Today's markets: What DeepSeek means for markets

"Only when the tide goes out do you learn who has been swimming naked.” - Warren Buffett. 

Well, the tide well and truly went out yesterday. Wall Street was roiled by DeepSeek, a Chinese AI firm that is able to make large-language models for a fraction of the cost of Google or OpenAI. The S&P 500 fell 1.5 per cent, the Nasdaq 100 dropped 3 per cent, and the Russell 2000 gave back 1 per cent. Losses on the futures had been heavier but buyers were found as the market digested and discounted a tonne of noise about the model. 

Trump called DeepSeek a “wake-up call” for the American industry. OpenAI’s Altman vowed “better models”. Ray Dalio said the AI boom looked very much like dotcom bubble. Nvidia said the R1 model from DeepSeek was an “excellent AI advancement” but stressed it still requires “significant numbers of Nvidia GPUs”. 

So, what are the lessons? Here are some ideas. 

DeepSeek seems to have altered the rules of engagement. It seems that soaring capex is not required to launch a successful AI.

Nvidia’s 17 per cent decline in value, by $589bn, is the biggest market cap loss ever in a single day – not to be sniffed at when we look at exposures and margin debt. Though analysts seem to generally be of the opinion that the move in the stock yesterday was overdone and is a “buying opportunity”.

But the concentration of the US market has exposed too heavy a reliance on a handful 

of stocks. Nvidia was always going to look too rich at some point, the question was when. Last week’s ‘Stargate’ announcement of a $500bn US AI infrastructure plan seemed the perfect “all-in” moment to unravel – the market will find a way to inflict maximum pain. 

We now move into a phase of AI that will be marked not by who can spend the most but by who can do it the cheapest. This is an important change of dynamic and is essential to the long-term success of the technology, to avoid vanity spending and misallocation.

If AI is actually now cheap rather than prohibitively expensive, then there are more winners than losers from this. It’s all about allocation and dealing with this rotation. There were more advancing stocks on the NYSE than declining, though this was the opposite on the tech-focused Nasdaq. 

The energy implications may be more significant than anything else. AI energy play Constellation Energy (US:CEG) tumbled 20 per cent., which was more than Nvidia’s 17 per cent loss. Vistra was down almost 30 per cent while Talen Energy and GE Vernova were both down more than 20 per cent. 

But maybe it’s a load of baloney. “It seems categorically false that ‘China duplicated OpenAI for $5mn’ and we don’t think it really bears further discussion,” analysts at Bernstein said. Nevertheless, talk of a price war and competition in a world of big-spending idiocy is enough to justify lower multiples for now. 

Elsewhere, the FTSE 100 managed to remain calm throughout Monday’s session and closed flat on the day. Asian stocks mainly continued the slide that started Monday with Japanese chipmakers. This morning Frankfurt and London opened firmer, Paris a bit lower. The tech contagion is not happening just yet. 

US Treasury secretary Bessent said he is pushing for universal 2.5 per cent tariffs that rise by that amount each month up to 20 per cent. Trump said he wants much bigger tariffs than 2.5 per cent. The dollar caught some bid again today, having retreated a bit earlier on the DeepSeek-inspired risk-on drop in yields. 

By Neil Wilson, an analyst at TipRanks