DeepSeek’s latest AI model prompts market frenzy, but investors should remember to stay the course

Today, markets have been adjusting to a new threat: a new artificial intelligence (AI) model is challenging many assumptions about U.S. technology dominance.

DeepSeek, a two-year-old Chinese startup, launched its latest model early last week. The model is an open reasoning large language model (LLM) developed using adaptations to Meta’s open source Llama. Critically, DeepSeek’s latest model matches the performance of OpenAI’s cutting edge model across math, coding and reasoning tasks at a reported approximately 95% discount to operate and train.

What’s the big deal?

The market is worried that DeepSeek’s cost efficiency threatens the assumed dominance and valuation premium that leading U.S. semiconductor and infrastructure companies have enjoyed. Indeed, some of the stocks that are taking the biggest hit so far today are Nvidia (DeepSeek built their model on older chips), Constellation Energy (AI models may consume less energy), and Eaton (there may not be the same need to build power transmission). Some of the “hyperscalers” who were driving AI capital expenditures are down on the day, but are outperforming the stocks that are more levered to AI infrastructure.

What are we watching?

Concentration of the U.S. large-cap stock market in mega-cap tech names is a risk facing investors in 2025. But the AI opportunity is not a monolith. Jevons Paradox states that increased efficiency can lead to increased consumption of a resource. Lower costs for AI models could lead to faster adoption by corporations and households. Further, the drop in the headline stock index masks some encouraging performance underneath the surface. The average stock is only down 15 basis points. Multi-asset investors can also welcome the rally in core fixed income. Another note on DeepSeek, there are still many unanswered questions to the validity of the model, the true cost to train it and its implications for U.S. tech firms.

The bottom line

We expect the AI trend to continue to drive economic and market outcomes. However, continued competition and innovation will create winners and losers underneath the surface of equity indices. We encourage investors to look for opportunity while maintaining an overall portfolio that is resilient to the potential shocks that could occur. Some ways to ensure portfolio resilience could include checking in on your overall plan, proper diversification, a consistent approach to rebalancing and a reminder that stock market volatility is normal (the average year sees a nearly 15% peak to trough decline).

Past performance is no guarantee of future results. It is not possible to invest directly in an index.

All market and economic data as of 01/27/2025 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

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