From Glen's Desk: DeepSeek Upsets AI-Driven Stocks

Artificial Intelligence (AI) has been a major driver of stock market growth since Open AI’s ChatGPT entered the scene in late 2022. Despite its relative success in the technology sector, AI’s momentum was shaken recently with the unveiling of China’s DeepSeek, a new AI option that boasts superior efficiency—particularly in power consumption—compared to ChatGPT. The emergence of DeepSeek has had numerous ramifications in financial markets; it not only caused a pullback in AI-driven stocks but also dragged down energy and utility sectors, which had been bolstered by expectations of surging electricity demand due to AI’s rapid expansion.

The AI Boom

Mega-cap tech companies, including those at the forefront of AI development, have experienced high returns as investors banked on AI’s potential. Companies like NVIDIA, Alphabet, and Microsoft have been prime beneficiaries of the AI boom, with their stock prices reflecting the high expectations for AI’s future role in industries ranging from healthcare to finance. However, with valuations stretched, some analysts have cautioned that these stocks were vulnerable to corrections, and DeepSeek’s entry into the space appears to have triggered one. DeepSeek’s claim of greater efficiency is a notable competitive edge. Power demands for training and running AI models have been a growing concern, with large language models (LLMs) consuming vast amounts of electricity. Many people are concerned about the environmental effects of these models.  

If DeepSeek’s technology can offer similar or superior performance to OpenAI’s ChatGPT while using significantly less power, it could shift market dynamics and challenge the dominance of current AI leaders.

Market Breadth: A Silver Lining?

Despite the recent hit to AI stocks, there may be a broader positive development for markets. Raymond James Chief Investment Officer Larry Adam pointed to the performance of the equal-weight S&P 500 versus the capitalization-weighted index, suggesting that the market may be broadening beyond just the tech sector.

For much of the past couple of years, market gains in the tech sector have been heavily concentrated in a handful of AI and mega-cap tech stocks, leading to concerns about an overly narrow rally. A broadening market, where gains are more evenly distributed across sectors, could indicate more sustainable growth.

What’s Next for AI Stocks and Investors?

The coming months will be crucial in determining whether DeepSeek’s entry significantly alters the AI landscape. Investors will be watching closely to see if DeepSeek’s technology lives up to its efficiency claims and whether it gains traction in the global AI race. If DeepSeek does prove to be a valid competitor, established AI players such as ChatGPT may need to adjust their strategies.

The implications for energy and utility stocks also remain uncertain. While DeepSeek’s claims may temporarily dampen expectations for AI-driven electricity demand, the long-term trajectory still points toward increased power consumption as AI continues to integrate into industries worldwide.

For investors, this moment serves as a reminder that while AI remains a powerful growth driver, the tech sector is not immune to volatility and competition. Diversification across sectors and a focus on fundamental strengths—rather than just AI hype—could be key strategies moving forward. Maintaining a diversified portfolio is one aspect of a solid financial plan.

As always, we advise you to discuss your positions with a financial adviser who is qualified to help you choose investments that are in your best interest. If you have any questions or concerns, reach out to our office at (469) 212-8072 or www.gdswealth.com.