February 13, 2025

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DeepSeek selloff gets ugly as Nvidia extends loss to 17%

DeepSeek selloff gets ugly as Nvidia extends loss to 17%

From New York to London, Tokyo and Toronto, stocks are getting hammered in DeepSeek rout

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Wall Street had a rough start to the week on concern that a cheaper artificial intelligence-model from Chinese startup DeepSeek could make valuations of the technology that has powered the bull market tough to justify.

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From New York to London and Tokyo, stocks got hammered. The S&P 500 dropped 1.9 per cent and the Nasdaq 100 slipped 3.2 per cent. A closely watched gauge of chipmakers plunged almost 7 per cent. Nvidia Corp., the poster child of the AI frenzy, sank 17 per cent and headed toward the worst market-cap loss for a single stock in market history. Equities remained lower after news that DeepSeek is restricting signups for new users to people with a mainland China telephone number.

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In a rush for safety, Treasuries rallied, driving yields to the lowest levels this year. Haven currencies like the yen and the Swiss franc climbed. And the crypto world came under heavy pressure after a big rally, with Bitcoin sinking.

“What was shaping up to be a big week in the markets got even bigger with the disruption in the AI space,” said Chris Larkin at E*Trade from Morgan Stanley. “That could make this week’s megacap tech earnings even more critical to market sentiment.”

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Monday’s plunge drove new fissures into a market narrative that prevailed since the re-election of Donald Trump in November, the America-first, tech-fuelled uber bullishness that saw a clear upward path for risky assets spurred by deregulation, tax cuts and even government sponsorship of AI investment. Treasury yields slid sharply as haven-seeking investors laid aside concern – for today, anyway – that the new president’s policies will stoke inflation.

The severity of the selloff in U.S. assets was proportionate to the weightings of AI-enabled firms in the biggest stock indexes. Even after a recent paring to curb their influence the cohort of Nvidia, Apple Inc., Microsoft Corp., Amazon.com Inc., Meta Platforms Inc. and Alphabet Inc. account for 45 per cent of the Nasdaq 100 Index. It’s more than 30 per cent in the S&P 500, leaving both gauges significantly exposed to concerted drops in those names.

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The next leg lower for the biggest U.S. tech stocks may come from the retail crowd, according to Tony Pasquariello at Goldman Sachs Group Inc.

“Tactically speaking, I suspect the next few days bring a hurried reduction of length by the retail community,” Pasquariello wrote in a note to clients Monday, adding that hedge funds have been aggressively reducing exposure for months, so this is really about the response of households.

However, he’s a true believer in the structural supremacy of U.S. tech companies, which “arguably have only more incentive to spend.”

The S&P 500 fell 1.9 per cent. The Nasdaq 100 sank 3.2 per cent. The Dow Jones Industrial Average lost 0.2 per cent. A gauge of the “Magnificent Seven” megacaps slid 2.9 per cent. The Russell 2000 slipped 0.8 per cent. Wall Street’s “fear gauge” — the VIX — soared the most since mid-December to almost 20.

The yield on 10-year Treasuries declined eight basis points to 4.54 per cent. The Bloomberg Dollar Spot Index was little changed. Bitcoin sank 3.8 per cent to $100,625.01

“We don’t know whether this is the ‘Sputnik Moment’ for stocks, but this is certainly a wake-up call that we are not the only game in town,” said Paul Nolte at Murphy & Sylvest Wealth Management. “To put these very high valuations in the stocks thinking they have cornered the market is a huge mistake and that is being re-rated.”

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To Matt Maley at Miller Tabak + Co.,  the idea that this company’s latest AI model is much more cost effective, and runs on much less-advanced chips, is raising some serious questions about what kind of earnings can be drawn from the AI phenomenon.

“If these companies look like they’re going to have a tough time maintaining their earnings growth (chip stocks) or a tough time reaching their earnings growth goals (the “picks and shovels” companies), it’s going to create some serious headwinds for today’s expensive stock market, he noted.

In fact, the slide in tech came at a time when the Nasdaq 100 is trading at 27 times estimated forward earnings, which is significantly above its 10-year average of 22. Nvidia, which has led the way on AI technology, has a valuation multiple of 32.

All focus will be on earnings announcements from the likes of Microsoft Corp. and Apple Inc. this week to restore confidence in the so-called Magnificent Seven group of companies.

Investors are heading into yet another pivotal Big Tech earnings cycle with the companies’ shares near record highs and valuations stretched. A key distinction this time: The group’s profit growth is projected to come in at the slowest pace in almost two years.

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“This should be a fairly good earnings season, but the bar has been raised and they may not be able to live up to high expectations,” said Dan Taylor, chief investment officer at Man Numeric. “It will be very difficult for the group to perform the way it did last year, especially as valuations have increased.”

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What exactly is DeepSeek?

DeepSeek was founded in 2023 by Liang Wenfeng, the chief of AI-driven quant hedge fund High-Flyer. The company develops AI models that are open-source, meaning the developer community at large can inspect and improve the software. Its mobile app surged to the top of the iPhone download charts in the US after its release in early January.

The app distinguishes itself from other chatbots like OpenAI’s ChatGPT by articulating its reasoning before delivering a response to a prompt. The company claims its R1 release offers performance on par with OpenAI’s latest and has granted license for individuals interested in developing chatbots using the technology to build on it.

— With assistance from Margaryta Kirakosian, Allegra Catelli and Catherine Bosley.

Bloomberg.com

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