The impact of DeepSeek on U.S. tech stocks and the broader market

By Raj Singh
Portfolio Manager, Multi-Asset

U.S. tech stocks recently experienced a sharp sell-off and remain volatile so far in 2025. Investors are increasingly worried about whether the equity market rally can continue or if it has peaked, given the relatively high valuations. Adding to this uncertainty is the emergence of DeepSeek, a Chinese startup that has developed a open-source AI language model R1, which has quickly climbed the app store charts, gaining attention for its performance comparable to Western AI models achieved at substantially lower cost. If DeepSeek's cost advantages are proven, it could challenge the belief that heavy capital expenditures on advanced chips are necessary. This has already impacted chipmakers, who were hit hardest recently.

DeepSeek comes at a vulnerable time for big tech firms, as investors question the sustainability of high earnings growth and potential return on Al related investment. Raising concerns across the AI ecosystem, including data centers and energy.

AI's rapid evolution will likely continue to disrupt markets, presenting both risks and opportunities. While DeepSeek’s innovation intensifies scrutiny on U.S. tech giants, it may also democratize AI technology, lowering the cost of training advanced models and accelerating widespread adoption across various industries. This could lead to long-term productivity gains across the global economy potentially providing tailwind to broadening earning growth. Despite potential challenges for certain chipmakers, demand for computing infrastructure and AI applications is likely to remain strong and the recent market dip may offer opportunities in area such as data centers and software sectors.

Another concern to the market is the uncertainty surrounding the Trump administration’s policies. It will likely remain a defining theme in 2025, particularly regarding the scale and scope of its objectives.

With tariffs already announced for Mexico, Canada, and China, and more seemingly on their way, these tariffs are expected to extend to a broader range of consumer goods than in Donald Trump’s first term, potentially exerting greater upward pressure on inflation expectations. While inflation remains a key concern and the Fed may initially look past tariff-driven inflation, persistent price pressures and the risk of unanchored inflation expectations could prompt a more cautious stance. But the bar for a rate hike remains high as higher policy uncertainty will prompt companies to delay their investment plans and weigh on economic growth.

While investors should remain mindful of extended valuations and the challenges ahead, today’s macroeconomic landscape differs meaningfully from past market peaks, leaving room for continued growth especially if earnings growth continues to deliver as expected.

This content was published on Hong Kong Economic Journal on 4 March 2025. (Chinese only)

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