(Bloomberg) -- The arrival of China’s DeepSeek is fanning concerns among investors over whether US tech stocks deserve their rich valuations.
The drop of more than 10% in the shares of Nvidia Corp. and ASML Holding NV is a sign that many traders are ready to cash out on their winnings rather than wait around to find out. Other investors, like Fares Hendi at French asset manager Prevoir AM, say they’re holding onto their Nvidia shares and waiting for more information about DeepSeek’s technological promise.
“If they really need less chips to make their model run, then yes the threat is real, it would weigh on growth and valuation,” said Hendi. “But at the moment, we’re going to take the time to really look into it.”
The Nasdaq 100 is trading at 27 times projected profits in the next 12 months, almost a quarter above its 10-year average. Nvidia, which has led the way on AI technology, has a valuation multiple of 32.
The AI mania has fueled a record-setting rally in US stocks over the past two years. Doubts about the dominance of the US in the AI theme, coupled with uncertainty about the path of interest rates and Donald Trump’s policies, cloud the outlook for US equities. All focus will be on earnings announcements from the likes of Microsoft Corp. and Apple Inc. this week to restore confidence in the so-called Magnificent Seven group of companies.
Paul Nolte, market strategist and senior wealth manager at Murphy & Sylvest Wealth Management:
“We don’t know whether this is the ‘Sputnik Moment’ for stocks, but this is certainly a wake up call that we are not the only game in town. That requires a lot of investors to look at the AI companies in a different way. To put these very high valuations in the stocks thinking they have cornered the market is a huge mistake and that is being re-rated this morning.”
Chris Murphy, co-head of derivatives strategy at Susquehanna International Group:
“It’s safe to say that anything US-AI related was very crowded and anything tech-related in China was very under owned. So you are going to see a bit of a unwind of those two different crowded sides. It’ll be interesting to see if the options market picks some winners and losers.”
Mark Malek, chief investment officer at Siebert:
“It would seem to me that if you still believe that AI is going to be big, this news out of China should only make you feel better… and perhaps present you with some buying opportunities. To be clear, that doesn’t mean that there won’t be bumps or risks (as price seeking continues). But it should be clear that there are some stocks that will be down this morning for the wrong reasons.”
Dennis Debusschere, 22V Research president and chief market strategist:
“It is possible to see a negative feedback loop of lower AI capex, downside risk to US economic growth, flatter yield curves (which have been a headwind to mega caps), and as stronger USD. But AI capex slowing is not a huge macro deal (unless its a total collapse, to early to make that call).”
Rob Almeida, strategist and portfolio manager at MFS Investment Management:
“Regarding DeepSeek, I think it’s a symptom of a ton of capital funneling into an industry that’s producing supply. And ultimately, what matters from an investment standpoint, is what’s the ROI. Right now, the ROI is very low.”
“At some point, there’s going to be less demand for those (Nvidia) chips, whether it’s because of AI scaling or VC funding for application providers starting to back away because the returns aren’t there. Something’s going to slow that down, at some point.”
Florian Ielpo, head of macro research at Lombard Odier Investment Managers:
“You can find AI outside of the US, and the valuation of some of the corps within the Nasdaq are quite elevated, making them quite vulnerable to something very difficult to anticipate” but the market reaction is disproportionate, showing “very little discrimination.”
“We need to recognize that in China you can find the equivalent to some of the Nasdaq companies, simply with multiples not at 40 but more like 10, which is a significant valuation difference.”
Nicolas Domont, a fund manager at Optigestion:
“We’re convinced that the market is overreacting to this announcement, largely due to current high valuations. In the event of a prolonged correction, we would see attractive entry opportunities.” He is not planning to sell or reduce his positions in Nvidia.”
“This announcement has caused panic in the technology sector and calls into question the massive investments of American giants in AI. However, we believe that this advancement will not disrupt the artificial intelligence value chain.”
Karen Kharmandarian, AI & Robotics portfolio manager at Thematics AM:
“For a lot of people who had never heard of them, it’s a big surprise, so some investors are inclined to shoot now and ask questions later.”
“We’re in a context of rich valuations, questions around returns on massive capex programs to build out the infrastructure, and upcoming earnings releases from big tech companies, so one can understand why some are reducing their positions before then can regroup later on.”
“On our end, we’re not sellers because we’ve got good visibility on our companies in terms of order books and growth and because lower model training costs is not synonymous of lower compute demand. It can even be an opportunity to reinforce some positions if the selling is extreme.”
“All in all there are still a lot of questions to be answered about how much time, chips, money and resources DeepSeek actually needed and to what extent they leveraged on existing LLM for the final result.”
Nori Chiou, investment director at White Oak Capital Partners:
“Small models are definitely getting attention, but the technological breakthrough isn’t as game-changing as it might seem. That said, the buzz and impact on market sentiment are very real.”
“Today, the market is more likely to find the good reasons to sell especially under the recent rally driven by strong AI investment in the US, via Stargate, and last Friday’s better than expected Meta Capex.”
Manish Kabra, head of US equity strategy at Societe Generale SA:
Recommends buying the S&P 500 equal-weighted index, which dilutes the impact of the technology heavyweights
“The onus may be on the hyperscalers to justify their capex projections, but on a top-down basis, we see that if more companies create productive ways of using AI, hyperscalers should also benefit from this.”
Ben Uglow at Oxcap Analytics:
“Multiple smaller companies will try out DeepSeek’s completely open-source product. It’s completely free, which questions the cost of existing models. Also, startup firms like DeepSeek are able to train their own models using someone else’s capital
The investment into AI is “one of the greatest spending binges in human history” but commercial use cases for generative AI remain unproven.”
Kok Hoong Wong, head of institutional equities sales trading at Maybank Securities:
“For the longest time the rally in tech has been led by NVDA and AI concept stocks. DeepSeek, a open source model, seemed to be able to run on lower-spec GPU, may pose a challenge to NVDA’s dominance, and other popular AI providers such as ChatGPT.”
--With assistance from Henry Ren, Sujata Rao, Esha Dey, Jan-Patrick Barnert, Allegra Catelli, Abhishek Vishnoi, Winnie Hsu, Sagarika Jaisinghani and Michael Msika.
(Updates with quotes from US analysts.)
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