MW Why DeepSeek could still shake up stock prices
By Joy Wiltermuth
DeepSeek's full impact isn't yet reflected in U.S. stocks, says Don Townswick at Conning
The ramifications of Chinese startup DeepSeek, with its promise of delivering cheaper, more energy-efficient alternatives to harness artificial intelligence, have yet to be fully reflected in U.S. equities.
That's the thinking of Don Townswick, director of equity strategies at Conning Asset Management, which oversees $170 billion in assets.
"If it turns out to be a little more sketchy, a little less valid than what people are saying now, the 'Magnificent Seven' stocks would tend to benefit," Townswick told MarketWatch.
On the flip side, if DeepSeek ends up delivering a less costly way forward, "I think it's going to be a lot easier for typical companies to more easily use AI in their business," he said.
Under that scenario, Townswick sees benefits from DeepSeek that could be accretive to earnings for a broader mix of companies beyond the current AI heavyweights, through greater efficiencies and productivity from less-expensive AI solutions.
Read: The blogger who helped spark Nvidia's $600 billion stock collapse and a panic in Silicon Valley
AI spending race
When DeepSeek's chatbot launched earlier this month in the U.S., it shocked Wall Street, prompting a historic $600 billion one-day wipeout for AI chip developer Nvidia Corp.'s $(NVDA)$ stock.
It also put huge sums being pledged for AI infrastructure by U.S. megacap tech companies under a microscope. Rather than back down, the U.S. spending race has intensified.
Meta Platform Inc.'s $(META)$ Chief Executive Mark Zuckerberg spoke a week ago of spending "hundreds of billions of dollars" on AI infrastructure in the coming years, after pledging $60 billion to $65 billion on the effort this year.
This week Alphabet Inc. $(GOOG)$ $(GOOGL)$ forecast $75 billion in capital expenditures in 2025, a bigger figure than Wall Street was anticipating. Microsoft Inc. $(MSFT)$ said its cloud and AI spending grew 95% in its fiscal second quarter to $22.6 billion.
"Spending on anything AI has got the market thinking: 'Geez, how much more has to be done before we see capital expenditures reduced, instead of increasing by tremendous amounts?'" said Robert Pavlik, senior portfolio manager at Dakota Wealth Management.
"When is enough, enough?" Pavlik asked.
Fresh AI-spending commitments helped lift shares of Nvidia on Wednesday, while a slump for Tesla Inc., $(TSLA)$ Apple Inc. $(AAPL)$ and Amazon.com Inc. $(AMZN)$ shares could suggest concerns about President Donald Trump's trade war.
China this week saw the U.S. apply new 10% tariffs, while Canada and Mexico saw Trump threaten but delay 25% tariffs by a month.
Catching up with the 'Mag Seven'
Despite the high scrutiny now on AI stocks, there also has been renewed focus from investors on other areas of the market.
"There has been a bit of a rotation," said Garrett Melson, portfolio strategist at Natixis Investment Managers, noting that while tech has been under pressure, defensive and rate-sensitive parts of the market have been gaining.
"That's been the name of the game this year."
See: Big Tech stocks struggle after quarterly earnings as Alphabet sees steep drop
?Townswick at Conning still sees reason for caution. For one thing, the growth rate of "Magnificent Seven" earnings has been tailing off in recent quarters, especially since the group reached a 61% yearly rate in the fourth quarter of 2023.
"That was a high-water mark," Townswick said, adding that forward expectations have the rate closer to 16% to 18% for the end of this year. "That's still pretty good growth," he said.
But that also would move the group closer ?to the roughly 12% to 13% yearly growth rate expected for the rest of the companies in the S&P 500 index, potentially making the high valuations of the "Magnificent Seven" tougher to justify.
Melson at Natixis still sees positive signs for stocks in recent dip-buying.
"The most surprising part of the past couple of weeks, given the news around DeepSeek and shocks on the trade front, is the fact that stocks were still close to their all-time highs," Melson said. "There is still a pretty resilient market here."
-Joy Wiltermuth
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February 05, 2025 17:21 ET (22:21 GMT)
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