates charts for all active trade ideas— today includes the first new trade idea for 2025.
Subscribe to receive access to each Sunday note, along with out of cycle letters when market conditions shift to risk-off, and access the series of trade ideas updated and maintained at the end of each month. Subscribe by the end of the month and receive a month free.
New All Time Highs
The S&P 500 closed last week at fresh all-time highs, gaining +1.74% over the week. The Nasdaq also advanced, rising +1.55% and coming close to setting a new record high. Meanwhile, ARKK—the modern-day small-cap barometer—surged +4.56%. Despite the earlier discussion about DeepSeek— the market continued its advance.