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Bear Market
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Market Decode
Disclaimer:
Please read important information at the end of this program. Recorded on 1/30/25.
[Chris Hyzy speaking throughout]
Some are calling it the DeepSeek "Frenzy." On Monday, January 27th, an entire chain of industries tied to Artificial Intelligence came under severe pressure by China-based DeepSeek's announcement of a lower cost, more efficient and less power-hungry AI tool.
The news rattled investors, leading to a sharp 3% decline in the tech-heavy NASDAQ, driven by a double-digit decline in one of the largest semiconductor companies in the world by market capitalization.
Lower third:
Chris Hyzy
Chief Investment Officer
Merrill and Bank of America Private Bank
I'm Chris Hyzy, with thoughts on what this means — and why we believe the fears may be overblown and the news, in the long run, contains some positives.
So, what's behind the "frenzy"?
DeepSeek's energy-efficient AI tool, which was reportedly developed at far lower cost than existing models, sparked fear and concern by investors on its potential impact on the following:
- Capital investment in Artificial Intelligence
- Future energy demand
- and whether U.S. AI dominance would be dented or even gone.
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- Capital investment in AI
- Future energy demand
- Whether U.S. AI dominance would be affected
While those concerns are understandable, we see the DeepSeek news as part of an evolving AI story that will contain many surprises, disruptions, and benefits.
Here's our view:
First, lower development costs, greater efficiencies, and less power usage point to higher productivity gains. That would be good for growth in the economy and positive for market growth, both nominal and real.
On-screen copy:
- AI evolution could lower development costs and increase productivity
- Easier AI adoption could lead to greater profitability for companies
- Competition could foster accelerated AI innovation
Second, these benefits could lead to wider and easier adoption across the corporate landscape, leading to potentially wider margins, and greater profitability for companies.
And third, we expect this new competition in the AI space to foster innovation at an accelerated rate.
Lastly, we don't believe that future power demand is likely to wane on the back of DeepSeek's news. Why? Because we expect even wider adoption. With wider adoption, the demand curve for power needs should go up across the globe, not down.
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Wider adoption could increase the need for power across the globe.
Let's turn to America's dominance in the AI space. Is it now gone?
We don't believe so. We expect this competition to kickstart further innovation.
U.S. capital investment still leads the world by many multiples, and the equipment, design, engineering, and power access needed to lead in the future is overwhelmingly U.S.-born.
What about the overall impact on markets?
On-screen copy:
New supports our:
Productivity theme including increased U.S.-led economic and profits growth
Infrastructure and power theme
View that AI software segment could benefit as the cost of integrating AI drops
If anything, this latest news supports our productivity theme, including above average, U.S.-led economic growth and double-digit profits growth.
And it supports our infrastructure and power generation theme, as well as our view that the AI software segment should benefit as the cost of integrating generative AI drops.
DeepSeek does call into question the premium valuations of some mega technology stocks and whether their future growth rates can be sustained.
But we believe the generative AI movement is just beginning. The robotics revolution is coming quickly, and the most advanced companies should remain leaders — even in the face of competition.
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The generative AI movement is just the beginning of the tech evolution.
And as AI adoption grows, we expect the "best of the rest" — those 493 S&P 500 firms not among the "Magnificent 7" companies — to see a boost in multiples as their profitability rises.
For more timely insights on the economy and markets, be sure to read our weekly Capital Market Outlook.
Thanks for watching, and that's the Market Decode.
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[End of transcript]
Some are calling it DeepSeek "frenzy." The recent debut of China-based tech startup DeepSeek's reportedly lower-cost, more efficient AI model led to a 3% decline in the tech-heavy Nasdaq index shortly after its announcement.Footnote 1 It also sparked concerns by investors about the potential impact it could have on America's dominance in the AI space.
"While those concerns are understandable, we see the DeepSeek news as part of an evolving AI story that will contain many surprises, disruptions and benefits," says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. In fact, Hyzy says, the generative AI movement is just the beginning in a larger tech evolution. Watch the video above for more on what this new competitor in the AI space might mean for the markets and investors.