Market Commentary
Chinese AI startup DeepSeek is leading to a massive route in U.S. and European technology stocks, as investors questioned bloated valuations for America’s largest companies.
DeepSeek, a one-year-old Chinese AI startup, made headlines over the weekend with a groundbreaking demonstration of AI models that rival the performance of chatbots like ChatGPT at a fraction of the cost. This has triggered a significant market sell-off, driven by a few key factors.
First, Washington’s ban on the export of advanced technologies, such as GPU semiconductors, to China seemed to place a major hurdle in the path of Chinese AI development. However, DeepSeek’s breakthrough suggests that Chinese engineers have found innovative ways to bypass these restrictions, achieving greater efficiency with fewer resources.
Second, this development raises concerns about the massive investments made by tech giants like Meta and Microsoft, which have committed over $60 billion in capital expenditures this year to build out AI infrastructure. If efficient models like DeepSeek’s can compete without such staggering investments, it challenges the notion that heavy capex is the optimal approach to leading in AI.
Lastly, it challenges the idea that China’s AI technology is years behind their U.S. counterparts. As investors continue to digest this information, it is key to note that AI dominance cannot be taken for granted.
This week promises to be volatile, with key earnings reports from mega-cap companies such as Microsoft, Tesla, and Meta. Adding to the market’s focus will be the Federal Reserve’s rate decision on Wednesday. While a rate hike is widely considered off the table, the spotlight will be on Jerome Powell’s press conference for insights into the Fed’s outlook. The decision comes amidst a challenging backdrop for the Fed. Inflation remains above target, the labor market continues to show strength, and economic growth has been solid. Complicating matters further, President Trump has explicitly urged the Fed to lower rates, creating an additional uphill battle.
Later in the week, after the decision, the Fed will gain more clarity on the economic picture with the release of first-quarter GDP data. Expectations suggest annualized growth of 2.7%, a slowdown from the prior 3.1% figure. Additionally, on Friday, the Fed’s preferred inflation gauge is set to be released, with projections indicating a reading around 2.8% which is still well above the 2% target.
Economic Releases This Week
Monday: New Home Sales
Tuesday: Durable Goods Orders, S&P Case Shiller Home Price Index, Consumer Confidence
Wednesday: FOMC Interest Rate Decision & Jerome Powell Press Conference
Thursday: GDP, Initial Jobless Claims
Friday: PCE Index
Stories to Start the Week
Colombia walked back from the brink of a trade war with the U.S., reaching an agreement on accepting deported migrants being returned on military planes.
Southern California rain helps firefighters but creates risks of flooding and toxic ash runoff.
Here is a deeper dive into DeepSeek.
The CIA shifted its stance about the origin of the virus that causes Covid-19.